Stocks could be setting up for a bit of a bounce back but first investors need to decide just how radioactive the financial sector has become. Heading into the weekend, market rumors of lurking credit issues plagued bank and brokerage stocks. The sector lost 1.64% Friday, after a steep decline Thursday. For the week, the S&P financial sector lost 6%.
CitigroupCEO Chuck Prince was expected to resignat an emergency board meeting Sunday, says the Wall Street Journal. Rumors swirled since Thursday that Prince was about to get the ax, and that Citi could also announce a big writedown. The news from Citigroup will be critical to the markets Monday.
"If you stabilize the financials just for a day or a week, you could give the rest of the market the opportunity to run in energy and tech," says Jerry Castellini, president and CIO of CastleArk Management. The intrigue in Citi's board room is a book end to the coup at Merrill Lynch that resulted earlier in the week in the ousting of CEO Stan O'Neal.
Merrill Lynch has since been surrounded by rumors of fresh writedowns. Even street darling Goldman Sachs was rumored to be harboring hidden credit time bombs though the firm firmly denied rumors of writedowns.
"I see a reflex rally of some magnitude between now and the next couple of weeks," said Castellini. "Then I have to go focus on what the auditors are going to do to these financial companies again" as the end of the quarter approaches.
Castellini thinks the S&P 500 "will drive you to 1560-1570. That's probably enough for those guys (hedge funds) to put their money in and take it out again." He says the drivers will be energy stocks and technology.
"My prediction is that two of them (energy and tech) will be half of the capitalization of the overall market. Tech is 25-30% and energy is 10-12%. They're going to increase their footprint by 10 or 15% over a period of time that the financials give up at least another 25%, relative to the market, in the next 12 to 18 months," said Castellini.
Dow Down, Nasdaq Up
For the week, the Dow fell 211 points or 1.5%, to 13,595. The S&P 500 was off 35.63 or 1.7% to 1509.65, and the Nasdaq was actually up 6.19 points for the week to 2810. S&P's tech sector was up 1.82% and energy was down 2.17%.
In recent sessions, as selling starts to subside, money has moved first into tech stocks. It happened again this past week. "The feeling is that tech has been a kind of safe haven because they don't have any poison paper in the basement" and they benefit from the weak dollar, says Art Cashin, director of floor operations at UBS.
Cashin says investors initially viewed the surprisingly strong jobs data Friday as a reason to rally. But the market "got overwhelmed by fear that the poison paper as spreading" among banks and brokers. He said a mild positive is that the market stabilized late in the session Friday, ahead of the weekend.
The big events investors look forward to in the week ahead include lots of Fed speakers, including testimony from Fed Chairman Ben Bernanke Thursday before the congressional Joint Economics Committee. Earnings news continues in the forefront but the economic calendar is relatively light. "We will get a post Fed meeting look at how the Fed views the potential fall out from the credit crunch on the economy," said CNBC senior economic correspondent Steve Liesman. He said Bernanke's comments will be the most important event for the markets.
Oil's big move up will also be a feature in the week ahead. It could run up through $100 per barrel as cold weather starts to take hold, says MF Global senior vice president John Kilduff. Oil ended the week at a record $95.93, up 4.4%. Kilduff, a CNBC contributor, says it would be no surprise to see crude touch $100 in the coming week. Gasoline rose 7.1% to $2.4395 per gallon, and heating oil rose 5% to a NYMEX record of $2.5737 per gallon. Natural gas jumped 7.8% to $8.418 per million btus.
Earnings news is starting to slow, but there are some important releases coming this week. AIG is one report everyone will be watching. The stock has been grouped (and battered) with other financials in the subprime tsunami, and there are questions about whether it will show signs of credit damage.
Time Warner reports Wednesday morning. CNBC's David Faber broke the story this past week that Time Warner is moving ahead with a plan to split off its majority holding in cable and will eventually spinoff publishing and parts of AOL. It will be interesting to see if some of that news comes out with Time Warner's earnings report.
On Monday, Wellcare Group reports, as do Burger King, Anadarko, Entergy, Marvel Entertainment and Sun Micro. Archer-Daniels, Valero, Allergan, Molson Coors, Tenet Healthcare, and Chesapeake Energy report Tuesday.
Besides AIG and Time Warner, Cisco and News Corp report Wednesday after the bell. Also reporting Wednesday are Polo Ralph Lauren, Harrah's, Fluor, Devon Energy, Sara Lee, and DirecTV.
Thursday's reports include Disney after the bell. Also reporting that day are Barr Pharma, Marsh McLennan, Vonage, Dynegy, Cephalon, and Qualcomm. Six Flags, Mirant and Liberty Media report Friday.
Conferences of Note
Fed Governor Frederic Mishkin speaks in New York Monday morning at Risk Magazine's Risk USA conference. His topic is financial instability and monetary policy.
The securities industry holds its annual meeting in Boca Raton at the end of the week. That meeting is always good for catching up with the latest trends on the street, and we know "CEO-icide" is one of them. First it was Merrill Lynch's Stan O'Neal, and now Citigroup's Chuck Prince. The crowd will be betting on who will replace them, plus which firm is housing the next big writedown.
Bet there's also some buzz, so to speak, around Bear Stearns' Jimmy Cayne. Cayne has denied any wrongdoing, but the allegations in the Wall Street Journal that he played golf during the summer's market turmoil and smoked marijuana at a bridge tournament will no doubt have the Boca crowd talking.
On Wednesday, the Deal's M&A outlook 2008 conference is held in New York, and Dow Jones and Nielsen hold a Media and Money conference in New York Wednesday and Thursday. Speakers include Time Warner president Jeffrey Bewkes, Viacom Chairman Sumner Redstone and Daniel Snyder, owner of the Washington Red Skins.
More like wind in your face
Last week, I wrote the stocks entered the week with the wind at their back and indeed they did. But CNBC Managing Editor Tyler Mathisen warned at the time they could be facing wind shear. I'm guessing that's what we saw Thursday. He was right.
"I think it's going to be ok," he says of the week ahead. "If Citigroup's news is bold and perceived as favorable, that will be a signal to the market that financials are doing what they need to do to get their houses in order."
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