Will the bulls keep running this week?

A number of big banks took big writedowns last week in a bid to clear their books of bad loans tied to this summer's credit crunch.

Citigroup

(C) - Get Report

,

Merrill Lynch

(MER)

,

Washington Mutual

(WM) - Get Report

and

Deutsche Bank

(DB) - Get Report

were among big financial institutions taking big writedowns on the value of their loan and trading books.

The losses were heavy, ranging as high as $5.5 billion in Merrill's case. But Wall Street's take on the banks' big hits was surprisingly upbeat, as stock indices hit new records. Citi CEO Charles Prince summed up the mood Monday, when he predicted Citi would "return to a normal earnings environment in the fourth quarter."

Still, the banks aren't out of the woods yet. Their writedowns this quarter are based on the assumption they'll succeed in selling billions of dollars of loans still on their balance sheets. A return to normal also assumes that banks can sell the loans without taking too big a hit on pricing.

Last week, many celebrated the sale of part of the loan package to finance Kohlberg Kravis Roberts' buyout of First Data. But a bigger deal lies ahead. According to sources familiar with the offering, the sale of loans to finance KKR and TPG's $32 billion buyout of Texas utility

TXU

(TXU)

is set to launch on Wednesday.

Traders likewise cheered how the week ended -- with a slightly better-than-expected report of 110,000 new jobs added in the month of September and higher revisions to August's and July's payrolls. Investors cheered that Goldilocks was back and that the economy wasn't wounded by the summer credit crunch.

"The

Fed

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tightened just enough through June of last year to pop a couple of bubbles and un-tighten the labor market," says T.J. Marta, fixed income strategist at RBC Capital Markets.

"It was win, win for the stock market," says Randy Diamond, trader at Miller Tabak. "Through hook or through crook, they'll look for a way to grind it higher."

But the bond market sold off on the news. James Bianco, president of Bianco Research, believes bonds sold off because of inflation fears. Embedded in the jobs report was an increase in average hourly earnings, a gauge of labor inflation. Also, the dollar fell on the jobs report against nearly every currency but the Japanese yen, which is lower-yielding.

Next week brings more insight into the Fed's thinking, when the minutes from September's meeting come out on Tuesday. Federal Reserve Vice Chairman Donald Kohn said in a speech Friday that the Fed did not cut merely to save the markets. He said the Fed seeks to "encourage moderate economic growth over time," and explained that the lagged effect of monetary policy would mean that the impact of September's easing wouldn't be felt until mid-2008.

Bianco is suspicious of such proclamations. He says that given the pronounced swing in sentiment from August's liquidity crisis to the current rally, it seems the Fed's latest cut had a lag time of about 30 seconds.

"The Fed cut for the exact reason Kohn says they didn't do it," he says.

The minutes should also offer some answers on how worried the Fed may be about the continued weakening value of the U.S. dollar.

Next week, the economic data include retail sales, which are expected to increase moderately, along with measures of producer prices and consumer sentiment, which are also expected to gain slightly.

Earnings season gets started too, when

Alcoa

(AA) - Get Report

reports after the closing bell Tuesday.

Costco

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,

General Electric

(GE) - Get Report

and

Sallie Mae

(SLM) - Get Report

are also on the calendar next week, among many others.

In keeping with TSC's editorial policy, Rappaport doesn't own or short individual stocks. She also doesn't invest in hedge funds or other private investment partnerships. She appreciates your feedback. Click

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