A Week of Worry and Weakness

Buying the rumor and selling the news is one of the oldest ways of Wall Street. And that is just what happened this week.

Stocks bottomed on Tuesday, November 27th and spent the next two weeks moving higher as investors became enamored -- then infatuated -- with the idea that not only would the FOMC cut rates, but that they would do so to the tune of 50, rather than 25 basis points.

The punditry reached a feverish pitch as discount rate cuts and other credit-easing measures were talked about as additional stocking stuffers for investors desperate for a catalyst to move the markets higher this winter holiday season.

In fact, it was a testament to the will to believe (or is it the will to greed?) that allowed commentators to ponder -- AFTER the Dow had already climbed 1,000 points in two weeks -- just how bullish a Fed rate cut would be for the markets going forward. The answer -- in the short-term -- seemed to be "not very bullish." But how much of the selling that arrived swiftly after the Fed's decision was really related to the 25 basis point cut (instead of the longed for 50) and how much was simply an unwinding of an exceptionally overbought market remains to be seen.

Bernanke: The Meat in a "Rock Meets Hard Place" Sandwich

I do not know if Ben Bernanke, chairman of the Federal Reserve Board is a little more than a Wall Street errand boy or if he is, as some prefer to insist, completely indifferent to the economy's desperate need for even more accommodative monetary policy (Jim Cramer's infamous "They know NOTHING" invective being the most memorable example of this sentiment). But it seems like the man once called Helicopter Ben for his stated willingness to provide the markets with whatever liquidity was required should a crisis occur on his watch, really cannot win for losing of late.

Mere days after the market turned its nose up at the further lowering the Fed funds rate to 4.25% (which represents a total of 100 basis points in cuts over the past three months), the market is smacked in the face with a report showing that inflation is surging, with November consumer prices rising more than forecast and evidence of inflation also accelerating in Europe.

To Bernanke's credit, he has sought out different ways to make credit more available short of pushing on the Fed funds rate string. His Fed has lowered the discount rate and, most recently, worked out agreements with the European Central Bank to extend terms of short-term loans to banks along with other measures.

But everything Bernanke does to make credit easier only seems to stoke inflation -- as Friday's inflation figures seem to suggest. Increasingly, it seems like the Bernanke Fed will have to decide whether or not inflation or potential recession is the bigger problem for the economy.

Is the Long Nightmare Over for the Financials?

How much is the negative sentiment priced into the market?

Back in the late 1990s, wise guys said that hearing cab drivers talk about their tech-heavy stock portfolios was a pretty good tell that the good times were just about over. Last night, listening to an old friend with no investment experience whatsoever fret about the impact of SIVs on his 401(k), I wondered if we were about as supersaturated with subprime panic as we could get.

BlackRock's Larry Fink certainly seems to think so. This week at a Goldman Sachs (GS@GS | Quote | Chart | News | PowerRating) investor conference, the head of BlackRock announced that he has been encouraging his clients to begin adding risk. Said Fink, "there is so much fear now that the marketplace is starting to see this and anticipate it. I think we've seen a large extent of the decline already." That said, Fink concedes the possibility of a recession, which has become an increasingly popular fear among many economists. Fink's BlackRock has devoted billions to new funds dealing in distressed mortgages, real estate and leveraged loans. Fink plans on increasing overseas investment, as well.

Word Friday morning that Citigroup (C@C | Quote | Chart | News | PowerRating) would be riding to the rescue to save seven of its structured investment vehicles -- to the tune of $58 billion -- was seen by some as evidence that the worst of the mortgage meltdown was increasingly behind us. It also likely heartened investors to the arrival of new Citigroup CEO, Vikram Pandit, whose decision it was to put SIV debt back on Citi's balance sheet, as well as the SIVs assets.

Stocks in the News

The stocks that made the headlines this week were a mixed bag of disappointing financials and improving technology companies -- particularly Apple and Texas Instruments. Even good news from Costco was greeted with annoyance by investors stuck with their heightened expectations of the retailer.

Citigroup (C@C | Quote | Chart | News | PowerRating) came to the rescue of seven of its structured investment vehicles -- or SIVs -- by both adding the SIV debt to its balance sheet, as well as the assets held by the funds.

A Bear Stearns (BSC@BSC | Quote | Chart | News | PowerRating) report hinted a very positive 2008 for Apple (AAPL@AAPL | Quote | Chart | News | PowerRating) based on expectations of strong sales of Mac computers. The report was based in part on a survey by research firm, ChangeWave.

News of layoffs, a preferred stock offering and a Bank of America downgrade to "sell" kept shares of Washington Mutual (WM@WM | Quote | Chart | News | PowerRating) under pressure.

Texas Instruments (TXN@TXN | Quote | Chart | News | PowerRating) was one of the brighter stars in the tech stock universe. Increased demand for mobile handsets and analog chips both cited in improved outlook for the company.

With fourth quarter earnings above expectations and the ability to avoid many of the subprime woes that have plagued other financial institutions, Lehman Brothers (LEH@LEH | Quote | Chart | News | PowerRating) rewarded CEO Fuld with a $35 million stock award.

Shares of General Electric (GE@GE | Quote | Chart | News | PowerRating) were buoyed by an optimistic, but conservative outlook for 2008 provided by GE CEO, Jeffrey Immelt.

Speculation grew this week that Motorola (MOT@MOT | Quote | Chart | News | PowerRating) might be split up in order to unlock shareholder value. Activist investor Carl Icahn continues to push for the restructing.

Costco (COST@COST | Quote | Chart | News | PowerRating) surprised investors with an 11% jump in third quarter profits reported this week, although shares moved lower after the news.

JetBlue (JBLU@JBLU | Quote | Chart | News | PowerRating) made the news this week with Lufthansa's decision to purchase 19% of the company for $300 billion.

What to Look for Next Week

Monday: NY Fed Manufacturing Index
Tuesday: November Housing Starts / Chain Store, Retail Sales Indices
Wednesday: None
Thursday: Jobless Claims / Leading Indicators / Philadelphia Fed Business Index
Friday: "Quadruple Witching" / Consumer Sentiment / Personal Income, Spending

Best Performing Stocks (PR 8-10) of Last Five Days

Here are some of the best performing, high PowerRatings (for Investors) stocks of the past five days. This week, all of the listed stocks have PowerRatings of 8 or 9.

United States Oil Fund ETF (USO@USO | Quote | Chart | News | PowerRating). PowerRating (for Investors) rating: 9

Coca Cola Enterprises (CCE@CCE | Quote | Chart | News | PowerRating). PowerRating (for Investors) rating: 9

Cadence Design Systems (CDNS@CDNS | Quote | Chart | News | PowerRating) PowerRatings (for Investors) rating: 8

Regency Energy Partners (RGNC@RGNC | Quote | Chart | News | PowerRating). PowerRatings (for Investors) rating: 8

DENTSPLY International (XRAY@XRAY | Quote | Chart | News | PowerRating). PowerRatings (for Investors) rating: 8

Worst Performing Stocks PR (1-3) of Last Five Days

Here are some of the worst performing, low PowerRatings (for Investors) stocks of the past five days. This week, all of the listed stocks have PowerRatings of 1 or 2.

Beazer Homes (BZH@BZH | Quote | Chart | News | PowerRating). PowerRatings (for Investors) rating: 1

Smith & Wesson Holding (SWHC@SWHC | Quote | Chart | News | PowerRating). PowerRatings (for Investors) rating: 2

MGIC Investments (MTG@MTG | Quote | Chart | News | PowerRating). PowerRatings (for Investors) rating: 2

Leap Wireless International (LEAP@LEAP | Quote | Chart | News | PowerRating). PowerRatings (for Investors) rating: 2

Fannie Mae (FNM@FNM | Quote | Chart | News | PowerRating). PowerRatings (for Investors) rating: 2

David Penn is Senior Editor at TradingMarkets.com