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GM, banks' fate to keep investors on edge

With stocks mired in multi-year lows and the fate of General Motors and banks hanging in the balance, investors are unlikely to curb their flight from risk this week, putting Wall Street on track for another brutal sell-off.

One focal point will be a meeting between the US auto task force and GM, Chrysler and officials from the United Auto Workers in Detroit this week after auditors raised doubts about GM's ability to survive outside bankruptcy.

Uncertainty over the plan to salvage banks will also hang over the struggling sector until more concrete details from Washington are revealed, leaving investors to fret that companies that were once pillars of the financial system will have to be nationalized.

The weak economy will likely be confirmed by a handful of economic reports, including a government report on February retail sales and a survey of consumer sentiment.

“There are, unfortunately, no guideposts to a lot of the market to allow investors to get a better sense of direction of where the market is going, where corporate America is going,” said Jack Ablin, chief investment officer at Harris Private Bank in Chicago.

“Short of that, we're going to likely have to rely on Washington. Unfortunately, it just seems lie Washington's relationship with the stock market is strained.”

With the Dow and S&P trading at 12-year lows, and the Nasdaq sliding to six-year lows, market watchers will be looking for signs of whether a bottom has been found, or if indexes still have another leg down to go.

Last week was the fourth week of declines for all three major US stock indexes, as the Dow Jones industrial average dropped 6.2% and the Nasdaq composite index fell 6.1%. The Standard & Poor's 500 slid 7%, its worst week since November.

“I've been in the business since 1963 and I've truthfully never seen a market that is so discouraging or painful,” said Carl Birkelbach, chief executive officer of Birkelbach Investment Securities in Chicago.

“I've been through a lot, but this is the worst I've seen.”

The Wall Street Journal reported on Friday that about $50 billion of more than $173 billion of US government bailout money poured into American International Group Inc has been paid to at least 24 financial institutions around the world.

Already cheap bank stocks continued their tumble last week. The stock price of Dow component Citigroup, once the world's most valuable bank by market capitalization, fell under $1 for the first time, reigniting anxiety over the bank's health and that of the entire banking sector.

Clarity on how toxic assets will be cleared off banks' balance sheets and how those assets will be valued is key to stabilizing the financial sector and seeing markets manage a sustainable recovery, analysts said.

“In order to move forward, we need (Treasury Secretary) Geithner to come out and tell us the answer to the question: ‘How do you value the assets?’,” said Marc Pado, US market strategist at Cantor Fitzgerald & Co. in San Francisco.

“We may be happy about it, we may not be happy about it, but at least we'll know.”

Members of the U.S. autos task force will visit Detroit this week to meet with GM, Chrysler and officials from the United Auto Workers labor union, an official for the Obama administration said on Friday.

GM's failure could trigger round of massive layoffs and hurt companies that supply and manufacture parts, said Joseph LaVorgna, chief US economist at Deutsche Bank in New York.

In all, GM's bankruptcy could lop off 4 percentage points from the US gross domestic product, of which two-thirds is driven by consumer spending, LaVorgna said.

Ahead of the Fed's policy-making meeting the following week, Federal Reserve Chairman Ben Bernanke is set to address the Council on Foreign Relations on Tuesday. Investors will be watching for any comments on the state of the economy and the outlook for banks.

Economic data on February retail sales on Thursday and a preliminary reading on March consumer sentiment on Friday, coupled with quarterly results from office supplies and electronics retailer Staples Inc on Wednesday, should give a gauge of consumer spending. January's international trade deficit report is due on Friday.

Economists polled by Reuters forecast that retail sales will slip 0.5% in February, after January's unexpected gain of 1%. They forecast a preliminary March reading on consumer sentiment of 55.0, down from 56.3 for February, from the Reuters/University of Michigan Surveys of Consumers. The international trade deficit is forecast to drop to $38.1 billion in January from $39.93 billion in December.

Last week, US retailers posted better-than-expected same-store sales for February, helped by a strong gain at Wal-Mart, the world's largest retailer and the leading US discount chain. But analysts cautioned that stores will have to show consistent improvement for expectations of weakness to change. (Reuters)