investors Await 1Q Earnings

The fear of the unknown that has rattled the stock market for months appears to be fading. The question now is whether upcoming corporate financial reports and readings on the housing market will further calm Wall Street's anxieties or rekindle them.

Stocks rose early last week and, despite data showing that U.S. employers are eliminating more jobs than they have in five years, held onto their gains. There was a palpable relief that some banks such as Merrill Lynch & Co. feel they have enough cash, while others in need of capital -- namely Lehman Brothers Holdings Inc. and Switzerland's UBS AG -- are able to sell stock to raise cash.

Now that JPMorgan Chase & Co. has offered to buy Bear Stearns Cos. and the Federal Reserve has lent hundreds of billions of dollars to banks, investors are more confident that the financial system can bounce back from what looked last month like a worst-case scenario: a big bank on the brink of collapse.

Wall Street knows other problems could arise, but at this point the overriding sentiment is that troubles down the road won't pull the whole market and economy down with them.

"There's been so much talk of recession for so long now. If anything, I get the sense that people are looking to get back in," said Brian Gendreau, investment strategist for ING Investment Management. But they're apprehensive, he added. "There's bad economic news still coming in. It takes some pretty steely nerves."

The Dow Jones industrial average finished last week up 3.22 percent, the Standard & Poor's 500 index rose 4.86 percent, and the Nasdaq composite index ended up 4.20 percent.

The stock market's recovery was aided by selling exhaustion among big investors. Although it's impossible to predict the market's direction, it's likely that stocks are going to be driven less by investors' need to cash out, and more by the fundamentals underlying each stock. Those fundamentals will be determined mostly by profit reports.

Alcoa Inc. on Monday reports first-quarter results, and analysts, on average, predict the aluminum company's earnings per share fell 36 percent from where they were last year. Another Dow component, General Electric Co., reports on Friday, and the average analyst estimate is for a 16 percent gain in per-share earnings.

The big headliners, however, are likely to be next week's bank earnings.

Last week, the various banks traded more divergently from one another than they have in months, indicating that there is less fear about the sector as a whole. This is not to say the battered financial sector's troubles are over. Rather, there are winners and losers emerging, and market participants know that buying the winners now could bring huge returns in the months and years to come.

Meanwhile, the Fed on Tuesday is scheduled to release minutes from its March 18 meeting, when it lowered the key interest rate to 2.25 percent. Though the minutes will be regarded to some extent as old news -- they precede the Bear Stearns buyout -- investors will want to see evidence that the Fed remains ready to come to the financial system's rescue if the credit markets deteriorate further.

It's certainly possible the credit markets, though they've loosened up over the past week, could seize up again. The reason is the housing market is anticipated to take at least another year to recover. On Tuesday, economists expect the National Association of Realtors to report that pending sales of homes in February were only slightly higher than in January -- which saw the second-lowest reading on record.

"The core, the kernel, of the credit problems are mortgages," said Quincy Krosby, chief investment strategist at The Hartford. She said defaults in Alt-A mortgages may spike higher since they became popular relatively late in the mortgage boom. Alt-A mortgages are loans to individuals with cleaner credit records than subprime borrowers, but who are not considered prime.

A Down Market Has Its Upsides for Young People

By Anya Kamenetz

Sometimes what seems like bad news can be turned into good.

All the recent talk about the faltering economy certainly seems to fall into the bad-news category. Housing prices had the biggest decline ever, the U.S. and international stock markets had some very dark days, 17,000 U.S. jobs unexpectedly "disappeared," and many experts feel that we're heading into a recession.

But there's reason for young people to look on the bright side. In fact, beginning your financial life during an economic correction or downturn can be a preferable thing in many ways. Here are a few of the positives:

1.) We won't expect to get rich quick.

Economic dramas shape an entire generation's beliefs about the nature of the economy and the risks involved. Just ask your grandmother, who experienced the Depression and is probably still saving rubber bands.

If you're in your 20s or early 30s, your living memory consists of a nearly unprecedented runup in stock market values -- the tech bubble of the 1990s. Bubbles by definition get people excited about making lots of money, fast. Thanks to the Internet, millions of people were able for the first time to pick, follow, and trade stocks for themselves. Unfortunately, the common outcome could be summed up by the title of film critic David Denby's book: "American Sucker." An affluent, well-connected New Yorker with ties to top stock analysts, Denby lost over one million dollars gambling on tech stocks.

Investors like Denby, who try to get rich quick by picking individual stocks, exemplify what is known in the investment world as "dumb money."

It's nearly impossible for you and me to beat the market consistently. And commissions, as well as trading and research costs, tend to eat up your returns if you try. It's a great lesson to learn by example -- not by experience.

You can also learn some lessons from the downturn of the housing market. In the past decade, it became much more common for first-time homebuyers to borrow big and hope to flip within a few years for huge appreciation -- 50 percent and up. But if you buy a house these days, you'd better love that city and that neighborhood, not buy more than you can afford, and be prepared to hold onto it for a long, long time.

2.) We'll get real about consumption.

Think about this: Consumer spending increased every year for the past 16 years. That's the longest buying binge Americans have ever gone on.

This spending increase was largely fueled by the runup in house prices, which allowed home-owning Americans to borrow against the cost of their homes. Consumer credit also expanded markedly over the past decade and a half.

For those of us in our 20s, this may mean that our parents borrowed against their home to send us to college or to pay for vacations or other luxuries while we were growing up. It also means that credit cards have always been there to fill the gap when we wanted a pair of shoes or a restaurant meal. Young people have been spending 16 percent more than they earn in recent years -- not a sustainable situation.

Well, now the credit market is tightening. As long as house prices are falling, not rising, home-equity loans will be harder to get. And in the general atmosphere of a recession, out-of-control spending tends to slow down as everybody tightens their belts. For example, this past holiday shopping season was the weakest in five years.

But did it really hurt your celebration with friends and family if the presents were a little less lavish?

3.) We'll buy on the cheap.

The current scary economic environment should not cause you to stuff your money under a mattress. The stock market may not be the best way to make a fast buck, but it is still the best long-term investment for your money; market returns average 7 percent to 10 percent over the long term (although your mileage may vary based on investment costs.)
And the "long term" means decades, not a few years.
Even with the recession in 2001-02, stock prices never really corrected to historical norms, which means they may still have a ways to fall. According to David Leonhardt of "The New York Times," the stock market is currently "overvalued" by 10 percent, relative to historical norms. And in a recession, the market sometimes plunges more than it should because of the mood of the investors, rather than because of underlying economic indicators.
That's bad news for people who are retiring now or in the near future. Your grandfather might have had a million dollars if he cashed out last year, and only $800,000 today. But it's good news for the average 25-year-old. You have most of your stock-buying ahead of you. You'll ideally be putting 10 percent to 15 percent of your salary each year into a retirement savings account that's invested in stocks. If stock prices go from "overvalued" to "undervalued", you're essentially buying in at a discount -- and you have plenty of time to see your investments appreciate.

As for the housing market, some are predicting prices will sink 25 percent to 30 percent in the next few years. At best, prices could remain flat while they catch up with rents. (Before the bubble, the monthly costs to rent a home were roughly comparable with the monthly costs to carry a mortgage. These days, in New York City at least, the same apartment that rents for $2,500 may sell for $650,000 -- $3,800 a month after a 10 percent down payment.)
So my advice (which I'm following myself) to would-be homebuyers is to watch and wait and keep your eye out for a bargain. Make a lowball offer and, again, you'll leave plenty of room for appreciation.

The next few years are going to be a real economic education for us all. In my next column, I'll talk about the two cardinal rules for the cautious slowdown investor: hold down costs and diversify.

Latest Updates

11:00 am : Stocks climb to their best levels of the session in a broad-based move. All ten sectors are in positive territory.

Financials (+1.6%) is leading the rebound with all 19 of its industry groups in the green. Industrial REITs is posting a 2.3% gain and regional banks is up 1.8%.

Even the energy sector (+1.0%) has rebounded into the green, despite a 1.4% slide in crude oil prices.DJ30 +53.36 NASDAQ +6.68 SP500 +7.61 NASDAQ Dec/Adv/Vol 1446/1271/508 mln NYSE Dec/Adv/Vol 1476/1445/322 mln

10:30 am : Stocks recover after falling to fresh session lows on the weak new home sales data. Utilities are leading the recovery effort with a gain of 1.3%. Meanwhile, telecom (-0.5%) pares most of its losses.

With regard to the new home sales data, the December seasonally adjusted annual rate of 604,000 is 4.7% less than last month's reading and is 40.7% less than last year's number. The median sales price of a new house in December was $219,200. This equates to a 10.9% price drop year-over-year, the largest decline in nearly four decades. At the current sales rate, there is a 9.6 month supply of new homes. In 2007, there were an estimated 774,000 new homes sold, down 26.4% from 2006.

This number of sales is very low, and the large supply of inventory should keep pressure on prices for some time. Homebuilders are down 2.7% this session.DJ30 +6.91 NASDAQ -2.28 SP500 +2.60 NASDAQ Dec/Adv/Vol 1632/1008/342 mln NYSE Dec/Adv/Vol 1763/1100/205 mln

10:05 am : Just hitting the wires, the U.S. Dept. of Commerce said December new home sales fell to a seasonally adjusted annual rate of 604K. Economists were expecting sales to hold at 647K. November's reading was revised downward to 634K. Stocks had climbed back to the unchanged mark, but fell back into the red after the disappointing data.

Three of the ten sectors are trending higher. Utilities is leading the way with a 0.6% advance. Telecom is the main laggard with a 1.7% drop, as it continues its poor showing this year.DJ30 -74.87 NASDAQ -13.77 SP500 -6.56 NASDAQ Dec/Adv/Vol 1624/790/120 mln

09:40 am : The stock market dips into the red after opening on a slightly higher note. Foreign markets saw another day of steep declined on fears of U.S. economic slowdown. Japan's Nikkei fell 4.0% and Hong Kong's Hang Seng fell 4.3%. Goldman Sachs said in a report dated Jan. 25 that Japan is either already in a recession or is very likely to do so in the first quarter, according to SCMP.com.

Earnings news leaned bullish. McDonald's (MCD), Corning (GLW), Sysco (SYY) and Halliburton (HAL) topped earnings expectations. Verizon (VZ) came in-line with expectations. McDonald's is trading lower though, as investors were disappointed with its flat December U.S. same-store sales.DJ30 -53.57 NASDAQ -16.76 SP500 -4.97

09:13 am : S&P futures vs fair value: -1.3. Nasdaq futures vs fair value: -2.0.

08:59 am : S&P futures vs fair value: -2.2. Nasdaq futures vs fair value: -3.0. Stock futures shed a few points and suggest a slightly lower open. The Dec. new home sales report is set for release at 10:00 ET. Economists are expected a reading of 645K.

08:30 am : S&P futures vs fair value: +0.3. Nasdaq futures vs fair value: -4.5. S&P 500 futures are now pointing to a flat open as investors respond positively to this morning's earnings

reports. McDonald’s (MCD) announced its dividends declared will now be paid on a quarterly basis. Nasdaq futures are pointing to a slightly lower open.

08:00 am : S&P futures vs fair value: -5.0. Nasdaq futures vs fair value: -10.0. Futures indicate a lower start for stock market after foreign markets fell sharply on concerns of U.S. economic slowdown. Japan closed down 4.0% and Hong Kong ended its session 4.4% lower. Earnings reports have lifted futures off their worst levels. Verizon (VZ) reported earnings in-line with expectations. Corning (GLW) topped earnings expectations by one cent and issued first quarter earnings guidance above the consensus estimate. McDonald’s (MCD) beat expectations by $0.02.

06:18 am : S&P futures vs fair value: -8.1. Nasdaq futures vs fair value: -19.3.

06:18 am : FTSE...5761.40...-107.60...-1.8%. DAX...6709.27...-107.47...-1.6%.

06:18 am : Nikkei...13087.91...-541.25...-4.0%. Hang Seng...24053.61...-1068.76...-4.3