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Market Insider: Tuesday's Make-Or-Break Day

Monday, 17 Sep 2007 | 6:14 PM ET

Trading should stay tentative ahead of the Fed's Tuesday afternoon announcement. But before that news, Wall Street will have to navigate the first big earnings from the brokerage industry and some important economic data, including inflation measure, producer prices.

Lehman Brothers reports earnings before the bell, and that will give investors a look at what kind of subprime fallout has been felt by the firm and a possible clue to what others on the street might be experiencing. Brokerage stocks sold off Monday in anticipation of this week's brokerage industry profit reports, which include results from Morgan Stanley on Wednesday, and Goldman Sachs and Bear Stearns on Thursday.

"Lehman tomorrow and the Fed on the same day. Why are you going to gamble today," said Keefe, Bruyette and Woods senior vice president Peter McCorry of the decline in broker shares. McCorry said KBW estimates Lehman will earn $1.47 per share, while the "Street is at $1.51 and there's a pretty big spread between the high and low." McCorry said the low is $1.29 but the high is over $1.90 per share. Lehman has a 10 a.m. conference call. CNBC's Mary Thompson will be reporting on the numbers and the firm's statements which will be closely watched.

Late in the day, Bank of America's Chief Financial Officer Joe Price told a company-sponsored investment conference in San Francisco that the credit market chaos will have a "meaningful impact" on the bank's third-quarter results. He said the bank is being affected by "unprecedented dislocations" in the credit markets as investors place greater risk on a variety of loans and securities.

The nation's second largest bank joins a list of companies saying difficult market conditions affected profits. Earlier, E*TRADE Financial lobbed a bombshell late Monday when it revealed profits would come in 31% below its latest profit guidance because of its mortgage business. Earnings are now expected to be $1.10 per share, down from the expected $1.60 when the company reports next month.

Handicapping the Fed

One of Wall Street's favorite past times these last few weeks has been crystal ball gazing and trying to read the collective mind of the Bernanke Fed. To get the latest read, CNBC has conducted a spot survey of economists and strategists that will be reported at 11 a.m. Tuesday.

CNBC's senior economic correspondent Steve Liesman will report the findings which will reveal the latest thinking of the Street. For the most part, Wall Street has been expecting a 0.25% cut to the Fed funds target rate, but many are hoping for a 0.50% cut to the 5.25% Fed funds rate. A cut to the discount rate, the short term borrowing rate the Fed gives banks, is also expected to be trimmed and that cut could potentially be even larger then the cut to the Fed funds rate.

The comments from the Fed will also be watched closely and there's a debate about whether the Fed would introduce any new comment on inflation. Fed Chairman Ben "Bernanke has a finite number of points he can move, but he's got an infinite amount of words he can use," said Liesman.

CNBC's Rick Santelli says the cut to Fed funds could be 0.25% with a discount rate cut of possibly 0.50% or 0.75%.

"A 100% of the people I talk to say that, but 20% also believe the Fed shouldn't cut...There's still a silent minority that's thinking he's making a big mistake, but they don't trade that way," said Santelli.

Econorama

Producer prices or PPI is expected to be down 0.3% for august with core up 0.1%. Santelli says the inflation data is important and he's been watching import/export prices. He points to a change in Chinese import prices that started ticking up in May.

"Four data points that changed the world ...May of '07, year-over-year up 0.1%, June up 0.7%, July up 0.9%, and August up 1.1%, and everything before May was a negative number for years...That's a trend," said Santelli.

Other data points due Tuesday the National Association of Home Builders Survey. Another real estate gauge we'll be following is the National Association of Realtors report on commercial real estate, expected at 10 a.m. CNBC's real estate correspondent Diana Olick will be reporting on the surveys.

Oil Drip

Those who are worrying about inflation are likely keeping a close eye on the energy markets. Look at the activity there in what was another record setting session Monday. Crude jumped another 1.9%, to a record $80.57 per barrel. Oil and other commodities rose on expectations the Fed will cut rates, and thereby help the economy and demand.

Month-to-date, oil is 8.8% higher, and it has risen 32% year-to-date. Gasoline prices rose $0.78 Monday or 0.4% to $2.0442, up 27.6% for the year but virtually flat for the month. NYMEX heating oil also roared to a new record, leaping 1% to $2.2287 per gallon. Natural gas rose 37.4 cents per million BTUs to $6.653, up 21.7% for the month.

A French official over weekend suggested war could be one outcome of Iran's nuclear ambitions. "The statements from the French (foreign minister) over the weekend were really arresting and very strong even though there's been a little calming down," said Cambridge Energy Research Chairman Dan Yergin.

"It put Iran back at the top of the agenda in peoples' minds. We don't see oil supported at this level by the physical fundamentals but expectations and sentiment are very strong and that could carry it further," said Yergin, CNBC's global energy analyst. "Another disruption of any kind would give it another upward push. The oil market, like everybody else, is waiting to see what the Fed does. It's so attuned to the question of whether economic growth slows down around the world and that would certainly shape demand and prices."

Corporate Speakers

Countrywide Financial Chairman Angelo Mozilo speaks Tuesday at that Bank of America conference in San Francisco.

Media industry leaders will be speaking in New York at Goldman Sachs Communicopia conference. Speakers include Barry Diller and Rupert Murdoch.

Earnings Central

Other earnings news is expected Tuesday from retailer Best Buy , which will give a good view of the consumer's activity and the strength of electronics sales. Also reporting are Autozone , Kroger and Darden Restaurants .

Questions? Comments? marketinsider@cnbc.com

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Featured

  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

  • Sharon Epperson is CNBC's senior commodities and personal finance correspondent.

  • JeeYeon Park is a writer for CNBC.com. Follow her on Twitter: @JeeYeonParkCNBC

  • Rick Santelli joined CNBC Business News as an on-air editor in 1999, reporting live from the floor of the Chicago Board of Trade.

  • Senior Producer at CNBC's Breaking News Desk.

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