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Market Insider: Friday Look Ahead

Stocks could trip up on more bad news from the financial sector Friday, but the bigger issue for market direction is whether the commodities selloff continues.

Fannie Mae earnings are expected before the opening. Investors sold Fannie's stock Thursday on fears it will repeat the bad results turned in by fellow mortgage giant Freddie Mac this past Wednesday.

"It (Fannie) might even get a bounce on worse than expected news," said Art Hogan, chief strategist at Jefferies and Co.

"First of all, we were so off on our Freddie expectations, you have to assume the same people are estimating Fannie earnings. My guess is that it would be impossible for the collective wisdom that was wrong about Freddie to get up to speed in time for Fannie to report," he said.

Other earnings Friday include an after-the-bell report from Warren Buffett's Berkshire Hathaway .

Financials Under Fire

Big losses at AIG and a government settlement with Citigroup cast a major cloud over the financials and the stock market Thursday. Disappointing chain store sales and jobless claims also weighed on the market. The Dow was down 224.64, or 1.9 percent to 11,431.43, and the S&P 500 was down 23.12, or 1.8 percent to 1266.07. The Nasdaq was down 1 percent. The financial sector was down 5 percent. The second worst performer was consumer discretionary, own 2 percent.

In a deal with New York state and federal regulators, Citigroup agreed to buy out the more than $7 billion in auction rate securities it sold to individual investors, charities and small businesses. Citigroup is expected to use its best efforts to liquidate another $12 billion of these securities it sold to retirement plans and institutional money managers.

Merrill Lynch, after the bell, said it was offering to buy out its retail customers who invested in auction rates securities. Wall Street executives say the major firms put some of their best clients in these securities, and it is a point of contention between management and their brokers, who have been shouldering customer complaints. These securities were heavily marketed to high net worth individuals.

Until the credit crunch froze this corner of the credit markets last winter, auction rate securities were a popular funding vehicle for student loan companies, municipalities and other financial instructions. They are long-term securities, but they have short-term characteristics. Interest rates reset weekly or monthly. For many investors, the perception was these securities were a safe-haven, equal to cash but paying a better rate.

It is expected the rest of the street will follow Citi's lead and pay back investors. After the bell, Reuters reported that Texas is investigating nearly a dozen firmsand is acting as lead investigator on one or two.

Oil Drill

Oil prices perked up Thursday for the first time in four sessions, adding to the negative gloom around equities. Oil finished at $120.02, up $1.44 per barrel or 1.2 percent. The dollar, meanwhile, was firmer against the euro after turning in a weak performance overnight.

"I think crude tumbled when heating oil followed natural gas down on the day. The fact that gasoline hung in there helped on the crude side. it's kind of strange because the dollar was strong all day against the euro. I just think we're kind of stuck here," said Addison Armstrong of Tradition Energy.

"I get the feeling there's buyers lurking who would like to push (oil) up and see if we can get a settlement above $121.25. if we get a settlement above there, they would start to build on it. I think it's too early to tell what's really going," he said.

Armstrong, a CNBC contributor, said the fact that it is Friday and its August, may result in more sluggish trading. "We could find ourselves between $120 and $130 for the month of August without any new news coming into the markets," he said.

Those who follow energy will no doubt be watching Texas oil man Boone Pickens, who is a guest on Squawk Box Friday.

Hot Commodities?

Gold fell $4.90 per troy ounce, or 0.6 percent to $870.70, but it had been higher overnight. Wheat, corn and other grains though were up broadly for the first time in a week.

"If we have another up day (for commodities and oil) and more weakness in the dollar, and it seems liked we reversed that trend, we may shave off another 200 points," on the Dow, said Hogan. He said this trend is one of the most important for the stock market right now, and stock traders are watching for falling commodities and a weak dollar to help lift stock prices.

Stocks had been benefiting from weaker oil, and Hogan points out oil is in the middle of its trading range for the year. At the same time, some investors were theorizing that it is time to put money into financial stocks.

"There's a lot of market participants out there that thought they were bottom picking financials, and they were selling energy to do it. It was a dangerous bet today, and that bet's going to be fraught with danger for a while," he said.

Econorama

Friday's data includes productivity at 8:30 a.m. and wholesale trade at 10 a.m.

Questions? Comments? marketinsider@cnbc.com

  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

  • CNBC Senior Commodities Correspondent and Personal Finance Correspondent

  • JeeYeon Park is a writer for CNBC.com. Follow her on Twitter: @JeeYeonParkCNBC

  • Rick Santelli joined CNBC Business News as an on-air editor in 1999, reporting live from the floor of the Chicago Board of Trade.

  • Senior Producer at CNBC's Breaking News Desk.