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Market Insider: A Sober and Subdued Wall Street

With little else to sway it, the stock market should continue to trade quietly ahead of the Fed's Wednesday afternoon statement.

Oliver Quilla for CNBC.com

Stocks Tuesday drifted higher with as little enthusiasm as they drifted lower the day before. The Dow was up 51 at 9829, while the S&P 500 gained 7 to 1071 and Nasdaq rose 8 to 2146. Financials were the best performing sector, gaining 2.2 percent.

The energy sector was second best, up 1.4 percent as oil gained 2.6 percent to $71.55 per barrel. After the close, oil futures slid on new API data showing that supplies rose last week. Another batch of weekly oil and gasoline inventory data is released Wednesday at 10:30 a.m.

Gold and other commodities rose as the dollar sunk to a new year low. The dollar declined 0.84 percent to a one-year low against the euro of $1.48. Gold gained a percent to $1,015.50. The Reuters-Jefferies CRB index, which tracks 19 commodities, rose nearly 2 percent.

The Treasury auctions $40 billion in 5-year notes Wednesday at 1 p.m., an auction traders expect to go smoothly. Tuesday's auction of $43 billion in 2-year notes was well received. Bonds gained, with the yield on the 10-year falling to 3.456 percent and the 2-year slipping to 0.967 percent.

On Wednesday

  • The Fed is the main event of the day with the release of a statement at 2:15 p.m.
  • There are a handful of earnings: General Mills and AutoZone ahead of the open and Bed, Bath and Beyond , Cintas and Paychex , after the closing bell.

Investors are also watching the gathering of world leaders at the United Nations General Assembly where President Obama speaks at 10 a.m. followed through the day by Russian President Dmitry Medvedev, French President Nikolas Sarkozy and U.K. Prime Minister Gordon Brown. At 6 p.m. Iranian President Mahmoud Ahmadinejad speaks. President Obama has separate meetings with Medvedev and Japan's new Prime Minister Yukio Hatoyama. He also meets with the peacekeeping nations in a closed-door session.

Fed Ahead

Besides a possible, slight upgrade to its economic view, traders don't expect the Fed to say much new.

But there was some chatter and wire reports that the Fed could consider reverse repurchase agreements to drain reserves, helping regulators remove some of the huge amount of liquidity it pumped into the system.

The reports said the Fed could sell securities to primary dealers in a program that would temporarily decrease the amount of money in the banking system and gently pressure interest rates without a rate hike.

David Ader, head of rates strategy at CRT, said he thinks it's too soon for the Fed to make this kind of move. "It's a little early for the Fed to consider the effective tightening of the money supply via reverse repos - but there is a camp skewed for any hint of it in the statement or the minutes that follow in mid-October. Cooler heads suggest this will not be a meaningful risk to the market until 2010," Ader wrote in a note.

J.P. Morgan economist Michael Feroli wrote in a note that the end of the Treasury's Supplementary Financing Program could mean the Fed may do a trial run of its exit strategy.

"The recently announced reduction in the SFP (the Treasury reserve-draining facility) may give the Fed the opportunity to test out some new reserve management tools in a way that doesn't send a signal of an imminent rate hike (that is, they could say we're just draining the $185 billion that the SFP is adding). Some of these tools would be committee decisions (reverse repos) others would be Board decisions (term deposit facility)," he wrote.

"The big talk is the exit strategy," said Ader later in an interview, adding that the talk about an exit strategy doesn't necessarily change the time frame. There have been reports that G-20, which meets Thursday, will also address the exit strategies from government programs around the globe.

"I would be surprised to see the Fed announcement materially different than what we saw in the August meeting. With that last announcement they put a little more emphasis on weak wage growth and emphasis that the recovery is going to be a slow and sluggish one," he said.

"I think it's going to be bland, and I think the market takes a little bit of relief from that," he said.

The debate in the stock market continues to be whether equities are moving ahead too far and need to correct, or whether they can keep chugging higher. Ader, from his bond market view, believes the former. "Because I'm typically pessimistic not he economy and more bullish on bonds, I'm genuinely worried about the stock market," he said.

Howard Marks, chairman of Oaktree Capital Management LP, said the markets are now at "fair" value but are getting a little rich. "I think it's a time for caution as an investor. Now with prices up 40, 50, 60 percent," he said Tuesday.

From 'FastMoney':

Marks said he was a buyer of distressed debt last fall, when the fear of a global financial collapse was at its height between mid-September and mid-November. "Then there were two, three buyers," he said.

Marks' view is that the rescue operations of the government are still unproven though markets have improved. "I think we're still in uncharted waters, an overused phrase...we have problems that have never arisen before," he said.

"This is not a test where the smartest kid in the room gets 100. This is a test where the smartest kid gets a 70. I hope we get a 70," he said.

Looking forward, he said it is unclear what the impact of the government's programs will be.

"I think the range of outcomes are very wide and some of those outcomes are very unattractive. Nobody really knows what the effect will be of long-term government stimulus, and also the effect of the government messing around with business," he said.

"What does the future hold? I think what it holds is defaults and bankruptcies." Some of those future bankruptcies can be seen now in the holdings of buyout funds, he said.

What Else to Watch

  • More discussions of regulatory reform.
  • Treasury Secretary Tim Geithner testifies before the House Financial Services committee on regulatory reform proposals at 9:30 a.m., and FDIC Chair Sheila Bair and other regulators appear before the committee at 2 p.m.
  • The GAO gives an update on implementation of stimulus funds. The report is issued at about 10 a.m.

Questions? Comments? marketinsider@cnbc.com

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