Wall St recovery set to face speed bumps
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By Ellis Mnyandu of Reuters

NEW YORK -- Wall Street's recovery push from 11-year lows could hit major speed bumps next week as investors fret about the US automakers' fate and the Federal Reserve holds its last scheduled policy meeting of 2008.

The market's other big test will be the start of the quarterly reporting season for investment banks when Goldman Sachs and Morgan Stanley report results that most expect will show heavy losses.

The US auto industry's survival hangs in the balance after a measure that sought to avert a possible bankruptcy by one or more of the nation's Big Three automakers collapsed in the US Senate on Thursday.

Without government aid, investors fear that a failure of any of the three -- General Motors Corp , Ford or Chrysler -- would exacerbate the year-long recession and drag other companies under.

The automakers employ nearly 250,000 people directly and 100,000 more jobs at parts suppliers could hinge on their survival.

On Friday, the White House said it was willing to consider using some of the $US700 billion initially approved by Congress to shore up the financial system to help the beleaguered auto industry. But it gave no indication when that help might come.

"It seems the way things are going to play out, they're going to keep the carmakers on life support in the intensive care unit until the new administration takes over," said William Stone, PNC Wealth Management's chief investment strategist in Philadelphia.

"On the other hand, maybe that doesn't help the market, either, because you will still sit there with the other uncertainty that you've got to put away the bad someday."

The bid for auto industry aid comes at the worst time as the United States is transitioning between administrations. President-Elect Barack Obama is set to be sworn in on January 20, succeeding George W. Bush as president.

On Friday, concerns about the automaker's fate rattled investors, causing Wall Street to gyrate between gains and losses in a choppy session. But advancing technology shares helped spark a late recovery.

The Dow Jones industrial average rose 64.59 points, or 0.75 per cent, to end at 8,629.68. The Standard & Poor's 500 Index gained 6.14 points, or 0.70 per cent, to 879.73. The Nasdaq Composite Index climbed 32.84 points, or 2.18 per cent, to 1,540.72.

For the week, though, the Dow still fell 0.1 per cent. But the S&P 500 rose 0.4 per cent for the week and the Nasdaq shot up 2.1 per cent.

The Fed's limbo dance

But besides worrying about the auto upheaval, analysts said the Fed's policy meeting probably would give investors pause amid signs that the US central bank is practically running out of room to cut interest rates and would have to try other means to revive the economy.

The Fed is widely expected to lower benchmark US interest rates by a half-percentage point to 0.5 per cent from one per cent at the December 15-16 meeting.

"Investors will be looking at how far they will cut, and even more important is what kind of communication they would do regarding the future course of policy," said John Praveen, chief investment strategist of Prudential International Investments in Newark, New Jersey.

Two weeks ago, Federal Reserve chairman Ben Bernanke said the Fed could directly buy "substantial quantities" of longer-term securities issued by the US Treasury or government-sponsored agencies to lower yields and stimulate demand.

"Markets are going to be looking for how they are conducting policy forward and what are they going to say about quantitative easing," Mr Praveen added.

Rivers of red ink

As one of Wall Street's worst years comes to a close, investors will brace themselves for Morgan Stanley's and Goldman Sachs' results this week.

Analysts expect a tough fourth quarter for the two banks, and Goldman is widely expected to post its first quarterly loss since going public in 1999.

"It could be tougher sledding as far as write-offs go," said PNC's Stone.

Morgan Stanley is likely to wind up in the red for the second time in the past four quarters.

But since the S&P hit its bear market low on Nov. 21, the US stock market has increasingly showed signs of shrugging off even the bleakest of news as investors bet that the downturn could not possibly get much worse and an economic revival is likely by the second half of 2009.

For the year, the S&P 500 is down 40.1 per cent.

But since falling to it bear market intraday low of 741.02 on November 21 -- which marked levels last seen in 1997 -- the benchmark S&P 500 has gained almost 19 per cent.

Tame CPI, weak housing starts

The coming week's economic calendar is sparse, but reports that will command attention include a November reading on industrial production on Monday.

The US Consumer Price Index and housing starts, both for November, are scheduled for release on Tuesday.

Overall CPI is expected to show a 1.3 per cent drop in November, with core CPI, excluding volatile food and energy prices, forecast to inch up 0.1 per cent, according to economists polled by Reuters.

On a year-over-year basis, overall CPI is seen up 1.5 per cent, the Reuters poll showed.

Housing is likely to show continued weakness, with housing starts forecast to slip to a seasonally adjusted annual rate of 740,000 units in November from October's record low of 791,000, according to the Reuters poll.

A December survey of Mid-Atlantic factory activity is due on Thursday from the Federal Reserve Bank of Philadelphia. The Labor Department also will give the latest reading on weekly jobless claims on Thursday.

The roster of Fed speakers is also thin. Federal Reserve Bank of Dallas President Richard Fisher due to speak in Dallas on the historical perspectives on the current economic and financial crisis.