Wall Street's fixation with the Fed will be a main driver for stocks between now and when the Fed issues its rate decision next week.
Not unlike Wednesday's crazy trading, the next couple of sessions could be highly volatile. A deep dip on worries about Merrill Lynch and related credit fears drove stocks sharply lower. But in the afternoon, rumors the Fed would come to the rescue with both an emergency discount rate cut and another blow out 1/2 point cut to the Fed funds rate next week reversed the move.
The Dow even crossed into positive territory by late afternoon and finished less than a point lower. The Nasdaq, down 3% earlier in the day, lost less than 1% or 24 points, and the S&P 500 was down just 3.71 points.
There's plenty of earnings news to watch before Thursday's session. Fresh numbers are expected from Bristol-Myers, Ericsson and Motorola. Microsoft reports after the bell. Some significant data is due Thursday as well. Durable goods are reported at 8:30 a.m., as are weekly jobless claims. New home sales are reported at 10 a.m.
Back to the Fed
The Fed's two-day meeting next week wraps up Wednesday afternoon, and traders are increasingly speculating the Fed will cut deeper than the 0.25% that has become the latest conventional thinking on the street. Miller Tabak's Tony Crescenzi called the rumors of a pre-meeting rate cut "shallow chatter."
"It is particularly amusing to see this emerge today following the revelation of a major write-down at a major investment bank, as if the revelation were a threat to the financial system. It is hardly of that variety and it is better that the losses be shouldered by the fat cats than by a string of smaller institutions, such as occurred in the early 1990s when the U.S. savings and loan industry crumbled," said Crescenzi in an afternoon note.
"...One conclusion to draw from today is an old one, which is that the markets will find plenty of support during periods when the Fed is cutting interest rates, unless of course there is a recession seen on the near-term horizon or asset prices are abnormally high, as was the case entering 2001," he wrote.
I spoke to CNBC contributor Michael Farr as he visited CNBC global headquarters today. He agreed that the market will rise for now with the Fed's help. "I'm still bullish because the Fed is at the ready. Intermediate, I'm bearish, but longer term, I'm bullish," says Farr, president of Farr, Miller & Washington.
Wall Street vs. Main Street
Wall Street was running red for a good part of Wednesday because of the the goring of one of its own. Merrill Lynch's announcement of a big $7.9 billion writedown was followed by an S&P credit downgrade, and now analysts at some rival firms are taking shots at its stock.
The street has been near hysteria at times about the subprime-derived credit crunch and its fallout. But on Main Street, it's a different story says one senior Wall Street executive. The exec, who spoke on the condition of anonymity, says: " The clients are too complacent." -- meaning that individuals are way too confident about the stock market.
It sounds counterintuitive because it is. "Normally when the market is going to be resilient, clients don't feel good. It's contrarian. It's the wall of worry," he said. "It's usually when clients are this relaxed, we're in for trouble."
Let them Eat Cake!
Or at least some of our bad debt. Not unexpected, but Merrill Lynch execs on their earnings post mortem conceded that their retail clients were sold CDOs (collateralized debt obligations) that were later downgraded. They would not elaborate or detail the amount.
CNBC's Ariel Nelson works behind the scenes at CNBC to make us all look smarter, and here's something interesting he found. The chart below from Haver shows the ratio of existing to new single-family home sales. Since the mid 1970s, the average ratio of existing to new homes has been around five. In February, 2007, that ratio shot up to an all time high of seven. Now, the level is around six. If this level holds, it means Thursday's new home sales number would have to be around 730,000, less than the consensus 775,000 units.
But Nelson points out, every time there has been a spike in this ratio, there has been a recession. Of course, he asks, "Are we out of the woods?"