Market Insider/Wednesday Look Ahead

Selling in the financial sector bit into Tuesday's stock market performance and could do the same Wednesday.

After the bell Tuesday, Fannie Mae announced that it was issuing $7 billion in preferred stock and chopping its dividend by 30 percent.

More potential bad news for the brokers came in a Wall Street Journal report Tuesday evening which said New York's Attorney General Andrew Cuomo subpoenaed several firms, seeking information on the sale and packaging of debt related to high-risk mortgages. The Journal quoted people familiar with the matter and said the subpoenas seek information from Merrill Lynch , Bear Stearns and Deutsche Bank .

The newspaper report, which appeared on the Dow Jones news service, said the review is part of a broader investigation into the mortgage industry and is likely to to focus on the relationships between mortgage companies, third parties that did due diligence, the securities firms and the credit-rating firms.

Other important news to watch Wednesday includes OPEC's meeting in Abu Dhabi and a few economic data points. Of course, a big focus will continue to be the market's debate on what the Fed will do at its meeting next week and how much it might cut rates. Since Fed Vice Chairman Donald Kohn spoke last week, opening the door to the idea of a rate cut, traders have speculated about an increasingly generous Fed which could cut the funds rate by as much as a half point and the discount rate by maybe even more.

ADP's employment data, Q3 productivity and labor costs, factory orders and ISM non-manufacturing are due Wednesday. U.S. Treasury Secretary Hank Paulson speaks on U.S. China relations. Democratic presidential candidate Sen. Hilary Clinton, D-NY gives an address at the Nasdaq in the afternoon.

AIG and Bristol-Myers hold investor meetings.

Fried Financials

Fannie Mae's dividend cut was not a surprise, but its stock took an even deeper spill after the market close on the news. Fannie Mae plans to raise capital by selling $7 billion in preferred stock and reiterated that weak housing and credit markets is hurting its fourth quarter. The government sponsored mortgage investor joins its rival Freddie Mac in tapping the markets for more capital. Freddie said last week it was raising $6 billion and it also trimmed its dividend.

Fannie and the rest of the financial group were under water Tuesday on credit worries and downgrade news. Analysts at J.P. Morgan and Punk Ziegel lowered their outlooks for 2008 for investment banks. Punk Ziegel analyst Richard Bove slapped a sell on Bear Stearns, Goldman Sachs and Lehman. The S&P financial sector was down 1.85% and is down nearly 3% since Friday's close.

The Dow Tuesday finished off 65.84 points, or 0.5%, to 13,248. It's still up 6.3% for the year. The S&P 500 was off 9.63 points at 1462.79, and the Nasdaq fell 17.30 or 0.7% to 2619.83. The Dow Jones Utilities Average, though set a new record at 542, and is 19% higher for the year as investors seek out the security of the high-yielding sector.

Tempered Forecast

Goldman Sachs chief stock strategist Abby Joseph Cohen Tuesday issued her outlook for 2008. She expects the S&P to reach 1675 by year end. She told CNBC's Maria Bartiromo on Closing Bell that the firm believes there will be more write downs in those weak financial stocks in the fourth quarter but that the investment picture for that group should become clear in 2008.

On the overall market, she expects a continuation of the current high volatility. "Keep in mind '07 started out strong, started out with low volatility. Second half of '07, weakening economic conditions, lots of market volatility, and we think that 2008 may be the mirror image," said Cohen.

"So, in early 2008, we think there will be concerns about economic growth. We think that some of the more consumer staple-oriented names will do well and it will be, we believe, in midyear 2008 when the U.S. economy looks like it's reaccelerating again, and at that point we think that recession fears will fade away and the market can do better."

Oil Drill

Crude fell $0.99, or 1.1% per barrel Tuesday to $88.32 on NYMEX . Oil is now down 9.6% from its record of $98.18, hit on Nov. 23. The U.S. intelligence report that Iran is not building nuclear weapons contributed to the selling.

As oil falls, OPEC meets in Abu Dhabi Wednesday. The cartel is seemingly sending mixed signals from its huddle. The group is expected to consider a 500,000 barrel per day increase in production but several ministers reportedly say an increase is not needed. Saudi Arabia though says options are open.

Venezuela's energy minister made clear in Abu Dhabi that the rejection of Venezuelan President Hugo Chavez's constitutional overhaul on the weekend will have no impact on Venezuelan oil policy.

Meanwhile, Venezuela's Cardon oil refinery suffered a series of power outages on the weekend and also on Tuesday. The refinery is owned by Petroleos do Venezuela.

Looking For A Leader

Citigroupcontinues its hunt for a new CEO to replace Chuck Prince. The Financial Times reports that Deutsche Bank's chief executive Josef Ackermann turned down an approach about the job. On Monday, you may recall Treasury's Paulson ruled himself out for the job on CNBC. Citi's Vikram Pandit remains at the top of the rumor mill's list of possible successors.

Bullishness Meter

CNBC's Larry Kudlow recently told us he was having a hard time finding stock market bulls for his program. On Tuesday, he reported he found one, and it was none other than the perennially bearish Michael Metz (of all market analysts.) Metz said on Kudlow and Co that he likes energy, including the drillers and metals and multinationals. "There are always opportunities in the marketplace, as you know," he told Kudlow.

Kudlow told us he liked the dearth of bulls on the street as a contrarian indicator. The more negative it gets, the better for a market turnaround.

Not Bullish

We reported when perma bear Seabreeze Partners' Doug Kass predicted a short-term year end rally a couple of weeks ago. Well Tuesday, he said in a note that the rally may be over. He said a lot of the oversold conditions in the market were corrected in last week's rally.

Questions? Comments?