The bears have Wall Street cornered and they just won't let go.
This week is almost sure to be a rocky ride for the U.S. stock market as investors fret about the stability of Fannie Mae (FNM.N) and Freddie Mac (FRE.N), the government-sponsored home finance companies that own or guarantee about one in every two mortgages in this country.
Barring any news, say over the weekend or early this week, that quashes fears of capital constraints at Fannie and Freddie, analysts and money managers said U.S. stocks were set to fall further into the bear market's arms.
Wall Street will focus on Federal Reserve Chairman Ben Bernanke this week, when he is scheduled to appear twice on Capitol Hill to give his semiannual testimony on monetary policy. He is set to testify on Tuesday before the Senate Banking Committee, and on Wednesday, before the House Financial Services Committee.
Investors will latch on to anything Bernanke says about Fannie Mae and Freddie Mac, as well as his take on the U.S. economy, inflation and interest rates.
"The bottom line is that we're in the middle of a financial tsunami. This is a storm the likes of which this country hasn't seen," said Peter Kenny, managing director at Knight Equity Markets in Jersey City, New Jersey. "The market right now needs to see results. It no longer gives anyone the benefit of the doubt."
Fannie Mae and Freddie Mac, which own or guarantee almost $5 trillion in mortgages and package them into bonds, are confronted by mounting losses from loan delinquencies and foreclosures. Investors fear that if they are hampered from doing business, the paralysis will only make the housing crisis get worse.
This week also brings a torrent of numbers from earnings reports and economic indicators. It will be one of the busiest weeks for quarterly earnings, with reports from Dow component Citigroup (C.N), the No. 1 U.S. bank, and technology bellwether Google (GOOG.O), the leading Web search company.
Making the terrain even more treacherous for stock investors are worries about oil and inflation. On Friday, oil shot up to a record above $147 a barrel. This week, investors will scrutinize data on consumer and producer prices for any signs of rising inflationary pressures.
Major economic reports on tap include the U.S. Producer Price Index and the Consumer Price Index, industrial production and capacity utilization, and housing starts.
"I have my helmet on and my body armor on," said Frederic Dickson, senior vice president and market strategist at D.A. Davidson & Co in Lake Oswego, Oregon. "We expect it to be another volatile week with the market reacting to a triple play of earnings, oil and the mortgage agencies.
"The market is going to remain nervous, watching developments with oil and tensions in the Middle East, and the avalanche of earnings and outlooks that will really start to hit the tape with banks and tech companies (this) week."
OIL, PPI AND CPI
Political tensions over Iran's nuclear work and supply worries drove oil prices to yet another all-time high last week.
August crude gained $3.43, or 2.4 percent, to settle on Friday at $145.08 a barrel on the New York Mercantile Exchange. Earlier, it hit an intraday record of $147.27, eclipsing the previous NYMEX high of $145.85 set on July 3 -- the day before the Independence Day holiday.
The government's report on Producer Price Index for June is set for Tuesday, followed by June CPI on Wednesday, when the Federal Reserve also is expected to release the minutes from its most recent policy-making meeting on June 24-25. At that meeting, the Fed held its benchmark fed funds rate for overnight bank lending at 2 percent.
FANNIE AND FREDDIE FALLOUT
Concerns about Fannie Mae and Freddie Mac's stability drove Friday's sharp sell-off, marking the sixth straight weekly drop for both the Nasdaq and the Standard & Poor's 500 Index -- their longest weekly losing streaks since 2004.
Earlier last week, the S&P 500 entered its first bear market since 2002. It joined the Dow and the Nasdaq, which had already slid 20 percent or more from their most recent closing highs, set last October.
During Friday's roller-coaster session, the Dow dropped below the 11,000 level for the first time since July 2006.
For the week, the Dow Jones industrial average (.DJI) lost 1.4 percent and booked its fourth straight weekly decline.
The Nasdaq Composite Index (.IXIC) slipped 0.3 percent for the week, while the S&P 500 (.SPX) slid 1.9 percent.
The anxiety over Fannie and Freddie is likely to spill over into this week. As the twin pillars of the U.S. housing market, Fannie's and Freddie's troubles put the U.S. economy and its banking system at risk, according to analysts.
"If the Fannie and Freddie crisis is not resolved, the markets are going to be in worse shape than they are right now," said John Praveen, chief investment strategist at Prudential International Investments Advisers in Newark, New Jersey.
"There's a lot of fear and uncertainty about what is going to be the outcome," Praveen said, adding that such a resolution could occur over the weekend or this week, and it is "probably going to set the tone for the market."
U.S. Treasury Secretary Henry Paulson offered no hint of an imminent government bailout, saying on Friday his major aim was to back Fannie and Freddie "in their current form."
Paulson's statement followed a report in The New York Times saying that the U.S. government was considering taking over the two if their funding problems get worse.
EARNINGS AND MORE FROM THE FED
In addition to quarterly report cards from Citigroup and Google, this week's earnings to watch include chipmaker Intel Corp (INTC.O) and Microsoft Corp (MSFT.O). This barrage of quarterly numbers and companies' comments on what they expect for the rest of the year are likely to make stock trading extremely choppy.
Friday's session, marked by a spike and a pullback in the Chicago Board Options Exchange Volatility Index, illustrated just how jumpy the stock market has become. The VIX (.VIX), which is Wall Street's barometer of fear, shot up 15 percent in midday trading to 29.44, its highest level since March 20. By the close, the VIX was higher, but more subdued. It ended at 27.49, up 7.42 percent.
Besides Bernanke, the week's agenda includes appearances by two other Fed officials: Janet Yellen, the president of the Federal Reserve Bank of San Francisco, is scheduled to speak on the housing market on Tuesday in Hollywood, California. Thomas Hoenig, the president of the Federal Reserve Bank of Kansas City, is set to speak on monetary policy and the economic outlook on Wednesday in Durango, Colorado.
(Wall St Week Ahead runs weekly. Questions or comments on this one can be e-mailed to: ellis.mnyandu (at)thomsonreuters.com)
(Additional reporting by Kristina Cooke; Editing by Jan Paschal)
