Market Insider: Thursday Look Ahead

Stocks could continue to run Thursday unless the market is again scorched by higher oil prices.

The stock market defied Wednesday's big 3.8 percent jump in crude. The initial move up took the steam out of an early rally, but the market shook it off and the Dow closed with a 186-point gain. The S&P was up 21 to finish at 1284.

"It's the market against oil," said Art Cashin, director of floor operations for UBS. "Given what's happened, the market's going to watch and see what goes on with oil overnight. Oil will play a big part, along with economics" in Thursday's market.

Encouraging to traders was a 2 percent gain by financial stocks. Those shares wilted against the rise in oil initially but recaptured gains, a move viewed as a positive because financials and energy are usually counter trades. Traders are also looking for any signs that the group has bottomed. The S&P energy sector was up 5.6 percent.

Oil rose $4.58 to $126.77 per barrel. The dollar was up 0.6 percent against the euro.

Econorama

The first look at second quarter GDP, the employment cost index, and weekly jobless claims are expected Thursday at 8:30 a.m. The Chicago purchasing managers survey is released at 9:45 a.m., and natural gas inventories are reported at 10:35 a.m.

Treasury Secretary Hank Paulson speaks on the economy at 1 p.m. in Washington. But first, we'll be watching CNBC senior economic correspondent Steve Liesman at 10 a.m. as he conducts a roundtable with the President's top economic advisors - Keith Hennessey, Jum Nussle and Ed Lazear.

Thursday's big economic number is second quarter GDP. Economists expect it to come in at 2.3 percent, but some of that gain is a product of stimulus rebate checks, and third and fourth quarter expectations are not that high. Some economists, in fact, see the fourth quarter as slightly negative.

"I think it's (Q2) going to be weaker than consensus for sure, " said Joseph LaVorgna, chief U.S. economist at Deutsche Bank. His estimate for Q2 is 1.5 percent.

Steve Wieting of Citigroup though expects the number to surpass the consensus. "We're at 3 percent. I think if you look at the quarter, it's pretty good. The consumption pace, while not robust, was strong than the first quarter," he said. "The tax rebates played a role very clearly and will as well in the third quarter."

Wieting said trade added 1.6 percent. "Gross exports have added a good deal. They've been strong, but in addition to that we have an outright drop in unit imports ... It's contributed a good deal to the upside." Wieting says he expects growth to trail off and be softer in the second half. He expects the third quarter will be a number starting with a 1 as will fourth quarter GDP.

LaVorgna also expects a weaker second half. "I think a lot depends on what's going to happen after the tax rebate phase," said LaVorgna. "Regardless of what we print tomorrow, I don't think it's going to do anything to change the second half. The second half is going to be weaker than the first half." He said it will also be important to look at the revisions.

"The economy was ok when the credit crisis struck ... What happened was the consumer entered the downturn with a lot of leverage just like the financials. What happened is you have this crisis and the economy isn't able to deal with it like it might have," he said. LaVorgna said lending standards for consumers could get even tighter. "It's going to affect us over the long term," and the Fed, as a result, could "be on hold for a long time."

Earnings Central

Companies that report earnings Thursday include ExxonMobil, Aetna, Altria, Kellogg, MasterCard, Motorola, Unilever and Goodyear. After the bell, Chesapeake Energy and KLA-Tencor report.

Still Crunched

It was about a year ago when the impact and implications of the credit crunch started to really take hold. Many pundits told us we were in for a year or more of pain. Well, as you know, it's going to be more.

I asked John Sprow, senior portfolio manager with Smith Breeden, to tell us where we stand a year later.

"Subprime writedowns should be largely done by now. They should certainly be done by next quarter. Then we still have the big unknowns like commercial property and the list goes on. Then there's consumer debt. You've got auto loans and auto receivables. The whole market securitized all kinds of risk," he said.

Sprow said the crunch is taking longer than expected to unravel and still has a ways to go. "The plumbing is still not working that well," he said, noting that financial firms still need to go to the Fed for funding and they cannot tap commercial paper markets as they did.

"We still have the question of where does stuff get priced on balance sheets and that's not done ... It took Merrill this long to get to where they finally got that stuff off the balance sheet and it's not 100 percent because they're providing financing. There are still other banks that were holding stuff and they're holding it at higher level than where Merrill has it marked," he said.

"It really comes down to the timing. Given that everybody had to delever at the same time, no one is in the position to buy much of these assets that are coming out ... so many asset prices are egregiously cheap," he said. Asset prices, for the right buyers, are incredibly attractive.

"I don't mean to be dour. I'm not in the longer run. It's actually the best opportunities I've seen for what we'd call long only accounts that don't use leverage. They're the kings. They know they're in it for three to five years. They're in a very good position," he said. Sprow said some mortgage securities could provide "equity like returns" for buyers who can afford to hold them.

Oil Drill

Those holding out hope that oil would move below $120 a barrel were disappointed by Wednesday's action. Oil moved higher on inventory data and gained traction throughout the trading day. Cashin said oil was boosted by a report that Sen. Barack Obama, D-Ill. told House Democrats that if sanctions on Iran don't work, Israel could strike Iran. It also got a boost as Israeli Prime Minister Ehud Olmert said he will resign in September, raising uncertainty about that country's future leadership.

M.F. Global senior vice president John Kilduff has told us if oil closed above $125, it would be "off to the races" towards $130 per barrel. That $130 number is believed to be a turning point for stocks.

Taking Flight

The airline industry is among the most fuel sensitive industries, and Squawk Box spent a lot of time Wednesday focused on the topic. Ron Allen, former Delta CEO, spoke to me as he left the set. He says if oil heads lower, the airline industry would see some good improvement in 2009.

"They've been very proactive," he said. They've reigned in costs and capacity and would see a real boost from cheaper fuel. "I suspect oil prices will be below $100 by the end of the year," he said. "You get down to $90, and you'll see some good results for the airlines. 2009 could be a good year."

"Airlines generally lead into and out of recessions," he said.

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