UPDATE 1-Wall St Week Ahead: Investors banking on toxic plan

Mon Mar 23, 2009 2:04am IST

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(Adds details of plan, comment)

By Deepa Seetharaman

NEW YORK, March 22 (Reuters) - Wall Street's attempt to recover further from 12-year lows faces its biggest test yet this week in the Treasury's long-delayed bank rescue plan.

But skeptics abound after reports this weekend revealed a plan coupling old approaches with several new twists.

Concerns about the lack of investor interest last week in the government's new fund aimed at reviving consumer and small- business lending, called the Term Asset-Backed Securities Loan Facility (TALF), rippled through the U.S. stock market, sending major indexes down about 2 percent on Friday.

"I don't think the market will jump up and down on this (new plan)," Chip Hanlon, president of Delta Global Advisors Inc, in Huntington Beach, California, said on Sunday.

"This is an alphabet soup of brilliant new ideas" that come on the heals of several failed efforts, he added.

The plan incorporates a three-pronged approach that includes the Federal Deposit Insurance Corp offering low-interest loans to private investors for buying up banks' soured assets, a source familiar with the plan said on Saturday.

The Treasury Department will also revive a recent idea to hire fund managers to run a public-private fund that invests for potential profit in troubled mortgages, with government capital matching private capital contributions and the Federal Reserve will expand the $1 trillion TALF to buy old assets weighing on bank balance sheets. For details see [ID:nN21533022]

Analysts herald the toxic-asset plan as integral to jolting the recession-hit economy at a time when unemployment and jobless claims notch multiyear highs.

The weakness of the economy will likely be highlighted by reams of economic data, including sales of new and existing homes, a final reading on fourth-quarter gross domestic product and weekly jobless claims.

Indications on the consumer's state of mind may come from quarterly results from closely watched names such as electronics retailer Best Buy Co (BBY.N) and an expected wave of pre-announcements about earnings, as well as a final reading on March consumer sentiment and a report on February personal income and consumption.

Still, the bank plan more than any other factor probably will be in the forefront of investors' minds.

"Pretty much everything else is going to be background noise to the core issue: confidence in banks," said Eric Kuby, chief investment officer for North Star Investment Management Corp, in Chicago.

ALL ABOUT BANKS

Stocks rose last week, emboldened by news that the Federal Reserve would take bold steps to expand its balance sheet and purchase mortgage-backed securities. Still the Fed move underscored the extent of the economy's weakness and worries over unintended consequences of the central bank's decision, which spurred a sell-off late in the week.

For the week, the Dow gained 0.75 percent and the S&P 500 added 1.58 percent, while the Nasdaq climbed 1.80 percent.

Before news of the new three-pronged effort, investors had been anticipating details on the closely related Public Private Investment Fund, or PPIF -- first proposed last month in only very broad terms by U.S. Treasury Secretary Timothy Geithner.

Some government officials have said the plan could be modeled on the Fed's $200-billion Term Asset-Backed Securities Loan Facility, known as TALF.

But the lackluster reception of the first TALF auction on Thursday suggests there will be challenges for the bank recovery plan. Additionally, lobbyists said the drama over bonuses for workers at American International Group (AIG.N) was prompting private investors to hesitate about participating in the program.

Funding for the bank plan and the pricing of those bad assets are key issues that investors will be keen to get more details on, Praveen said.

A disappointing plan could set the stage for a sharp, swift slide in the stock market, but a well-designed one could serve as a catalyst for further gains.

"Two things have really roiled the market place throughout the cycle -- the lack of clarity at the policy-maker level and the pattern of the rules changing in the middle of the game," said Craig Peckham, equity trading strategist at Jefferies & Company in New York.

"If we can assuage those concerns with the 'bad bank-good bank' plan, that will help."

CHECKING THE CONSUMER'S PULSE

Friday's reports on March consumer sentiment and February personal income, as well as earnings from companies like Walgreen (WAG.N) and Tiffany & Co (TIF.N), may provide further clues on consumer psychology. Existing home sales for February are due on Monday, while new home sales for that month will be released on Wednesday.

"By and large, things are getting less bad overall," Peckham said. "Dare I say it? We're starting to scratch the bottom of consumer spending."

But obstacles could come from Wednesday's data on February durable goods orders and the final reading on fourth-quarter gross domestic product on Thursday.

Last month's preliminary reading showed the economy contracted at an annual rate of 6.2 percent in the final three months of 2008.

Economists polled by Reuters on average expect the final reading on fourth-quarter GDP to show a drop of 6.5 percent, but some estimates call for a decline of 6.9 percent.

A downward revision "might give some negative sentiment that things are even much worse than what we were looking for," Praveen said.

But "a positive revision might give a little bit of a relief."

(Wall St Week Ahead runs weekly. Questions or comments on this one can be e-mailed to: deepa.seetharaman(at)thomsonreuters.com) (Additional reporting by Chris Sanders, Edward Krudy and Leah Schnurr; Editing by Jan Paschal and Maureen Bavdek)

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