Tuesday Look Ahead: GDP, Insider Trading Probe in Focus
Tuesday's economic headlines should show that the third quarter grew at a slightly better rate than reported, but the Fed's view of next year is likely to be worse than its previous forecast.
Traders are watching the economic news as trading slows down ahead of Thursday's Thanksgiving holiday, but they are also watching for developments in a wide-ranging investigation into insider trading that they worry could impact hedge funds and major Wall Street institutions.
Third quarter GDP is expected to show that growth was 2.4 percent, up from the government's initial report of 2 percent. GDP is released by the Commerce Department at 8:30 a.m., and existing home sales, expected to show a decline for October, are reported at 10 a.m.
Deutsche Bank chief U.S. economist Joseph LaVorgna said he expects third quarter GDP to be revised to 2.5 percent, based on higher net exports and inventories. But the big number he is looking for is the first third quarter economy-wide look at corporate profit growth, which he expects to see at an annualized rate of 18 percent.
"I think we're going to see a pretty sizeable increase in profits, and at this point, we're in one of the most incredible recoveries in profits ever," he said, adding it is no longer just the result of cost cutting. "It's really about operating earnings and pricing power."
The Fed releases the minutes of the November FOMC meeting and its updated economic outlook at 2 p.m. LaVorgna expects the Fed's central tendency projection of 2011 real GDP to be lowered to 2.7 percent to 3.7 percent. In June, its forecast was 2.9 percent to 4.5 percent.
"I hope the markets look past this, but every time the Fed downgrades its outlook, the equities market reacts negatively," said LaVorgna.
He expects the Fed to increase its expectation for unemployment to 9.3 percent from 8 percent. It is currently at 9.6 percent.
The minutes of the meeting could also shed some insight on the FOMC's thinking in November, where it adopted its controversial "quantitative easing" (QE) program to purchase $600 billion in Treasury securities.
"They've been talking publicly so much in the last few weeks, it would be shocking to see any surprise," said Adam Brown, co-head of Barclays' Treasury trading desk.
"We know, given that they thought QE was important, that they're probably predicting lower inflation and lower growth...They let the cat out of the bag on purpose. It would be shocking if any of this was hugely new," he said.
The Dow Monday fell just 24 points, after starting the day in negative territory and declining close to 150 points before turning around. The Dow ended at 11,178, and the S&P 500 slid 1 point to 1197. The Nasdaq, helped by tech, rose 13 points to 2532.
Stocks hit their lows of the day as investors pared back holdings in financial stocks. Traders say the group was hit by concerns about spillover from Europe's sovereign crisis, but also from the concern that institutions could be hit by the insider trading investigation, first reported by the Wall Street Journal Saturday.
"I think this is going to be a very defining moment in the history of our industry. If this is as widespread as it appears to be, it's not just material non public information. It's material non public information with a fiduciary duty to the information.. that becomes a tricky thing," said Steve Massocca, managing director at Wedbush Securities.
The Journal reported that the scope of the investigation includes consultants, investment bankers, hedge fund and mutual fund traders, and it is expected to be larger than past insider trading investigations.
"I think this is the big news of the day. Ireland aside and whatever else happened," said Massocca. "Raj Rajaratnam's trial is coming up in 2011, and now you have this going on..How many institutions are going to be lining up to put money in hedge funds? It's an industry with a publicity issue to begin with, and now it appears to be getting worse." Rajaratnam is the founder of Galleon Group and was charged along with others in an insider trading scheme in October, 2009.
On Monday, three hedge funds were raided by FBI agents. They include Diamondback Capital, Level Global Investors and Loch Capital.
What Else to Watch
Hewlett-Packard's after the bell earnings drove that stock higherMonday afternoon, and that report could be a slight positive for tech stocks Tuesday. HP earned $2.5 billion, or $1.10 per share, up from $2.4 billion or $0.99 per share, and it issued an upbeat outlook for the current quarter. Brocade, on the other hand, forecast a first quarter below analysts' expectations, and its stock traded lower after hours.
Tuesday morning's earnings include Campbell Soup , Medtronic , and Hormel Foods . Tivo reports after the closing bell.
The Treasury auctions $35 billion in 5-year notes Tuesday, the second of three days of auctions this week. Buyers moved into Treasurys Monday, in part on concerns that the agreed EU bailout of Ireland is not the end of the sovereign debt crisis.
"Overall, we think the auction should go fine," said Brown.
At noon Tuesday, Treasury Secretary Tim Geithner meets with the Financial Stability Oversight Council.
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