Stocks staged a mini comeback Tuesday after a day that saw indexes seesaw on both sides of the unchanged line. The market once more fretted over the financial sector and could do the same on Wednesday.
The Dow rose a half percent, or 65 points to 13,232, while the Nasdaq was up 21 or 0.84 percent at 2596. The S&P 500 climbed 9 points to 1454, up 0.63 percent. The S&P financial sector finished just up a fraction after a choppy day. All the major brokers were in the red.
On the horizon for Wednesday are Morgan Stanley earnings, ahead of the opening, Oracle's after-the-bell earnings, and the outcome of the Fed's Monday auction. Those results will be released by the Fed at 10 a.m. and have been the topic of trader chatter since Monday.
Morgan Stanley is expected to report a loss of $0.39 cents per share, taking a hit from subprime related-write downs. Morgan follows Wall Street's golden child, Goldman Sachs which disappointed some investors Tuesday despite its better-than-expected earnings and revenues. Some investors were concerned the numbers weren't quite as high quality as they expected.
Plus, Goldman's Chief Financial Officer David Viniar was a bit cautious, rattling investors. "We're cautious about the near-term outlook for our businesses as we see dislocation in some of the world's capital markets has continued," he said in a conference call with reporters.
"When we look out for the time frame we invest for - medium to longer term - we see good global growth, but for the near term, it's very hard to predict," he said.
Don't feel too sorry for Goldman though. Reuters reports Goldman Sachs employees on average are paid twice as much as those down the street at rival Lehman Brothers and that could be because they are twice as productive.
In a comparison of financial statements, Reuters found revenue per employee at Goldman was $1.5 million in 2007. At Lehman, it was a mere $674,359. Goldman's compensation per employee? $661,490 in 2007. Same guy this year at Lehman? Just $332,469.
Earnings due Wednesday include Oracle , expected to earn $0.27 per share. Nike also reports after the bell, and is expected to earn $0.65 per share. General Mills reports ahead of the open and is expected to report $1.14 per share on revenues of $3.62 billion.
European Central Bank President Jean-Claude Trichet testifies before the European Parliament in the wee hours Wednesday, well ahead of the Wall Street open. We would like to hear more about the ECB's big funding operation when he speaks.
The European Central Bank opened the flood gates Tuesday, doling out $501 billion, yes half a trillion dollars, in short-term loans. The Bank of England injected another $20 billion. The ECB and BOE are among the five central banks that pledged along with the Fed, to juice the markets temporarily with buckets of short term loans. The move clearly had results. The three-month Euro Libor (London inter bank offer rate) rate had its biggest drop in six years.
Pimco chief investment officer Bill Gross, in a Bloomberg report Tuesday, said that investors should watch the amount the Fed will report was bid at auction Monday. Traders have speculated the Fed was swamped with requests for short-term loans under the program it announced with other central banks last week. Some believe if the demand is very large, it means there are a lot of credit problems lurking.
"If the auction is large, I don't think it's bad because we know things are bad," said CNBC's Rick Santelli. "We fully expect people to use this facility. We see the ECB has $500 billion in direct loans. The Fed's doing $20 billion, at a total $80 billion for four auctions, if nothing changes. So basically, what I'm asking is who do you think is more in touch with the needs of the credit markets?"
Fed watchers will also be paying attention to Richmond Fed President Jeffrey Lacker, who speaks at 1 p.m. on the economic outlook in Charlotte, Va.
New Lending Rules
The Fed's new rules aimed at protecting consumers from predatory lending in the mortgage market, and preventing the next subprime disaster, were met with an air of skepticism on Wall Street Tuesday. Comments I heard for the most part were that these new rules were long overdue.
The Fed, in an unusual open meeting, approved the plan that would tighten rules protecting borrowers from such things as prepayment penalties. Its new rules also apply to a much broader share of mortgage loans than current regulations cover. The plan requires more extensive disclosure, restricts certain advertising and requires better documentation for borrowers.
You would think making sure someone has enough money to pay back a loan would be a good idea if you were lending money. But since many mortgage brokers lent out other people's money, I guess some of them just didn't care and some of the borrowers may have been foolishly optimistic about what they could afford.
At any rate, the Fed, in its new rules, requires institutions to be sure that mortgage borrowers have enough money to pay back what they borrow. Sad, but true.
Oil ended lower Tuesday after a volatile session, ahead of the expiration of the January futures contract. Crude closed down $0.14 at $90.49 per barrel, after trading in a range from just above $89 to $93. Investors reacted to news that Turkey's military conducted operations aimed at Kurds in Northern Iraq.
Inventory data is reported Wednesday at 10:30 a.m.
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