Reuters - Positive data needed to lift stocks

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Positive data needed to lift stocks

Saturday, May 23, 2009 2:22AM UTC

By Chuck Mikolajczak

NEW YORK (Reuters) - Wall Street may feel more pressure next week unless a raft of economic data, including

consumer confidence, home sales and GDP, restores the optimism that had driven a two-month rally before fading in the past few days.

Investors cited the potential bankruptcy of General Motors <GM.N> as a concern, as further job losses could imperil the U.S. economy. Such an event, even though it is anticipated, would not help sentiment, which is already subdued after the major U.S. stock indexes fell on Thursday and Friday due to worries about the U.S. budget deficit.

GM is facing a June 1 deadline to work out its issues with creditors if it wants to avoid a bankruptcy filing. On Friday, a spokesman for some of GM's creditors said the biggest bondholders of roughly $27 billion in debt plan to reject GM's current offer for a 10 percent equity stake.

"That's the biggest risk for the market here," said Paul Mendelsohn, chief investment strategist at Windham Financial Services in Charlotte, Vermont. "We are going to lose a lot of jobs as it is, with closing of dealerships both from Chrysler and GM.

"A (GM) bankruptcy throws everything into chaos."

Deutsche Bank analyst Joseph LaVorgna has forecast that a General Motors bankruptcy could lop 4 percentage points off of U.S. gross domestic product.

Since the markets peaked two weeks ago on May 8, stocks have given back some of their gains over doubts about the speed of the economic recovery. U.S. stocks were higher through most of the session Friday, but sagged at the end of the day as investors sought to reduce positions heading into the three-day Memorial Day holiday weekend.

For the week, the Dow Jones industrial average <.DJI> rose 0.1 percent, while the Standard & Poor's 500<.SPX> gained 0.5 percent and the Nasdaq <.IXIC> advanced 0.7 percent.

For the year, both the blue-chip Dow and the broad S&P 500 are in the red -- the Dow is down 5.7 percent and the S&P is down 1.8 percent -- while the Nasdaq is up 7.3 percent.

BUMPY RIDE AND BIG BOND AUCTION

With investors skittish over the indebtedness of the United States, stocks could be subjected to more volatility if the allure of U.S. assets dims further.

The Chicago Board Option Exchange Volatility Index <.VIX>,or VIX, best known as Wall Street's fear gauge, climbed 4.1 percent on Friday to end above 30, a key psychological level, according to analysts.

Next week, the U.S. Treasury will auction $101 billion in bonds, matching the record, with $2 trillion in new bonds expected to hit the market in fiscal 2009 alone.

"What happens if the demand isn't there from the foreign entities?" said Alan Lancz, president of Alan B. Lancz & Associates Inc, an investment advisory firm, based in Toledo, Ohio.

"There's $2 trillion of U.S. Treasuries owned by foreign central banks, and if all of a sudden, they lose their appetite for U.S. Treasuries, there's only one way to pay this debt, and that will be to increase interest rates. And then you get the potential problem of higher inflation, a lower dollar and higher interest rates, like we had in the 1970s."

The S&P 500 has risen 31 percent since hitting a 12-year closing low on March 9, which some analysts said put it at risk of a pullback, while the holiday-shortened week could exaggerate moves in the market due to light trading volume.

U.S. markets are closed on Monday for the Memorial Day holiday.

"Traditionally, the story has been 'sell in May and go away.' We are heading into the summer doldrums," said Peter Jankovskis, co-chief investment officer at OakBrook Investments LLC in Lisle, Illinois.

"But the other side of things is that also normally leads to light trading volume and light trading volume can magnify reactions."

GDP, CONSUMER DATA AND HOME SALES

The economic calendar is fairly busy despite the short week, and may prove to be the bright spot to reaffirm investors' recent optimism that the recession is ebbing.

Friday marks the preliminary reading of U.S. gross domestic product for the first quarter. GDP, which measures output of goods and services within U.S. borders, is forecast to shrink at an annual rate of 5.5 percent, according to economists polled by Thomson Reuters.

Also on tap are readings on May consumer confidence and the final reading for May on consumer sentiment from the Reuters/University of Michigan Surveys of Consumers.

The housing market, whose slump has been at the center of the economic downturn, will get more scrutiny when existing home sales are released on Wednesday and new home sales are released on Thursday. Both reports will cover April data.

U.S. existing home sales are estimated to have risen in April to a seasonally adjusted annual pace of 4.66 million units, up from 4.57 million in March, according to the Reuters poll. New home sales are projected to have inched up to an annual pace of 360,000 units in April from 356,000 in March.

On Tuesday, the U.S. Commerce Department said housing starts fell 12.8 percent to an annual rate of 458,000 units, the lowest since the government began keeping records in January 1959.

DUDE, YOU'RE GETTING DELL'S RESULTS

Earnings season has nearly come to a close, as 484 companies in the S&P 500 had reported through Friday, leaving just a handful of retailers, including Tiffany & Co <TIF.N> and Costco Wholesale Corp <COST.O> for next week.

Of the 484 companies, 65 percent beat analysts' estimates, 9 percent matched and 26 percent missed, according to Thomson Reuters data.

Also on the docket for next week is Dell Inc <DELL.O>. The

No. 2 PC maker said on Thursday that it is still cautious about corporate technology spending, but plans to make acquisitions and aggressively pursue enterprise customers in an attempt to win back market share in the United States.

(Reporting by Chuck Mikolajczak; Additional reporting by Ellis Mnyandu; Editing by Jan Paschal)