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Market Insider: Wednesday Look Ahead

The ailing banking system is at the top of the Obama Administration's agenda Wednesday, after worries about the sector Tuesday handed the stock market its worse Inauguration Day losses ever.

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Financial stocks went into free fall Tuesday, with the S&P financial sector losing 16.7 percent. Headlines were peppered with bad news on individual bank names, before, during and after the trading day. But traders said the bottom line is that there is doubt about the banking industry's ability to find enough capital, raising fears about further failures, more government ownership, more devastation for the economy, and more losses for shareholders.

On Wednesday, the Obama Administration starts its first day of work with the scheduled confirmation hearing for Timothy Geithner as Treasury Secretary. Geithner, outgoing New York Fed President, is expected to win the nomination but questions have been raised about tax issues while he was employed at the IMF. The Senate Finance Committee hearing on Geithner begins at 2 p.m.

President Barack Obama also meets with his economic team. In the afternoon, the House of Representatives is expected to complete consideration of the TARP reform act. Last week, the Senate approved the release of the remaining $350 billion from TARP, the Troubled Asset Relief Program, which so far has been used to inject capital into banks.

The Senate government affairs committee, meanwhile, holds a 10 a.m. hearing on the breakdown of financial governance.

Markets Mayhem

On Tuesday, the Dow tumbled 332 or 4 percent to 7949, while the S&P 500 fell 44.90 points or 5.28 percent to 805.22. The Nasdaq lost 5.78 percent to 1440. The Chicago Board of Options Exchanges Volatility Index shot up 22 percent to a reading of 56.65 in a measure of rising market fear.

The dollar rose 1.7 percent against the euro but lost 1 percent against the yen . Treasurys had a mixed and erratic day, with the 30-year selling off before reversing as the banking sector sunk. The 10-year yield was higher at 2.344 percent.

All financial stocks got slammed Tuesday but none more than State Street , which lost more than half its market value after disclosing new unrealized losses on its fixed income investments. PNC fell on fears of losses at its National City unit, and Citigroup fell below $3 on worries about losses and its earnings power. Citi cuts its dividend to a penny after the bell.

"Everyone just hit the sell button. You saw a bit of panic selling in these financials. It's the first time since 1992 that they are less than 10 percent of the S&P 500," said Patrick Boyle of LaBranche Financial.

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RBC Capital Markets banking analyst Gerard Cassidy said shareholders are realizing the risk surrounding their bank holdings is not going away. "I think what's happening is it's a realization by investors that the problems with the banking sector in 2008 -- it started in 07 --were largely centered around the housing problems in the United States. Now, based on the numbers that have been reported by the big banks, the credit problems have spread into a traditional credit cycle. The credit losses are everywhere. They're not just in a specific loan portfolios," said Cassidy. "This is showing up in spades in the banks in the fourth quarter."

Cassidy said capital issues, like those at State Street, have not been addressed by TARP. "I would say for the broader industry, there's certainly concern for more ..Everyone hates the "N" word, which is nationalization. There is concern that the government will have to get more involved with the banks form an equity standpoint."

Washington has also been discussing the idea of an "aggregator" or bad bank to suck up the toxic assets on bank balance sheets. "With this second round of TARP that President Obama is going to have to address, do the regulators recommend that the government is going to have to take common equities?" Cassidy said.

Obamanomics

Boyle said traders were hoping to hear more detail on the economy from President Obama during his noon speech. "Everybody was teed up on the long side ahead of the Obama speech," he said. The market held in its morning range during the speech, but hit its lows afterwards and continued to decline into the close as bank shares sunk.

Greg Valliere, chief strategist at Stanford Washington Research Group, said he thought the speech hit all the right notes even if it disappointed traders.

"I think this speech was for the world," said Valliere, noting Obama's outreach to Muslims. "I think he wanted to point out to the world how this country works. But in our little parochial world, I think the most important line was that without a watchful eye, the markets can spin out of control. This speech marks the transition from New York to Washington. The banks and Wall Street have forfeited their rights to act unfettered."

Valliere said he thinks the market wants to see action now. "It wants the stimulus done by President's Day break..They want to see a big stimulus. I think markets would get worried if it's delayed or watered down," he said.

"Today's a day for poetry. We'll get cynical tomorrow. Starting tomorrow, we get the Geithner hearing and all these messy issues resurface," Valliere said.

Geithner, who was well regarded as New York Fed President, may face some criticism during the nomination process, but Valliere expects him to succeed. "That's the safe bet. There's a chance he could stumble, but I'm more interested in what he says about the bailout than his taxes. He's the poster boy for the bailouts. He's got a lot of questions to answer..like why didn't you save Lehman?" Valliere said.

Earnings Central

IBM should be a feature in Wednesday's market after its after-the-bell earnings report drove its stock higher. "You're going to see a trading bounce in the next couple of days," Boyle said. "... Even if the financials look desperate, you might see some money coming into the market in tech."

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He said though the market will have to get past some key earnings news this week. On Wednesday, U.S. Bancorp, Northern Trust, United Technologies, Abbott Labs and Coach report in the morning. After the bell, Apple, eBay, Burlington Northern and Noble Drilling report.

General Motors releases its fourth quarter global sales Wednesday.

Other reports Wednesday include the National Association of Home Builders Survey at 1 p.m. and mortgage applications before the bell. Oil inventory data is postponed until Thursday because of the shortened holiday week.

Oil markets focus on the March contract Wednesday. The price is several dollars higher than the closing February contract, which expired Tuesday. The February contract rose $2.23 per barrel to finish at $38.74. The March contract Tuesday fell $1.73 to $40.84 per barrel.


Questions? Comments? marketinsider@cnbc.com