Market Insider: Friday Look Ahead
CNBC Executive News Editor
A blast of negativity surrounds the financials this morning, dragging stocks lower in what promises to be a volatile day.
Rumors that Merrill Lynch will preannounce a writedown swept through trading rooms ahead of the open. Merrill declined to comment on that rumors, according to Reuters.
Separately, Merrill Lynch's analysts this morning made a significant call on big regional bank stocks, saying they expect dividend cuts at SunTrust, Wachovia, and Bank of America. The firm cut price targets and earnings estimates for the group and said bank stocks appear to be in "capitulation mode."
J.P. Morgan analyst Vivek Juneja also said more reserves are needed at large banks in a note this morning.
There is no economic data on the calendar, but this could be be an important day for crude ahead of Sunday's oil producers and consumers meeting in Jeddah, Saudi Arabia. It is also an expiration Friday in the stock market, and that could add to volatility.
Oil fell $4.75 per barrel, or 3.5 percent to $131.93 Thursday after China said it would increase the price for diesel by 18 percent. That helped stocks gain and the dollar rose against the euro for the first time in three days, reaching $1.5502 per euro. In the Treasury market, yields rose, with the 10 year reaching 4.201 percent.
Oil was moving higher this morning.
Citigroup was a negative for the financial sector Thursday but the group finished higher after a wishy-washy performance. Citi stock though finished off a percent on comments from its CFO that there could be more writedowns.
Citi CFO Gary "Crittenden's comments were not that surprising. The market decline in response to them may just indicate how jumpy the markets are right now," Sandler O'Neill anlayst Jeffrey Harte wrote to us. (Sandler has a client relationship with Citigroup)
This morning, Citigroup was lower after Ladenburg Thalmann analyst Richard Bove cut his target on the stock to $25 from $31 and projected a bigger loss. UBS also made negative comments on the stock.
The financials have been acting poorly this week, and Keefe Bruyette trader Pete McCorry doesn't expect much improvement ahead of earnings in the beginning of July as fears of dividend cuts and writedowns linger. "We're a couple three weeks from earnings. What's the catalyst for these things now? I don't see it," he said.
Cambridge Energy Research analyst Dan Yergin said this weekend's meeting will be very important for the Saudis. "The basic thing they want to do is bring a halt to what they see as a speculative bubble in oil prices. I think that's the central objective," said Yergin, CNBC's global energy analyst. "A lot of prestige and a lot of credibility is now invested in this and it's being done on very short notice."
Yergin said the Saudis are concerned oil shock will hurt the global economy, but they are also concerned about oil "overreaching." "As a result, oil could lose its dominant position in transportation, a loss of market share, and they don't want to be held responsible for this."
The Saudis are expected to increase the amount of oil they produce but Yergin says despite the numbers flying around, it is still unclear what the amount will be. It'll be a range. It may surprise us, but at this point it will be at least several hundred thousand barrels. We don't know the number of barrels ... the question is who wants to buy the barrels. That's a key determinant." The Saudis produce a heavy crude.
Yergin said China's announcement was very important. "It's a very powerful message and it's very likely it was timed to the Jeddah process. Whether it's been in the works for months or whether it was (this weeks' meetings with Treasury Secretary Hank) Paulson connected to this, it's been on the mind of the Chinese leadership for months, and they've always been worried about the social turmoil that would come from price decontrol ... So they chose to address it by subsidizing the sensitive groups, like farmers and taxi cab drivers, groups for who the burden falls disproportionately. But they're not going to subsidize the rising middle class any more," he said.
Yergin said China's move is also significant in that other Asian countries have also moved to decontrol prices. "It means that demand will start to reflect real prices rather than subsidized prices."
One stock group that had a decent day Thursday and may benefit again Friday is tech. Look at the action in Apple , Research in Motion , and Amazon .
I spoke to T3 Capital's Scott Redler June 5 on a few of the tech names, including Research in Motion. Redler is a technical analyst and at the time, he pointed out that RIM was ready to break out, as we see it has.
This is what he told me June 5:
It is forming a pattern that is a precursor to a move. "If all the rest of the big cap techs move, we believe it will move to the upside," he said. "$140.25 would be the technical buy price and the measured move for Rim would be around $170," he said.
Since that time, a number of analysts have made positive comments on the stock including UBS, Lehman, Bank of American and AmTech this week. RIM reports earnings next week.
"A stock's not going to break out and have follow through unless something fundamental's going on,:" Redler said Thursday. "Now at $147, it's hard to initiate a trade here. At this point it's where smart money sells into the move. It probably will continue to act well into earnings which is next week." Redler said he would take profits now on a third of his position which would have been acquired at around $135. Redler's horizon is typically very short term.
(Readers: I have updated this commentary this morning to reflect market developments)
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