Credit crankiness hangs around the stock market as the Fed winds up its rate meeting Wednesday. Investors are counting on a rate cut, and without one, the market could see some significant selling.
"I'm looking for a 25 basis point cut," said Diane Swonk, chief economist of Mesirow Financial. "The Fed is trying to do this as a risk management approach, trying to avert what could be larger fallout from the the collateral damage from the housing market situation and the credit market crunch that occurred over the summer."
Expectations are high for that 0.25 percent cut to the current target 4.75 percent Fed funds rate, the overnight rate for loans between banks. The stock market Tuesday closed a stormy session for energy and commodities related stocks with a 77 point decline in the Dow. The Nasdaq fell less than a point and the S&P fell 9.96 points. Energy stocks, following oil lower, dropped more than 3 percent, and materials stocks fell 2.2 percent.
But the financial stocks carried out their own side show as fear once more crept into that group amid rumors of more credit-related writedowns. Rumor du jour? Goldman Sachs, the darling of the beaten down group, was rumored to be planning a major writedown in the current quarter. "There's no truth to those rumors," a Goldman spokesman said. Traders said disappointing third quarter results from UBS no doubt was a catalyst for this latest wave of speculation.
Merrill Lynch is still haunted by the prospects of another big writedown in its fourth quarter and its stock fell on lingering uncertainty about its finances and management.
Finally on Tuesday, Merrill officially announced the anticipated ouster of CEO Stan O'Neal, who left with a hefty $161 million package. The firm's board appointed board member Alberto Cribiore as interim chairman while a search is conducted for a new chief executive.
As if Wall Street doesn't have enough to mope about, New York State Comptroller Thomas DiNapoli said Wall Street's 2007 bonuses may fall by 10% from last year's record $23.9 billion because of credit market turmoil.
More Pricing Pressure
Procter and Gamble and Colgate-Palmolive reported earnings Tuesday and like so many companies this quarter, they said they were hit by rising costs. Both companies said they would raise prices on consumer staples. P&G is raising prices between 3 and 12 percent on everything from diapers to pet food.
Earnings news Wednesday will include reports from Kraft, Clorox, Hess, Newmont Mining, Weyherauser, Barrick Gold, Prudential and Sunoco.
Besides the Fed's meeting, investors are watching Q3 GDP, expected at 8:30 p.m. Economists expect a 3 percent annualized growth rate. Also due Wednesday is the Labor Department's employment cost index.
The Mortgage Bankers Association releases the Mortgage Market Index for the week ended Oct. 26 at 7 a.m. ADP releases its employment report at 8:15 a.m.. At 10 a.m., Chicago purchasing managers is reported as well as construction spending.
Oil had its worse day since early August, losing 3.4 percent. Crude fell $3.15 per barrel to $90.38. A report from Goldman Sachs was a catalyst for the selling. The firm recommended taking profits in oil and gold in the short term and said the rally was due to fundamentals, not speculation. Goldman reportedly also said oil prices could break the $100 market on geopolitical concerns and colder weather.
Cambridge Energy Research Chairman Daniel Yergin, CNBC's global energy analyst, tells us his researchers are looking ahead to next year and expect oil to be in the $70s per barrel range again.
Traders talked again today about a decline in the ABX, a key derivatives index tied to supbrime mortgages. The index slumped as talk about new credit time bombs surrounded the financial stocks.
"In the very long run, I think what really scares people is how slow the structured credit and subprime problem is going to unfold," said John Sprow, senior portfolio manager with Smith Breeden. He said credit agencies have not even gotten to downgrades. " A slow train wreck is what I imagine."
Sprow, who heads up Smith Breeden's credit department, also expects the Fed to announce a quarter point cut when it issues its statement at 2:15 p.m.
Markets were shaken Tuesday by a Wall Street Journal report that said a rate cut was not a sure thing, while the majority of traders certainly believe that it is.
Swonk says not all Fed members are convinced they need to cut rates but she expects them to announce a reduction regardless. But she does not expect the Fed to ease at its December meeting. "It's going to be an interesting debate," she said of the Fed's meeting. "I would love to be a fly on the wall."
Swonk expects the Fed to show it is open to further easing. "They'll leave the door open to another move in December. It's kind of minimizing collateral damage. The commercial paper market is the plumbing in the financial market. It's fine as long as it works, but if it clogs up and overflows, it's not just a mess for Wall Street. It's a mess for Main Street as well and it's not a mess any of us want to deal with."
CNBC's Rick Santelli said the Fed's statement could be interesting. "They're going to try to break the mind set that September 18 started an easing cycle. They want to be flexible but the market is not going to believe them," he said.
"October's jobs report will make anything the Fed does and anything they write in their statement get lost in the shuffle when it is reported 8:30 Friday morning," said Santelli.
Corporate News to Watch
Verizon got a pop from late day news that it is in talks with Google about offering handsets for a new Google mobile phone service. The Wall Street Journal reported the story, quoting a source.
Also late in the day, Cerberus withdrew its $6.2 billion bid for Affiliated Computer Services.
Dell reported restated earnings after the bell. The computer maker reported a $92 million reduction in net income over the four year period that it restated.
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