The Bernanke Fed is being put to its first big test as Fed watchers monitor its handling of the credit drama when it releases its statement at 2:15 p.m. The Fed's one day meeting is not expected to end with any adjustment in rates, but traders are hoping for a tweaking of the Fed statement with language that will soothe some of the anxiety about mortgage and credit markets.
"I don't think they're going to make the amount of changes in their statement that some of the "credit concerned" will look for. They'll make it different enough so that stock traders will see it as transitional, meaning the Fed is closer to easing if market conditions worsen. I think the Fed's changes will allow them to make that inference. In many ways, this is psychological," says CNBC's Rick Santelli.
David Kotok, chairman and chief investment officer of Cumberland Advisors, said if he were writing the statement for the Fed he would lighten up the emphasis on inflation. "I would soften the statement on inflation, and I would add phrasing about concern in housing and subprime," he said.
"If the word 'contained' is not in the statement, that is a change. If the word is not in the statement you have a reason to be nervous," said Kotok, a CNBC contributor.
What would Kotok write? He said he would hedge it by acknowledging the weakness in housing and queasy credit markets. "I would use the words: The problems in the housing sector and related finance appear to remain contained," he said.
By now, we all know what CNBC's Jim Cramer thinks. Cramer has said the Fed needs to acknowledge the market's pain and cut rates. He has said that the Fed has no idea how bad it is out there and that it needs to take the pressure off financial firms and help homeowners, who are faced with higher costs as rates rise.
Stocks opened lower as the market awaits the Fed. Asian stocks were mixed overnight and European markets are sprinting higher this morning.
Yesterday, the Dow soared 286 points, or 2.2% to 13,468, its best point gain since October, 2002. Year to date, the Dow is now up 8.1% and it stands 531 points away from its all time high. The Nasdaq climbed 36, or 1.4% to 2547 yesterday, while the S&P was up 34 points or 2.4% in its biggest point gain since Oct. 14, 2002.
Financial stocks have been leading the market downhill and uphill. Friday, the banks had their biggest point loss since October, 2002. Yesterday, they had their biggest gain since October, 2002. The bank index was up 5.36% yesterday.
The big spike up in stocks erased Friday's losses. It also accompanied a big sell off in the oil market. Crude yesterday dropped 4.5%, or $3.42 per barrel to $72.06. This morning, it is slightly weaker again.
CNBC's Larry Kudlow tells us he knows he's not "in sync with the consensus." But he firmly believes that "in terms of all these credit indexes and spreads, I think the worst was over a week ago. The one exception might be subprime."
"My contacts are telling me there's money coming in. This credit freeze is thawing," he says. Kudlow says he thinks stocks got a lift yesterday because Bear Stearns is solid, and Friday's sell off was spurred by fears the firm was in real trouble.
Kudlow also thinks the Fed should modify its statement today. "The Fed ought to have a balance between recession and inflation," he said.
Luminent Mortgage said it suspended its dividend and is looking for ways to boost liquidity. The San Francisco REIT said it faces a significant increase in margin calls in its highest quality assets and it faces tougher terms from its own lenders. In a sign of the times, the company a week earlier had said its dividend was secure and would not be cancelled and that it had ample liquidity. Luminent is an asset manager that buys prime whole loans and others. It does not buy supbrime loans or make home loans. The company said the secondary market for mortgage loans and mortgage backed securities has "seized up."
Fannie Mae and Freddie Mac shares got a lift yesterday on reports that it is asking federal regulators to increase the limit on the amount of mortgage securities it is allowed to hold as investments. Traders saw this as a way to relieve the pressure in the secondary mortgage market.
"It's weird that this is a positive when seven months ago the idea of Fannie holding more was a huge political hot potato," says Santelli.
Sen. Hillary Clinton. D-N.Y. has a plan to ease the mortgage situation with a federal fund to help homeowners with foreclosures. She will appear on the Call this morning at 11:30 am New York time.
The ice jam around the takeover business does not seem to be thawing much but there was some movement yesterday when McDonald's announced it found a buyer for Boston Market. The buyer is private equity firm Sun Capital Partners. SLM (Sallie Mae) also reaffirmed that its buyout by an investment group including J.C. Flowers, J.P. Morgan Chase and Bank of America, should be completed by October. The company said it was confident legislation before Congress would not adversely impact its $25 billion deal.
If the market were going to pay attention to earnings, it would pay attention to Cisco's report after the bell today.
Also, Apple unveils its redesigned iMacs today in Cupertino, Calif. CNBC's Silicon Valley Bureau Chief Jim Goldman will be there.