Stocks held their own Monday, even after the shocking demise of Bear Stearns. But the market no doubt benefited from the view of many investors that the Fed will deliver a hefty rate cut when it meets Tuesday.
Right now, traders are betting on a full point rate cut by the Fed, which would take the target Fed funds rate to 2 percent. Just Friday, the Fed funds futures showed traders believed the Fed would cut by 0.75 percent. But the weekend rescue of Bear Stearns in a Fed-engineered buyout by JP Morgan and other extraordinary moves by the Fed changed that view.
Two investment banks report earnings before the bell Tuesday, and that news will also be key in setting the course for markets. Other important news includes producer price inflation data, due at 8:30 a.m., and housing starts, also reported at 8:30 a.m.
One of the most encouraging events for stocks in recent sessions is the pricing Tuesday afternoon of the giant $18 billion Visa IPO. The offering is expected to price after the bell Tuesday, and start trading Wednesday. There has been some real investor excitement about the offering, which is expected to price between $37 and $42 per share.
Goldman is expected to report first quarter earnings of $2.58 per share, a decline of 61 percent, on revenues of $7.47 billion, a 41 percent decline. Lehman is expected to report earnings per share of $0.72, a 63 percent decline, on revenues of $3.351 billion, a 34 percent decrease.
The shares of financial institutions were under pressure Monday after the Bear Stearns news, with Wall Street's investment banks particularly hard hit. The S&P financial sector was down 1.5 percent.
Lehman stock was the most tattered of all the firms as an uncomfortable level of rumors swirled around its shares. The stock at some points during the day was down more than a third, and it traded on volume of 224 million shares, nearly eight times its 10 day average of 33 million shares.
Lehman battled back. CEO Richard Fuld said in a statement that the Fed's announcement Sunday that it would allow investment banks to use its discount window takes the liquidity issue "off the table for the entire industry." Previously, commercial banks were the only institutions that could use the Fed's short term borrowing window. Traders said the Fed's rule change was a big reason why stock trading was so orderly Monday.
Lehman's CFO Erin Callan is expected to appear on "Closing Bell" Tuesday.
Deutsche Bank chief U.S. economist Joe LaVorgna is one who changed his view on the Fed and rate cuts over the weekend. He now expects a full point rate cut when the Fed announces its decision at 2:15 p.m. "The only way I could see the Fed not going 100 (a full point) is if they accompany the 75 cut with their intention to purchase GSE debt, Fannie and Freddie debt," he said.
Speaking of Fannie Mae and Freddie Mac , the Wall Street Journal was reporting late Monday that the Office of Federal Housing Enterprise Oversight is close to reducing capital requirements for the two companies, a move that would give the firms more flexibility in buying mortgages.
"Look at the Fed's action. They basically are telling you they are going to do something dramatic. I don't think 0.75 is particularly dramatic anymore. I think it has been priced into the market," he said.
LaVorgna said the Fed's statement will likely note that there's still downside risk. "The Fed is not going to worry about inflation. It's going to worry about growth...we're not out of the woods yet," he said.
The Dow finished 21 points higher at 11,972, after a nearly 200 point swoon. The Dow is now down 9.9 percent since the start of the year and 2.1 percent from a year ago. The Nasdaq though was bloodied in Monday's trading, scoring a 1.6 percent, or 35 point decline. Nasdaq is down 18 percent year-to-date and is off 9.1 percent in the past 52 weeks. The S&P 500 slipped 11 points to 1276, a level 13 percent below where it started the year.
The Bear Stearns story ratcheted up anxiety about risk in the market, despite equities relatively tame reaction. Treasury yields fell as buyer moved into the safety of Treasurys. The 10-year was yielding 3.314 percent, and the yield on the two-year slipped to 1.333 percent, its lowest level since July, 2003.
The dollar continued its weakening trend, losing 0.5 percent against the Euro and 2 percent against the yen .
Some of the real action though was in the commodities markets where sellers dumped energy, grains and metals (with the exception of gold). Gold finished at $1001.40 per troy ounce, up 0.3 percent.
Crude oil fell 4.1 percent to $105.68 a barrel. Gasoline fell 6.9 percent and natural gas fell 7.8 percent. Silver fell 1.7 percent, copper fell 3.5 percent. Soybeans, corn and wheat all fell sharply and sugar and coffee fell more than 10 percent.
Joseph Terranova, partner at Thelogicaltrader.net, said commodities prices could get a lift from the Fed's rate action Tuesday, but watch out Wednesday and Thursday.
"When market conditions get like they did this morning, you need to pare back and take a fresh look," said Terranova. He said it's time to reduce some risk from portfolios, but investors should look to add to positions heading into the second quarter. He expects commodities to be flattish for a while.
"I'm going to wait and see what Bernanke gives the street. I'll come back a week from today and we'll be putting stuff back in place ... But the oil story is not over," he said.
8:30 Producer prices, expected +0.3 percent
8:30 Housing starts, expected 999,000
8:30 Building permits
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