Stock Market Comeback Faces Triple Threat

It never seems to fail, but just as we get ready for quarterly account updates, the stock market decides to test it's lows for the year. While the market has technically avoided a bear market, and the economy has thus far avoided recession, the headwinds continue to mount. With the Presidential Election looming in the fall, this looks to be a summer of rhetoric and empty promises.

There are several solutions to the current mess we face concerning crude oil and energy. The Congress MUST override all environmental litigation and allow full scale drilling in ANWR and off the coasts. Full scale development of alternative energy sources is crucial, like the steps Honda has taken with their hydrogen/electric hybrid. Coal and nuclear energy sources must be utilized immediately, regardless of initial environmental impact. These steps would dampen speculation, even though this increased domestic energy production would not enter the market immediately, because much of the run up in oil prices is being driven by the same type of speculation that drove the dotcom bubble and the housing bubble. It is purely a perception of a lack of supply. Any chance the Congress has the nerve to take these steps? When you look at history, this was exactly the "nerve" which led to the development of the Alaskan Oil Pipeline. Had we only been serious about alternative energy solutions back in the late 70's and early 80's instead of conspicuous consumption!

Meanwhile, here is a reprint of a Marketwatch article on the threats facing the market a week before the end of the second quarter.

By Kate Gibson, MarketWatchLast Update: 6:00 AM ET Jun 21, 2008

NEW YORK (MarketWatch) -- U.S. stocks on Monday will attempt to recover from some hefty losses, but any comeback will likely be contingent on three factors: the price of crude oil, any hints of inflation, and developments in the troubled financial sector.

"Obviously this market is in lockstep with three things, the most important of which is the price of a barrel of oil," said Art Hogan, chief market strategist at Jefferies & Co.

On Friday, stocks sank as crude-oil futures gained, a trend that played throughout the week, as the weaker U.S. dollar added to the allure of oil and other commodities as a currency hedge. And, more trouble in the financial sector compounded market anxiety.

The Dow Jones Industrial Average ended at 11,842.69, off 220.4 points, or 1.8%, for the session. It lost about 465, or 3.8%, on the week.

Friday's finish marked the Dow's lowest close since March 10, when it settled at 11,740.15.

"Stocks finished a week that is best forgotten, and the Dow now finds itself flirting dangerously close with the pivotal 11,750 area," said Jon Nadler, senior analyst at Kitco Bullion Dealers.

And, while investors fretted about the impact of rising energy costs on the already soft economy, the credit crisis and its ongoing impact on the troubled banking sector last week continued unabated.

"We had a plethora of brokers talking about them, from the money centers to the regionals, and none of them were positive," said Hogan.

Merrill Lynch on Friday warned of investor capitulation on the regional banking sector, with analysts envisioning further dividend cuts as likely to be on the horizon. The broker cut its median earnings estimate for regional banks for 2008 by 15%, with J.P. Morgan analysts chiming in a prediction of further efforts to replenish reserves in the sector. .

"Merrill sees investors effectively throwing in the proverbial towel when it comes to bank stocks. With capitulation come buying opportunities, normally. A normal year 2008 has not been thus far," said Nadler.

Of the Dow's 30 components, 29 posted losses, with blue-chip financials among the hardest hit. Citigroup Inc. fell 4.3%, American Express Co. fell 3.4% and American International Group Inc. declined 3%.

The S&P 500 fell 24.9 points, or 1.9%, to 1,317.93, with all 10 of the index's industry groups posting declines, led by consumer discretionary, off 3.1%.

The S&P closed with a weekly loss of 3.1%.

Midway between its March low of 1,273 and May high of 1,426, the S&P appears headed back down toward its lows of three months ago, "as investors lose confidence that an economic recovery is just around the corner," said Kenneth Tower, chief market strategist at Covered Bridge Tactical LLC.

The Nasdaq Composite Index dropped 55.97 points, or 2.3%, to close at 2,406.09, giving the technology-laden index a loss of 3.1% for the week.

Bonded
As stocks sank, bond prices climbed, with the yield on the benchmark 10-year note, which moves in reverse of its price, falling to 4.16%.

The U.S. dollar declined against most currency rivals, while the price of gold climbed. .

And, with the price of crude already on the rise, the climb was further fueled by a published report of an Israeli dry run of an attack on Iranian nuclear facilities.

Crude for July delivery climbed $2.69 to end at $134.62 a barrel on the New York Mercantile Exchange, while uncertainty ahead of a meeting of oil producers and consumers this weekend in Saudi Arabia and China's hike in fuel prices helped push prices down 0.2% for the week.

In addition to energy concerns, next week brings a slew of reports that could shed further light on whether other costs are climbing as well.

"We will also be scouring the economic data calendar for signs of inflation," said Hogan.

The economic docket looks to be a busy one, particularly in regards to the ailing housing sector. Analysts expect the S&P/Case-Shiller Home Price Index will fall to 168.8 in April from 172.2 in March, with the report slated to be released Tuesday.

The second day of the week also brings June consumer confidence, which is projected to weigh in at a 16-year low.

On Wednesday, investors will receive durable goods in May, with the data expected to show a 1.0% rebound, along with an expected small hike in May new home sales, which are projected to rise to 530,000.

Thursday brings final first-quarter GDP, which analysts expect to be revised up to 1.2% from an initial 0.9%, along with initial jobless claims and existing home sales for May.

The May personal income report is due on Friday, along with a measure of consumer sentiment.

Added to the mix is the Federal Open Market Committee, or FOMC, which on Tuesday begins a two-day meeting, with Federal Reserve Chairman Ben Bernanke and his colleagues widely expected to step up talk about the risks of inflation, while not hiking benchmark lending rates from the current 2%.

"Fed projections on economy and inflation are also likely to be revised higher, laying the groundwork for a hike or two this fall," wrote analysts at Action Economics.

With any luck, the Saudi's will decide to add a bit more crude to the market as they conclude the oil summit held this weekend. However, even with facing strong U.S. pressure and global dismay over oil prices, Saudi Arabia could only say on Sunday it will produce more crude this year if the market needs it. Unfortunately, the vague pledge fell far short of U.S. hopes for a specific increase and may do little to lower prices immediately. For now, the current "oil shock" leaves Western countries with little choice but to move toward nuclear power and change their energy consumption habits, Britain's prime minister warned at a rare meeting of oil producing and consuming nations.

John Kaighn

Jersey Benefits Advisors