The stock market will have to shake off its renewed fear of the financials if it is to move ahead Wednesday.
The financial sector was down more than 2.4 percent in two sessions this week amid fears of fresh writedowns on Wall Street. The chilling reminder that the credit crises has not ended also put a dent in the stock market. The Dow was down 100 points Tuesday after a 134 point loss Monday.
The credit worries crept into the bond market Tuesday, with flight to quality buying in Treasurys pushing yields lower. The dollar held its own, gaining 0.50 percent against the euro after Fed Chairman Ben Bernanke said the weak dollar is causing inflation, and the Fed is monitoring it in conjunction with the Treasury.
Also not helping stocks Tuesday was the 1.8 percent decline in energy shares as oil prices slid 2.7 percent on the NYMEX.
Ahead of Wednesday's open, investors will be watching the ADP private sector employment report at 8:15 a.m. The report is expected to show a loss of 30,000 jobs and is a kind of preview for the May jobs report Friday. Non farm productivity and costs is reported at 8:30 a.m., and ISM non manufacturing is reported at 10 a.m.
Fed Chairman Ben Bernanke speaks again Wednesday afternoon, after his dollar moving comments Tuesday. He will speak to a Harvard Alumni Association group on "Economic Challenges: 1975 and Now" at 2:45 p.m., and he will not take questions.
The resolution of the Democratic presidential primary contest will also be watched by the markets. With his leading list of delegates, the market will now turn its focus to Ill. Sen. Barack Obama.
"I think from a broader market point of view the battle lines are clearly being drawn now. I think the market is going to start paying attention to real policy differences now that you have a presumptive nominee on the Democratic side," said Jason Trennert, chief investment strategist and managing partner at Strategas.
"No one is really giving (Republican Sen. John) McCain a big chance of winning," said Trennert. "He's certainly going to have his work cut out for him. At this stage of the game, I think it's kind of a toss up. The market's going to start paying a lot more attention."
Trennert says because McCain is viewed as such an underdog, the market has the potential for a huge upside surprise if things change. McCain is viewed as more business friendly and less likely to raise taxes.
"It's probably the biggest jump ball in American politics in 40 years," Trennert said.
No Bear Stearns
At the center of selling in the financial sector this week has been Lehman, a stock stalked by shorts for months now. The selling in Lehman turned into a frenzy Tuesday afternoon as rumors circulated the firm was tapping the Fed's borrowing window.
Lehman denied the rumorand said it has more than $40 billion in liquid assets at the end of the quarter, but that didn't stop the stock from losing 9.5 percent, for a total 18 percent in just three sessions.
I asked Ladenburg Thalmann analyst Richard Bove if he thinks Lehman will fail. "I don't think there's any chance of it happening, but that's a minority view," he said. He said the market appears to believe it could happen. "You're shorting a stock below book value. That tells you something about its viability."
"They made a couple of huge mistakes in the last two quarters and now they're paying the price for it," he said. One was to add about 16 percent more assets to its balance sheet in the first quarter. Now because of a ratings downgrade, it must unload assets.
"When everyone knows you have to unwind assets, you get attacked by predators form all sides, and that's what happening to them," he said. Lehman also put on a hedge that went against it in the second quarter, resulting in a several billion dollar loss, he said.
"The solution to their problem is doing a sizeable equity offering immediately in the $4 to $6 billion dollar range. If they do that and stop trying to sell assets, then the situation stabilizes," he said.
Lehman would not comment on reports that it is working to raise several billion dollars in new capital to shore up its balance sheet. But sources tell me that the firm is considering that option, although it does not necessarily have to do so.
Bove said Lehman is a different situation than Bear Stearns, and one reason is the experience and reputation of CEO Richard Fuld.
Stocks to Watch
Homebuilder Hovnanian reported a surprisingly deep quarterly loss after the bell but said it has ample liquidity to get through the current downturn. The company lost $340.7 million or $5.29 per share. Analysts had expected a $2.64 per share loss.
Around the World
It is the 19th anniversary of the military crackdown of pro democracy protests at Tiananmen Square.
The Organization for Economic Co-operation and Development releases its latest analysis and growth projections for the world's major economies In Paris.
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