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RPT-Wall St Week Ahead: Weak stocks face earnings and CPI

Published 11/16/2008, 11:03 AM
Updated 11/16/2008, 11:06 AM

(Repeating column initially transmitted late on Friday)

By Deepa Seetharaman

NEW YORK, Nov 16 (Reuters) - Wall Street will struggle to avoid a third straight week of losses as investors face another flood of earnings and data, including PPI and CPI, that are likely to signal a prolonged economic slowdown.

Encouraging news will probably be in short supply.

Hopes for a bailout of General Motors are fading as lawmakers hint that the legislation is unlikely to pass. Expectations are low that world leaders meeting in Washington over the weekend will deliver a concrete set of plans to combat the worst financial crisis in 80 years.

The Group of 20 meeting, which kicked off Friday night, comes on the heels of another grueling week.

For the past week, the Dow Jones industrial average fell 5 percent, the Standard & Poor's 500 Index dropped 6.2 percent and the Nasdaq Composite Index lost 7.9 percent.

With November half over, the Dow has lost nearly 828 points, or 8.9 percent, while the S&P 500 has dropped almost 96 points, or 9.9 percent, and the Nasdaq has fallen about 204 points, or 11.9 percent.

Year to date, the Dow is down 35.9 percent, while the S&P 500 is down 40.5 percent and the Nasdaq is down 42.8 percent.

"We're on a recession watch," said John Praveen, chief investment strategist at Prudential International Investments in Newark, New Jersey. "The question is: 'How deep is the recession going to be?' The economic data will give a sense of that."

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This week, the U.S. Producer Price Index and the Consumer Price Index will give Wall Street a reading on to what extent the weaker economy is keeping inflation at bay. October PPI is due on Tuesday, with October CPI on Wednesday. One factor to keep in mind with both reports: The price of NYMEX front-month crude oil dropped a record 32.62 percent in October to settle at $67.81 a barrel.

Economists polled by Reuters expect overall PPI to drop 1.7 percent in October, compared with a 0.4 percent decline in September. Core PPI, excluding volatile food and energy costs, is pegged to inch up 0.1 percent versus September's 0.4 percent rise.

Overall CPI is forecast to decline 0.7 percent in October, compared with September's flat reading, while core CPI probably rose 0.1 percent, matching September's slight gain, the Reuters poll showed.

Other major economic indicators this week will include the Fed's data on October industrial production, October housing starts and weekly jobless claims. Investors will pore over the data for clues on the slowdown's depth and duration.

TARGET, DELL AND HOME DEPOT

This week will mark the winding down of earnings season, but a few heavyweights remain, including discount retailer Target Corp on Monday and tech bellwether Dell Inc on Thursday. Video game retailer GameStop Corp, whose retail segment is among the few with expectations of brisk holiday sales, also will release earnings on Thursday.

Home improvement retailers Home Depot Inc and Lowe's Companies Inc could give more insight into the consumer's mood and the state of the housing market. Lowe's is set to report results on Monday; Home Depot reports Tuesday.

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Specialty apparel retailers Gap Inc and Limited Brands, the parent of Victoria's Secret, will report results on Thursday. Ketchup maker H.J. Heinz Co is set to report earnings on Friday.

"Look at every single company that's reported -- going forward, it doesn't look good," said Warren Simpson, managing director at Stephens Capital Management in Little Rock, Arkansas. "The economy is no better than it was six months ago, It's worse -- and the worst could be yet to come."

Investors will keep an eye on economies overseas after Europe officially slid into recession on Friday. Among the key pieces of data investors will watch may be Japan's gross domestic product, expected on Monday.

The number could help investors assess the health of global markets and shed some light on the future of U.S. exports. Exports have fallen as the dollar has risen and growth outside the United States goes into a skid.

The financial crisis continues to wreak havoc on the world's major economies.

But as leaders gather in Washington, few expect any breakthroughs, given the absence of President-elect Barack Obama, whose involvement will be key to any global initiatives.

"It's going to be difficult to come to anything that's really going to change anything over the weekend," Simpson said.

WASHINGTON'S MOTOWN BLUES

Instead, analysts said, the market could take its cues from any news on the GM bailout and a second fiscal stimulus package. The U.S. Senate plans to take up a $25 billion bailout bill for distressed domestic automakers on Monday, but it remains unclear if proponents can muster the necessary support to pass the legislation.

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"You definitely need a bailout," Prudential's Praveen said. "Remember what happened in the case of Lehman Brothers. It raised a whole Pandora's Box of counterparty risk questions.

"You can't make the same mistake with Detroit. In terms of what it will do to the sentiment of the market and to the economy, it's going to be quite severe."

But others argue a bailout would be a negative for the market.

"It will be postponing the day of reckoning when GM has to get competitive," said George Schwartz, president of Schwartz Investment Counsel in Bloomfield Hills, Michigan.

Still, analysts said given the thin trading volume, volatility will likely prevail. Fear on Wall Street, measured by the Chicago Board Options Exchange Volatility Index, or the VIX, is still running fairly high. On Friday, the VIX jumped 10.8 percent to close at 66.31.

"I think most calls are going to be very hard to make from now on," said Asha Bangalore, an economist at Northern Trust. (Additional reporting by Leah Schnurr; Editing by Jan Paschal) (Wall St Week Ahead runs every week. Comments or questions on this one can be e-mailed to deepa.seetharaman@thomsonreuters.com)

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