Market Insider: Thursday Look Ahead
A new deal between Citigroup and the government to shore up capital at the bank could be big news Thursday, but General Motors may also drive sentiment when it reports billions in losses ahead of the opening bell.
The Citigroup deal, when finalized, is expected to boost the government's stake in the bank to as much as 40 percent. The deal could be announced as early as Thursday.
Other headlines to watch include weekly jobless claims and durable goods, at 8:30 a.m., and new home sales at 10 a.m.
GM's fourth quarter sales plunged 26 percent and its losses should be substantial, but investors are also looking for an update on its restructuring plans. General Motors executives meet in Washington Thursday with members of the Obama Administration's auto task force.
Stocks Wednesday started off weak, got weaker, but then saw a midafternoon turnaround temporarily push indices into positive territory. The market staged the mid afternoon rally on the back of financial stocks which erased steep losses. But the market's gains faded and the Dow finished down 1 percent at 7270. The S&P 500 was at 764, also down a percent.
The sharp reversal in the banking sector at midafternoon was a highlight of the day, and it came at the same time the Treasury Department released new information on the stress test and terms of the preferred shares the government holds in banks. The sector finished down less than half a percent. "I certainly think it (the buying) coincided with the (Treasury's) release of the stress test. What it's going to mean. How it's going to play out. We don't have all the details but more clarity is better than less. We're getting the rules of the game," said Peter McCorry of Keefe Bruyette Woods. "Once the rules of the game are established, more people are coming in to play. The overhang of uncertainty lifted a bit so we were seeing some short covering."
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Also positive for the sector was word from Bank of America CEO Ken Lewis that the bank may already be seeing positive impact from its Merrill Lynch acquisition. Lewis, who is in the hot seat for the Merrill Lynch bonuses, talked about Merrill and Countrywide in an interview with Bloomberg.
"For the first whatever days of the quarter, the two stars ... the ones that are doing the best, are Merrill Lynch and Countrywide," said Lewis. He also said the bank expects to see revenues of more than $100 billion this year, and those two units will be the key profit contributors.
Lewis is expected to testify in a New York State Attorney General investigation into the Merrill bonuses. In the interview, he would not comment on the bonuses or the decision process that led to their granting.
What to Watch
Brian Dolan, chief currency strategist at Forex.com, said he is watching the action in the U.K. ahead of the open Thursday. The U.K. government is expected to unveil a banking recapitalization plan. "We're talking about 500 billion pounds (stg) of loans being written, backed by the U.K. government, all in an effort to stimulate lending, shore up confidence in the banks and show the government has got their back.That's kind of the big news on the horizon here. Otherwise, I would say jobless claims tomorrow could be another shot in the teeth for investor sentiment," said Dolan.
President Obama's budget blueprint will be released Thursday. "There will be some reaction, but I think it's probably going to generate more noise or news in the political circles. Its dwarfed by the borrowing plans and all the other things that are going on," Dolan said. "We're watching basically whether stocks can stabilize here -- whether risk appetites begin to improve. We're looking at gold potentially making a dramatic reversal."
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The dollar rose 1 percent against the euro and 0.76 percent against the yen Wednesday. The 10-year Treasury sold off, lifting its yield to 2.946 percent. The two year saw its yield rise to 1.105 percent, its highest level since Nov. 26.
Traders were encouraged this week by testimony from Fed Chairman Ben Bernanke. Despite the lack of details for the Treasury's bank rescue plan, Bernanke was able to inject a small bit of confidence into a highly vexed market. More than one trader called him the "grown up" in Washington when it comes to financial markets.
Also Thursday, Former Fed Chairman Paul Volcker testifies before the Joint Economic Committee at 10 a.m. and there's a House Financial Services Committee hearing on the economy and financial sector, featuring a number of heavy weight economists.
Patrick Kernan, who trades S&P options, said he is seeing trading as "skittish and lacking liquidity."
"If you rewound the clock back to November, we were trading VIX around the high 60s, low 70s and it did peak over 80. This time around, we're seeing a couple of people that just aren't buying protection," he said. In the last sell off, traders positioned themselves for a large bounce back. This time is different. "The options are implying that we're going to be closer to here or a in a slow grind lower near term," said Kernan, a principle in Cardinal Capital.
"I'm starting to feel there are opportunities finally in this market.," he said. "When everybody else thinks it's at its absolute worse, it's time to start buying. There will definitively be worse moments before it gets better, but I'm certainly not looking to pick a bottom. One thing is the fear is somewhat priced out of the market. Especially in the indices, we're not seeing the extreme out-of-the money put buying."
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