Tuesday's market action was the mirror opposite of Monday's mayhem. The Dow rose 215 points, or 1.69%. Money poured into the financial stocks. The credit markets calmed down, and 10-year Treasury futures traded near record volume but in a fairly tempered way. The dollar rallied. All this started with news Abu Dhabi Investment Authority was investing $7.5 billion in Citigroup.
"Today (Tuesday) was a very, very normal type day," said CNBC's Rick Santelli of the bond market. "Most of the moves in yields occurred before we even opened up in New York." The 10-year was at 3.952% in late afternoon, while the two-year yield rose to 3.076%.
Financial stocks, the vortex of credit market pain within the equities market, were stable and gained nearly 3%. Energy stocks were the worst performers, off 0.48% as oil declined. Down for a second day, crude on the NYMEX fell $3.28 per barrel, or 3.4% to $94.42 per barrel.
Wednesday's markets will have fresh housing data to digest shortly after the Wall Street opening. If you saw Marketinsider's earlier post, you know that Goldman Sachs economists are more bearish on the economy because of what they see as a worsening housing downturn. They believe the risks for a recession are now as high as 45% because of the sick housing markets, but they think a more likely scenario is that the Fed bails out the economy with aggressive rate cuts.
Existing home sales are reported at 10 a.m. and are expected to be down 8%, according to Dow Jones. Durable goods are reported at 8:30 a.m., and the Fed's Beige Book on economic activity is due at 2 p.m. Oil inventory data is due at 10:30 a.m.
Thirst for Capital
Citigroup wasn't the only financial firm raising capital this week. Freddie Mac reported after the bell Tuesday that it is offering $6 billion in the form of a special preferred stock. Freddie, the second largest generator of home loans, last week said it planned to raise capital in order to meet the 30% mandatory target capital surplus required by the Office of Federal Housing Enterprise Oversight. So the move was expected, but a surprise to the market was a steep 50% cut to Freddie's dividend.
Citigroup stock rose on the Abu Dhabi news, which injected confidence in the financial sector and across the stock market. However, traders said there was some disappointment that the investment would dilute Citi stock. There was also disappointment that Citigroup is not planning to put structured investment vehicle assets on its balance sheet, in a move similar to the one announced by HSBC Monday. Dow Jones news wire quoted a Citi official on the SIVs and traders took the news to mean the SIV problem will linger.
Meanwhile, Wells Fargo after the bell said it will set aside $1.4 billion in the fourth quarter to cover higher than expected losses on home-equity loans. And no surprise, it's also shoring up the standards on home equity lending.
The Fed vs. The Markets
Despite investors' expectations for more rate cuts, Fed officials are doing an awfully good job of talking down the idea that they will continue to ease. The street widely expects a quarter point cut in December.
Comments from Tuesday's Fed speakers were consistent with the recent tone set by the Fed: It does not have to act and it may be done with rate cuts for now. Philadelphia Fed President Charles Plosser said that in some circumstances, lower rates "may prolong the painful process of price discovery." Meanwhile, Chicago Fed President Charles Evans said he feels the monetary policy stance is consistent with objectives and will "help promote well-functioning markets."
The "stance" might promote well-functioning markets, but there will certainly be a lot of dysfunctional traders if the December rate cut is not delivered.
More Fed speakers will be out Wednesday. Fed Vice Chairman Donald Kohn speaks before the Council on Foreign Relations at 8 a.m., and he will take questions from the audience. Dallas Fed President Richard Fisher speaks later in the day on the regional economy in Amarillo, Texas. He will answer questions after the 1:30 p.m. speech.
Earnings reports are falling off to a trickle. Wednesday's releases include Men's Warehouse, Tivo and Dollar Tree.
The Value Investing Congress 2007, the Super Bowl of value investing, is underway in New York Wednesday. CNBC's Michelle Caruso-Cabrera will be there.
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