The Fed is expected to fast-forward rate cutting efforts and take an even bigger slice off its Fed funds target rate when it meets in the week ahead.
The big story of the week is the Fed's meeting Tuesday, but that meeting and all Fed activity takes on a new level of urgency after the central bank helped J.P. Morgan engineer a lifeline to keep Bear Stearns liquid.
Once scrappy Bear is the latest victim of the credit crisis and its fate will be a big factor in markets next week. It's conceivable Bear could have a new owner in the next couple of days, reports CNBC's David Faber.
Following the Bear news, traders and economists ramped up their expectations for the Fed's rate action and most now expect a 0.75 percent cut though some, including Citigroup, say a full percent cut is possible. Fed funds futures show traders expect a 100 percent chance for a 0.75 percent cut.
"I think that because the market is leaning toward a larger cut, the 50 basis point scenario is out and the 75 basis point cut scenario is more likely, unless the Fed plans other actions," said Miller, Tabak's Tony Crescenzi.
Even before the Bear news, the brokerage industry's first quarter earnings reports promised to keep the spotlight on Wall Street and the credit crunch in the coming week. Also on the calendar are a batch of economic reports, including inflation and housing data. The other big story traders are watching is the $18 billion public offering of Visa, which is expected to price after the close Tuesday and begin trading Wednesday.
Veteran trader Art Cashin told me last week that this past week was going to be a retest of the market's January lows and it would be a "pass/fail" test. Well, he says, if you were hoping to see the market bottom, the test was a failure.
To make his case, Cashin points to the big 3.7 percent move up in stocks Tuesday, after the Fed said it would add more liquidity to the banking system through short term lending. With big up moves, "if you're going to have a bottoming rally, three days later you tend to have a follow through," he said. That looked to be possible Friday morning, but then the Bear Stearns bombshell hit the market and a selloff followed. Conclusion: "It was a rally in a bear market," he said.
Cashin, the director of floor operations at UBS, told me right before Friday's bell that a lot of selling action came in at the close, setting up for a down Monday.
Stocks finished the past week just about at the unchanged mark, after an emotionally charged ride higher, then lower. The Dow was up 0.48 percent on the week, while the Nasdaq was unchanged.
The S&P 500 was off 0.4 percent. The best S&P sector was materials, up 3.2 percent, followed by energy, up 1.5 percent. The worst performer was healthcare, off 3.3 percent. Telecom was down 2 percent, and the financials were down 1.9 percent.
BlackRock Chief Investment Officer Robert Doll appeared on "Squawk Box" Tuesday, and told us the market was ready to move higher, even though many traders were pessimistic. Well, not long after that, we had the Fed news and a huge move up. I spoke to Doll the next day and he said that move made him a bit more optimistic.
Doll said the market's rally was encouraging, but of course the market will continue to have its down days as it works its way back to health. The retest of January's lows successfully created a second bottom, but he also said a third bottom is a possibility.
"It gives me some confidence that there's a higher probability that there's more of a floor under the market than bears would suggest," he said of Tuesday's action.
Doll said he thinks it's time to get a little less defensive. "You probably need to think a little bit more about technology and some other global cyclicals and maybe a little less about defensive stocks," he said. (By the way, I checked in again on Friday and Doll said the Bear Stearns news did not change his market view.)
On financials, he said he is looking at some but is still not ready to embrace them. "Our bias has been more toward insurance than banks. We're starting to nibble on some banks," he said.
The types of bank names that he's looking at are the top tier, global banks and he says he is highly selective in the group. In fact, he said he especially likes one of the big banks. I'm guessing it's the one that right now is helping out Bear Stearns.
What does the Fed do this week? "They won't disappoint the markets," he said, noting the Fed will cut 0.75 percent if it needs to.
Commodities on Fire
Commodities continue to be hot, hot, hot, with gold and oil springing to new highs in the past week. Oil finished the week at $110.21, up 4.81 percent. Gold touched $1,000 per troy ounce but finished the week at $988.10, a gain of 2.7 percent for the week.
The counter trade in the dollar continues, and the chorus of concern about the shrinking green back continues to grow.
The dollar lost 3.4 percent against the yen for the week and 2.1 percent against the euro, hitting another new low. It finished the week at $1.5671 per euro.
A group of Goldman Sachs analysts Friday issued a report saying we are in the "middle innings" of a powerful uptrend in commodity prices, and the market is underestimating the impact of commodity price increases.
"We believe we are at a tipping point in the he supply/demand dynamic of many commodities," the analysts said in a report. They say that any pullback in commodities prices this spring would signal a buying opportunity.
Using that scenario for commodities prices, the impact from the trend of rising commodities could ultimately mean very tight margins for some companies, who are hit also by the weak dollar and an inability to pass through all increasing costs.
The winners though would be commodity companies, which would have record profits. Other winners would be companies that benefit from indirectly participating in the commodities boom, like machinery companies that supply the commodities producers. Those that will be hurt include the U.S. auto industry, which will have to shift its product mix.
The analysts say rising prices could cause the consumer to adjust spending by trading down and staying home more, which would impact companies dependent on discretionary spending such as leisure and luxury companies. But home entertainment should benefit.
Analysts have been ratcheting down expectations for the investment banks for weeks now. Hard to believe anyone would be surprised to see some more writedowns. Lehman Brothers and Goldman Sachs report on Tuesday, in the morning ahead of the Fed's 2:15 p.m. announcement. Morgan Stanley reports Wednesday and Bear Stearns now reports after the bell Monday instead of Thursday, as planned.
Besides the Fed, there is plenty of other economic news in the week ahead. The fourth quarter current account is reported at 8:30am ET Monday, as is the Empire State survey. Also Monday, Treasury international capital data is released at 9am ET, while industrial production for February is reported at 9:15 am. The NAHB small business survey is reported Monday at 1pm.
On Tuesday, producer price inflation data is reported at 8:30am ET. Housing starts and building permits for February are due at 8:30am. On Thursday, the Philadelphia Fed survey is reported as are leading indictors, both at 10am. Weekly jobless claims are released at 8:30am.
Weekly oil inventory data is reported Wednesday at 10:30 a.m. Reuters reports that officials from OPEC and the Commodity Futures Trading Commission will meet with the International Energy Agency Monday, as well as representatives of oil companies. The topic is oil prices and meeting was planned in November.
On Friday, markets are closed for the Good Friday holiday.