Housing starts and earnings from Goldman Sachs and Best Buy are among the headlines the stock market will care about ahead of Tuesday's open.
As stocks struggled in another painful session Monday, the Treasury market drew in buyers, fearful about inflation and economic weakening. The Dow tumbled 172 points, or 1.29 percent, to 13,167, with selling across the board and particularly in some of the big name tech stocks. The Nasdaq took the brunt of selling, finishing 61 points or 2.32 percent lower. The dollar held onto gains.
All S&P sectors, but for homebuilders, were lower, and traders sold brokerage stocks into the close.
The 10-year rose 10/32 points, lowering its yield to 4.193 percent from 4.232 percent late Friday. In the bond market, "there's anxiety about the end of the year and it's not going to go away until January," says CNBC's Rick Santelli.
Santelli said there was trepidation about the Fed's $20 billion auction of 28-day credit, conducted Monday. The auction is the first in a series announced by the Fed and other central banks last week as way to keep markets liquid. Data on that auction will be released by the Fed Wednesday.
The European Central Bank, meanwhile, pledged unlimited bids in its liquidity operation Monday. Economists said the guarantee was unusual but clearly an effort to make sure the year end roll over of credit positions goes smoothly.
Former Fed Chairman Alan Greenspan's comment that stagflation is increasingly possible weighed on the markets and started the stock market off on a sour note. Santelli says the Fed funds futures told an interesting story. As of Friday, the futures showed traders expect about an 80 percent chance of a Fed rate cut in January. However, that percent moved to less than 70 percent Monday before moving back to the 80 percent level in a volatile session.
The level of expectation for a rate cut obviously was higher before producer and consumer inflation data last week showed a surprisingly sharp pickup. In fact, the 3.2 percent November gain in producer prices was the biggest jump in 34 years.
We Can All be Fed Watchers
I can't remember a time when we actually got to watch the Fed in action. I mean, really in action as if you were inside the Fed's board room. Well on Tuesday, that will be possible when the Fed meets to discuss proposals to change mortgage lending practices. The Fed is allowing cameras into its meeting room and you can see it on CNBC and CNBC.com.
This meeting lacks the super high-level of excitement that must be apparent during the FOMC's rate meetings. But nonetheless. it is important because the Fed is addressing some of the issues that led to the subprime meltdown.
The new mortgage rules are expected to be aimed at the overuse of exotic mortgages and predatory lending practices.
Goldman Sachs , which has seemed to grow richer as the credit crunch weighs more heavily on its rivals, is reporting fourth quarter profits Tuesday. Analysts' consensus estimate is $6.62 per share on revenues of $10.13 billion. Morgan Stanley and Bear Stearns report later in the week.
Punk Ziegel analyst Richard Bove on "Power Lunch" Monday said Goldman, in a sense, acts like two companies in one and its future operations are what investors should be watching.
"You've got an operating company on one side, and I don't think the operating company did particularly well in the quarter," said Bove. "It had problems obviously in private equity, hedge funds. I don't think credit derivatives sold as well, and I think you saw some weakness in trading activity overall. But on the other side, you have the hedge fund company and I think the hedge fund company did very well. It's been indicated they probably made $4 to $5 billion shorting CDOS in the period."
"I guess the operating company is not going to do well going into 2008, and that's what you should focus on and what the hedge fund company is going to do is an unknown," said Bove.
As for the industry, Bove says this quarter will not be the end of subprime-related writedowns for Wall Street, but that's not the only thing investors need to watch.
"They're not going to get it all out in this report. There's going to be more problems in the first quarter. But I think there's bigger problems than the writeoffs. I don't really care about the writeoffs at this juncture."
It is about "how do they get their business turned around and move forward again, and I think that's going to take a year to a year-and-a-half.
The core issue is getting their operating businesses to really work well," he said.
Other earnings reports Tuesday include Best Buy , which is expected to earn $0.41 per share, according to Reuters. Best Buy's comments will be watched carefully for its view on the holiday shopping season.
Housing starts and building permits for November are reported at 8:30 a.m.
Financials: Friend or Foe?
We spend a lot of time looking at the financial sector. The group has been front and center in the credit/housing/subprime tsunami. These stocks though are also seen as leaders for the stock market. Which means, their health is key to the market's ability to move higher.
In the last week, we've seen a few people talking about the possibility that the downtrodden financials may actually look attractive again in 2008, most especially Thomas Lee, chief U.S. equities strategist at J.P. Morgan. But there are others who continue to lower forecasts for the group and warn that more bad news is to come.
Look at what technical analyst Louise Yamada told "Fast Money" Monday night as she showed a chart with her analysis. "We're looking at the diversified financials versus the S&P 500. It has broken a six-year top and this is a structural message. It is not just a little top," she said.
"We would use rallies to be lightening positions because this kind of structural deterioration can go on for years. We saw this in computer hardware in the '80s, where the breakdown occurred, and then they had good bounces in terms of relative as well as the price itself and then they went down for another eight years," she said.
"The market's a discounting mechanism. There's something out there that we don't yet know but I think we want to be selling into strength," said Yamada.
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