Among the earnings season headlines: Bank of America Corp. (BAC) will be issuing its final earnings report of the pre-Countrywide Financial Corp. (CFC) merger era and investors hope that Wachovia Corp. (WB) follows in the recent footsteps of Citigroup Inc. (C) and JP Morgan’s Chase & Co. (JPM), the latter two of which both provided better-than-expected (though certainly negative) results.

Yahoo! Inc. (YHOO) gives its shareholder a bit more ammunition for the never-ending Microsoft Corp. (MSFT) buyout controversy, as Yahoo execs are clearly hoping against hope some decent numbers can save their skin (musings known by the acronym “WWID” – for “What Would Icahn Do?).

Amazon.com Inc. (AMZN) will shed some light onto the U.S. consumer spending/retail sector pictures; however, investors should remember that those Internal Revenue Service rebate checks have likely all been spent by now. The U.S. Federal Reserve stays in the limelight as the Beige Book provides the country one more look at the mindset of U.S. policymakers.

The energy-supply data will be analyzed more closely as investors hope that prices are headed down to more manageable levels. And, of course, the Freddie Mac (FRE)/Fannie Mae (FNM) saga merits continued close scrutiny. Anyone interested in some newly issued stock of these financially strapped companies? [For a related Money Morning story containing the latest developments in the Fannie/Freddie saga, please click here.]

Last week provided investors with a nice reprieve from the daily surge in oil prices, as well as an apparent rebound in the Dow Jones Industrial Average Index – out of bear-market territory. But at least with the stock-price rebound, there’s a real question about whether this represents the first leg of a new bull-market uptrend, or is just a bear-market “head fake” that will separate many investors from their money. [For a special weekend market bulletin, in which Money Morning Investment Director Keith Fitz-Gerald argues that last week’s reversal in trading trends was such a "head fake," please click here. The report is free of charge.]

The backdrop for such a “bear trap” was just about perfect as the week ended, for the overall investor-market mindset had shed the dire outlook of recent weeks and months. Bad earnings somehow didn’t seem so bad. Negative forecasts somehow didn’t seem so negative. Cautionary comments by the central bank didn’t translate automatically and immediately into marketplace fears. Weak economic releases somehow didn’t seem so weak. Investors departed for the weekend with a newfound confidence (or, as we fear, overconfidence). Again, this begs the question: Is this the start of a new, bullish trend, or is it just an aberration that will soon yield to a resumption of downward stock prices and rising food-and-energy costs?

Stay tuned…

Coming up in the week ahead: Leading Economic Indicators (Today/Monday), Fed Beige Book (Wednesday), Existing Home Sales (Thursday), Durable Goods Orders (Friday), New Home Sales (Friday).

Market Matters

Freddie Mac and Fannie Mae stayed in the headlines last week as U.S. Treasury Secretary Henry Paulson announced plans for a “non-bailout” government bailout, complete with improved borrowing terms and an expanded line of credit (and which required congressional approval, easier said than done). By week’s end, Freddie toyed with the idea of “going at it alone” (like any good private enterprise should) and opened discussions about raising capital by offering up to $10 billion in new stock. Given the company’s current “dire” financial position, any new shares must offer great incentives to potential investors. Currently, Freddie’s outstanding preferred stock yields in the neighborhood of 14%.

Meanwhile, the U.S. Securities and Exchange Commission (SEC) emerged from hibernation and offered a few regulatory ideas of its own. With “short interest” at all-time record levels, the SEC initiated actions aimed at limiting investors’ abilities to engage in short-selling strategies (which many observers have labeled as the “speculative excesses” that are responsible for everything from soaring energy prices to plummeting stock prices). Not be upstaged, the Federal Deposit Insurance Corp. (FDIC) took possession of IndyMac Bancorp Inc. (OTC: IDMC), another troubled institution engaged in “risky” mortgage lending, which opened again as a federally-owned institution. (So who’s next and just what will that cost the taxpayers?)

Bailouts and new regulations aside, the financial crisis still has a way to go – and possibly a very long way [To read my two-part report from last week about a Japan-style "Lost Decade" for the U.S. economy, including the investments you can make to sidestep this long malaise, please click here. Both reports are free of charge.]

In terms of earnings season, while Wells Fargo & Co. (WFC), JP Morgan Chase, and Citigroup announced weaker earnings (or losses) for the last quarter, their results actually beat Wall Street’s expectations. Merrill Lynch & Co. Inc. (MER) helped shore up its capital position by selling its 20% interest in Bloomberg LP for roughly $5 billion. The world’s largest brokerage firm also reported its fourth-straight quarterly loss and was downgraded by Moody’s Corp. (MCO) immediately after the release. Outside of financial-services companies, airlines – Continental Airlines Inc. (CAL), Delta Air Lines Inc. (DAL) and American Airlines Inc. parent AMR Corp. (AMR) – did as expected in this earnings season, and reported massive losses.

Google Inc. (GOOG) and Microsoft were among the earnings-season headlines, issuing disappointing forecasts, despite reporting quarters that saw earnings jump by more than 35%. Oil-services giant Schlumberger Ltd. (SLB) reaped the benefits of higher energy prices and manufacturer Honeywell International Inc. (HON) raised its forecast for the rest of the year.

Investors enthusiastically received the positive (yet negative) earnings news from the (depressed) financials and also reacted to a pullback in oil prices. Early in the week, the dollar dropped to a record low against the euro and oil continued its endless climb. After that, however, in four consecutive trading sessions, crude plunged by more than $15 a barrel to a market price of less than $130 – its lowest-such close in more than a month.

Excellent supply reports showed that oil-and-gas inventories actually rose last week as demand slowed, given the higher prices. Mid-week, investors took the opportunity to seek out some bargains as the Dow soared close to 500 points and experienced its best two-day percentage gain since October 2002. The other indexes lagged (thanks Google), though still ended the week in positive territory. Bonds tumbled as investors unwound previous flight-to-quality trades. The week came to a close with plenty of uncertainty, but also with the slightest glimmer of hope out in the market that the financial (and oil) madness may one day come to an end (although we here at Money Morning still believe that “end” is well down the road).

Economically Speaking

News from the economic front was not quite so positive last week as those inflationary fears we’ve been warning about for more than a year appear to finally be coming to fruition.

The June Producer Price Index (PPI) rose at its fastest pace in 27 years and wholesale prices now stand more than 9% higher than they were at this time last year. Likewise, the Consumer Price Index (CPI) jumped by 1.1% in June as energy prices skyrocketed by more than 6.5% during the month.

For those economists who choose to discount the energy statistics, core CPI experienced its worst showing since January and reflected escalating prices in airline tickets, among other areas. (Since ticket prices are directly tied to the price of jet fuel – a form of “energy price” – shouldn’t those optimistic economists factor travel out of the “core” equation as well?)

Retail sales rose by a slower-than-expected 0.1% in June, as weakness in auto sales overshadowed the consumers’ desires to spend those government rebate checks. In fact, many naysayers previously warned not to put too much stock in recent retail statistics as they are more reflective of that (temporary) economic stimulus than they are of any real motivation for consumers to shop.

U.S. Federal Reserve Chief Ben S. Bernanke was in the spotlight again last week (as he seems to be every week, these days), as he delivered his mid-year testimony to Congress and discussed the Fed’s ongoing challenges of stimulating a weak economy without prompting additional inflationary pressures. The central bank chair continued to walk a fine line between these two crises and the minutes from last month’s policymaking Federal Open Market Committee (FOMC) meeting revealed the difficult balance.

While many Fed-watchers expected the next move in rates to be higher, the continued economic weakness makes a rate escalation potentially deadly to the weak economy. For now, the central bank pretty clearly believes that the best move may just be no move at all. The Fed also announced some new rules aimed at protecting residential homebuyers against the “predatory” practices of those (now defunct) mortgage originators.

These days, lenders actually may be required to verify a potential borrower’s income to determine if he or she qualifies for a loan. (What a shame IndyMac never thought of that before.)

Weekly Economic Calendar

Source: New Bull Market or Bear-Market Trap? Investors Look to Earnings Season for Clues

Again just recently, after several big banks announced yet another round of major write-offs – all of them related to the subprime crisis, albeit indirectly – analysts, and even some banking-industry executives, said the write-downs were coming to an end.

Once again, we advised readers to avoid losing their heads over such heady optimism. And again, we were right.

The latest victims of the subprime crisis – mortgage giants Fannie Mae (FNM) Freddie Mac (FRE) – will be in the spotlight this week as investors, economists, bankers, mortgage brokers, homeowners, and politicos alike monitor the fate of these institutions. And here are the questions that will be asked – and hopefully answered – in the process:

• Are these government-sponsored enterprises (GSEs) too big to fail?
• Are their capital positions not as dire as some claim?
• Will the government nationalize them (at the taxpayers’ expense)?
• Will residential borrowing costs shoot through the roof?

The answers will go a long way toward determining how much longer we have to tell you “don’t you believe it” each time some analyst says the subprime crisis is over.

And some of those answers could well come today (Monday), especially after reports surfaced yesterday (Sunday) morning, stating that the U.S. Treasury was working on a rescue plan for the two government-sponsored mortgage firms. [For a related story detailing the Fannie and Freddie debacle in today’s issue of Money Morning, please click here].

Investors also will have to turn at least some of their attention to earnings season (remember that?) as some key financial companies report: US Bancorp (USB.L) (Tuesday), State Street Corp. (STT) (Tuesday), Wells Fargo & Co. (WFC) (Wednesday), Merrill Lynch & Co. Inc. (MER) (Thursday), JP Morgan Chase & Co. (JPM) (Thursday), and Citigroup Inc. (C) (Friday).

Even earnings season poses some questions related to the subprime crisis:

• Will these results lead to more write-downs and additional capital infusions – further fueling the subprime crisis?
• Are those foreign sovereign wealth funds still looking for more American investments?
• Will the high-tech sector be able to offset some of the financial-sector pain, as it has so many times over the past couple of years?

Technology also takes center stage as Intel Corp. (INTC) (Tuesday) and Microsoft Corp. (MSFT) (Thursday) report quarterly results.

In other tech news, Yahoo! Inc. (YHOO) continues to make for interesting news, and yesterday (Sunday) rejected a new takeover/breakup offer from Microsoft and corporate raider/investor Carl Icahn.

Investors get another look into the inflation picture as both June Producer Price Index (PPI) and Consumer Price Index (CPI) are released. Have the higher energy costs started to work their ways into other sectors of the economy? Are companies passing along these costs to the ultimate consumer? (Remember, the so-called “core” data – which excludes volatile food-and-energy prices – is useful, but check out the full inflation picture for a change).

Finally, June retail sales may look promising as those government checks will be reflected in the data, but don’t be fooled. This month, consumers are back out on their own.

Market Matters

And then panic set in. It’s one thing for The Bear Stearns Cos. Inc. (BSC) with all of its interconnected relationships to be close to failing and require a “bailout.” But what about two government sponsored entities (GSE) which own or guarantee $5 trillion in mortgages and serve as the backbone of that entire industry?

Surely, Freddie Mac and Fannie Mae have made news in the past (accounting irregularities, ineffective management) and have long been targets of certain politicos who have warned about a “too big to fail” mentality. Well, after losing a combined $11 billion (as of March 31) and raising $20 billion to shore up balance sheets, both entities face another major liquidity crunch and are in dire need of new infusions.

Lehman Brothers Holdings Inc. (LEH) analysts (like they have room to talk) and St. Louis Fed President William Poole were among the “experts” who implied both GSEs were on the verge of collapse without an immediate capital investment. Fannie and Freddie shares plunged to their lowest levels in more than 16 years and firms with significant mortgage holdings (investment-related and REITs) fell in lockstep. Though the Office of Federal Housing Enterprise Oversight (OFHEO) and Treasury Secretary Henry Paulson offered their best political spin by claiming the GSEs are “adequately capitalized,” investors were not buying (literally) as some awaited news of a government “bailout.” A lonely, optimistic voice in the crowd emerged Friday as Citigroup (as if it doesn’t have its own problems) stepped forward and made the statement that “we expect cooler heads to prevail…we believe the recent sell-off in the shares of Freddie and Fannie is overdone.”

The Freddie-Fannie news overshadowed virtually every other business story of the week. Staying within financials, Merrill Lynch is close to raising more capital of its own (possibly new write-downs on the horizon?) as it looks to reduce its investments in BlackRock Inc. (BLK) and Bloomberg LP. Likewise, Citi is selling its German banking unit to France’s Compagnie Financiere du Credit Mutuel SA for more than $7.5 billion.

Outside of financials, Dow Chemical Co. (DOW) is acquiring Rohm and Haas Co. (ROH) for $15 billion in a cash deal, and General Motors Corp. (GM) will be handing out more pink slips (so what else is new?) as it reevaluates most of its brands. Oh yeah, earnings season kicked off last week with Alcoa Inc. (AA) beating estimates and General Electric Co. (GE) affirming its profit forecast for the year. Thomson Reuters predicts that Standard & Poor’s 500 companies lost 13% in the 2nd quarter, with financials leading the slide with related earnings falling by more than 65%.

Oil prices ended a highly volatile week on a very negative note. After tumbling more than $9 a barrel in two days, crude once again soared to record levels as Iran threatened the world (or, at least, Israel) by test-launching a few missiles. After starting the week around $145, prices plunged to $136 on Tuesday before rallying again (to $147 at one point Friday).

The Dow Jones Industrial Average and the S&P 500 struggled as negative news from financials and the late week oil-price spike brought out the bears (again). The Dow even fell below 11,000 for the first time in two years before closing slightly above that level. Meanwhile, the S&P 500 hobbled into “bear” territory, as the index has reached a point that was down 20% from its October 2007 highs. As the weekend began, some investors speculated that U.S. Federal Reserve Chairman Ben S. Bernanke, Treasury Secretary Paulson and others might participate in more “round the clock” meetings over this Freddie-Fannie fiasco.

Is it time to panic yet?

Economically Speaking

No rest for the weary. Just because the economic calendar was light last week doesn’t mean the Fed officials were taking any time off. Instead, a “power-hungry” Bernanke was pushing for the central bank to get more regulatory authority over the financial markets. He believes that such a move would help ensure damage control in case of future potential failures (as we saw with Bear Stearns, and may soon see with the dynamic duo of Freddie and Fannie).

In congressional testimony, Bernanke spoke of the Fed’s continued creative moves to assist in the current financial crisis (this entire mess stems from the subprime crisis); he suggested that investment firms should be able to borrow from the discount window beyond the mid-September deadline (and into 2009). Late into the week last week, the week, reports claimed that Freddie and Fannie likewise would have access to the Fed’s discount window. Whether that will be part of the rumored Treasury Department bailout we mentioned remains to be seen.

Across the pond, European Central Bank President Jean-Claude Trichet implied that his policymakers stand prepared to raise rates further should threats of inflation continue to rise across Europe.

Last week, retailers reported “same-store” sales data (stores open at least a year) for June and the results were not half bad (at least, not for discounters). Wal-Mart Stores Inc. (WMT), Costco Wholesale Corp. (COST), and BJ’s Wholesale Club Inc. (BJ) each reported better-than-expected sales as consumers went “crazy” with those government rebate checks (or as crazy as a $300 to $600 refund will allow).

Children’s Place Retail Stores Inc. (PLCE) also reaped the benefits of the government’s generosity, though traditional mall-based stores like Limited Brands Inc. (LTD) and The Gap Inc. (GPS) failed to capitalize.

After struggling through a poor June, Nordstrom Inc. (JWN) warned that its 2nd quarter results might not meet prior forecasts. Analysts have grown concerned that the rebate checks were like a tailwind that temporarily filled the sails of some of the big store chains, enabling them to navigate some of this slowdown – but that these checks will ultimately leave the store chains becalmed going forward.

On that note, Morgan Stanley (MS) reduced its earnings forecast for the entire retail sector for 2009.

Weekly Economic Calendar

Source: Subprime Crisis Again in the Spotlight as the Meltdowns of Fannie Mae and Freddie Mac Fuel Fears of a Deeper Downturn