Stocks could chug higher if investors are comfortable with the status of the auto industry bail out and the Fed does not makes any surprise moves when it meets early in the week.
The Fed is expected to trim its target Fed funds rate by a half point, trimming it to a half percent, at the end of a two-day meeting Tuesday afternoon. There is a batch of fresh data on production, housing and inflation and fourth quarter earnings from major brokers—Goldman Sachs and Morgan Stanley.
Traders have been expecting the market to move higher in a December "Santa" rally but concerns about the auto industry stalled its progress. On Friday, the Bush Administration indicated it could provide emergency funds to the industry after Congress failed to craft a rescue. That soothed investor concerns that General Motors would soon file bankruptcy, setting off a string of cascading bankruptcies and massive job losses.
"The market gets more constructive, the more answers we get," said Art Hogan, managing director at Jefferies. "If we get an answer on Detroit, I think the market gets more constructive."
"Economic news was as bad as it gets last week, and the market trades higher. It's not that bad news is good new, it's just that it's not getting the bad reaction it was getting," said Hogan. Hogan said he does not expect the broker earnings to surprise the market in the coming week. Bad news is already priced in to their shares.
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Robert Doll, vice chairman of BlackRock, also commented on the trend that's catching investors' attention. "I think we have to be impressed that the market continues to generally shrug off the bad news," he said in an interview on CNBC's "Closing Bell."
"October 10 was the first important low ... We're higher today than we were at the lows of October 10. I think we've broken the downside, and now we're moving side ways. We build a base and digest just how bad this recession is going to be," he said.
One big piece of news the market was able to fend off late in the week was the revelation that Bernard Madoff, a well regarded asset manager with a long record in the industry, was accused of defrauding investors in a massive "ponzi" scheme. The market also dismissed more bad jobs data that showed the biggest jump in jobless claims in 26 years.
From 'On the Money':
"We're in this period where we think there will be bad news. There will be plenty of it. Can we digest it? That will be the question for the markets," said Doll.
Stocks finished the week virtually unchanged after its usual volatile swings. The Dow was down 5.74 points, or 0.07 percent at 8629.68. The S&P 500 was up 3.66 points, or 0.4 percent at 879.73. But the Nasdaq was the star, with a 2 percent increase to 1540.72.
Heavy Economic Calendar, Fed Meeting to Come
In the coming week, there's a relatively heavy calendar of data as well as the Fed meeting.
"You're going to have declining production, further lows in housing numbers, and industrial production is going to be negative. Headline CPI will be negative," said Joseph LaVorgna, chief U.S. economist at Deutsche Bank. He also expects the Fed to cut by a half point and make fairly dovish statements when it releases its interest rate move.
"I don't know how you forecast a consensus for words," he said of the highly anticipated Fed statement. "That things are pretty bad, that's what I think they're going to get at, and they're taking the situation seriously. We know it's a recession. They don't have to reinforce it."
From 'Fast Money':
There is some housing data in the National Association of Home Builders survey, expected Monday and housing starts Tuesday. New inflation data comes with the Consumer Price Index Tuesday. On Monday, industrial production is released, as is the Empire State manufacturing survey and the Treasury's TIC data on capital flows.
LaVorgna expects the news to continue to be bad. His forecast for fourth quarter GDP is negative 4.5 percent and it's not much better for the first quarter. But he said that the auto industry's expected rescue would be a reprieve for the economy.
"I think a lot of bad news is priced in. I think the forecast we laid out is being priced into the market... We'll have a real bad first half, then some improvement. I'm encouraged we're able to hold the lows in equities and we're seeing some improvement in money markets," said LaVorgna.
Buying in Treasurys in the past week pushed yields lower. In fact, some panicked buying pushed some short-term T-bill yields into negative territory in a rare market event. In longer duration issues, the 10-year fell to a yield of 2.590 percent, and the two-year's yield fell to 0.785 percent.
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LaVorgna said the short-end of the Treasury market has priced in "depression," but he was encouraged by that panicky move in yields.
"You are seeing agencies' spreads coming in. You're seeing Libor in absolute terms ... If you look at dealer commercial paper, that's kind of following the same pattern ... You're seeing money markets thaw a little bit. That makes me a little more confident that we're going to see the recession that we've been expecting," not something worse, he said.
LaVorgna said the short-end of the Treasury market has priced in "depression," but he was encouraged by that move. "You are seeing agencies' spreads coming in. You're seeing Libor in absolute terms ... If you look at dealer commercial paper, that's kind of following the same pattern...You're seeing money markets thaw a little bit. That makes me a little more confident that we're going to see the recession that we've been expecting," not something worse, he said.
Smith Breeden's John Sprow, a specialist in mortgage securities, said there's been some improvement in mortgage in the past week that's been encouraging to investors. In fact, in the past week banks were offering some of the lowest rates in years. "
"It helps in that little niche of the world which is the conforming mortgage markets, but clearly we have large and larger issues to deal with," said Sprow.
Energy and Earnings
The dollar fell 4.91 percent against the euro in the past week, its third straight week of decline. It was down 2 percent against the yen. As the dollar fell, commodities moved higher, including oil.
Nymex crude rose $5.47 per barrel for the week, or 13 percent to $46.28, its biggest weekly gain since June 6. OPEC meets in Algeria on Wednesday, and non-member Russia will be joining them.
"I think they're going to coordinate a cut with Russia," said John Kilduff, senior vice president at M.F. Global. "Everybody will cut too. They've been complying with the last round of cuts."
"They've informed Asian buyers in particular to look for lower supplies in January," said Kilduff. "They've already foreshadowed that there'll be less supply in January. I think prices will be under some pressure through the end of the year, but whatever the low is in December will be the low."
Kilduff, a CNBC contributor, said he thinks oil could stabilize around $50 a barrel but could take a potential run at $60 in the first quarter.
On the earnings calendar in the week ahead are Goldman Sachs , which is expected to report a $3.50 per share loss Tuesday, and Morgan Stanley , seen reporting $0.37 per share loss Wednesday.
On Tuesday, Best Buy, Hovnanian Enterprises and Adobe Systems report.
Nike reports after the bell Wednesday.
FedEx , Pier One and Rite Aid report Thursday morning. On Thursday afternoon, Oracle , Palm and Research in Motion report.
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