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Stocks Set To Move Higher As Dollar, Oil Fall

Markets around the world rocked on after yesterday's record setting session on Wall Street and U.S. stocks are set to move moderately higher on the open. Merger activity tops the news with an offer from Canada's TD Bank Financial Group's to buy Commerce Bank for $8.5 Billion.

Pending home sales are reported today, and auto makers report September sales today. Meanwhile, General Motors is closing 13 plants, four more it had previously announced, according to the New York Times.

Kitchen Sink
Today's big cross-border banking deal is especially soothing after yesterday's bank driven rally. Both Citigroup and UBS yesterday issued warnings on how the subprime-driven credit mess impacted profits. Citigroup says its writing off $5.9 billion and will see a 60% drop in earnings. The Citigroup hit puts the spotlight back on CEO Chuck Prince. Despite an endorsement from major shareholder, Saudi Prince Alwaleed bin Talal, for the bank's management and Prince, the Financial Times lead story today focuses on mounting pressure on CEO Prince.

If you heard CNBC's Bob Pisani and Dylan Ratigan on "Closing Bell" yesterday, you know the market priced the Citigroup and UBS earnings story in the 'bad news is good' category.

The theory is the banks flushed out all the bad news on subprime and other blowouts in this quarter's reports and it will be better sailing in the fourth quarter. The perception is they threw in everything, including the "kitchen sink," into those earnings warnings. Other financial institutions are sure to follow. Let's hope those sinks have garbage disposals.

There's a lot of fear about earnings out there despite the market's hoopla. But interesting to note is that there are fewer earnings warnings out this year, compared to last year. The Wall Street Journal quotes Thomson Financial as saying as of Friday, 50 companies in the S&P 500 index had issued profit warnings, compared to 98 this time last year.

Move over July 19
The new Dow record to beat is the 14,115 intraday high, reached yesterday. The Dow gained 191 points or 1.4% to close at 14,087, upsetting the previous closing record of 14,000 set on July 19. (remember the 10% correction that went on between then and now? ) Year-to-date, the Dow is up a solid 13%.

The S&P 500 rose 20.29 points, or 1.3% yesterday to 1547, its best one day gain since September 18. The S&P edged six points from its all time high, set on July 19. The S&P 500 is up 9.1% for the year so far. Nasdaq was up 39.49 points, or 1.5%, to 2740. Nasdaq is at its highest level since February, 2001 and is up 13% since Jan. 1.

What's Going on?
There's a lot of chatter that the upswing in stocks is coming as shorts cover and as investors seasonally adjust their portfolios for the fourth quarter, typically a strong time for stocks. There's also a growing sense that markets may have dodged the subprime crisis as banks expose the depth of their problems.

Vince Farrell, managing partner of Scotsman Capital, sent us a note yesterday saying that the stock market. as an indicator for the economy, is saying the economy is okay. He poses the idea that maybe the jobs number Friday will show a big gain, a strong sign for the economy. "I might offer the position the market (yesterday) celebrated that the financial system has handled the subprime crisis, that the jobs number is going to be good, and the Fed MIGHT NOT HAVE TO EASE. I think it's far more a reason to cheer that the economy is good and doesn't need help from the Fed," he writes.

"So maybe the market rallied because the financial system was stressed by the subprime crisis, but didn't break. The jobs number is going to be good, and we don't need the Fed. Or maybe I'm wrong and this was simply a short covering rally, but I have a feeling that something good is shaping up. I suspect the stock market is ahead of itself, but the valuations are reasonable and stocks are the correct vehicle for the next few years," writes Farrell, a CNBC contributor.

Mark Zandi, chief economist at Moody's Economy.com spoke with us a few days ago and his observation about the stock market was interesting. "The equity market is probably the most appropriately valued asset market on the planet. Until recently, the bond market was clearly overvalued. Equity markets elsewhere are more overvalued. The U.S. equity market is really the biggest asset market that feels appropriately priced. If you're going to hide out anywhere, it's going to be in U.S. stocks," he said.

Zandi reminds us the credit crisis was not the stock market's problem and that stocks were "appropriately priced" and acting well going into the mess this summer.

Shrinking Dollar
It's different this time. That's what we're hearing about the dollar's fall and the rise in commodities prices, along side a rather perky stock market. The new belief on Wall Street is that a declining dollar does not necessarily signal inflation. Therefore, the Fed can keep easing, the dollar can keep falling and stocks will keep rising. Ok, but we just want to remind that when internet stocks blasted into the stratosphere in the late 1990s and even your barber was flipping condos two years ago in the real estate boom, it was considered to be "different" then too.

The dollar is recovering some ground this morning and gold is weaker. European Central Bank President Jean-Claude Trichet commented on the U.S. government's strong dollar policy. That's the second ECB official to comment on the dollar policy in the last several days. Apparently, traders in Europe believe Trichet could be previewing a possible G7 comment on currencies when it meets later in the month. The dollar reached a new low against the euro yesterday of $1.4238. The 0.7% decline took the dollar down 7.3% year to date against the euro.

Oil Drip
Crude oil is down again today after falling $1.42 per barrel, or 1.7%, to $80.24 yesterday. Gasoline on the Nymex fell $0.0598 or 2.95 to $1.9813 per gallon yesterday.

Perma Putin
Russia President Vladimir Putin yesterday unveiled a plan that would allow him to stay in power even after his presidential term expires. Putin, whose popularity ratings are at 80%, says it would be "quite realistic" to move into the prime minister role. Russia's stock market rose today, as investors in Russian markets, at least, endorsed the idea.

Knicked Reputation
How will the Isaiah Thomas verdict affect how businesses address and/or settle issues of sexual discrimination? CNBC will look at that topic today as reporter Lee Hawkins covers the high-profile case. Today, the jury is set to work through whether Thomas should be assessed punitive damages. Yesterday, the jury signaled it found Thomas, coach of the New York Knicks basketball team, had sexually harassed a former marketing executive.

Questions? Comments? marketinsider@cnbc.com

  • 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.

  • CNBC Senior Commodities Correspondent 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.