Week in Review: Government Sponsored Destruction

This week's issue of "Week in Review" focuses on the dramatic unwinding of Fannie Mae and Freddie Mac, and how, ironically, positive financial sector news acted as catalyst for market turn by mid-week.

By "The Greek"

The week that was... was a tale of two tapes. The five-day drama began in a state of complete chaos inherited from the prior week's close, as investors and economic controllers contemplated the potential demise of the mortgage market as we know it. A mass exodus from the shares of Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) illustrated in living color the reason why the GSEs should never have been private entities in the first place. The shares enjoyed an unnatural premium over the years, as the term "government sponsored" was misinterpreted as "indestructible" by equity investors.

"Fannie and Freddie shares enjoyed an unnatural premium over the years, as the term "government sponsored" was misinterpreted as "indestructible" by equity investors."

Fannie's shares ranged wildly this week from $6.82 to $13.99, and have depreciated in value by 31% in July alone. The same goes for Freddie, whose investors have born a 44% value decimation this month. However, even as the free world held its collective breath through the Congressional testimonies of Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson, a caped crusader swiftly answered the market's call for help.

It wasn't Batman who saved the day though, but Wells Fargo (NYSE: WFC). Wells single-handedly pulled the market up and out of its doldrums on Wednesday thanks to its surprisingly strong earnings report. Make no mistake about it; the event was as powerful a catalyst for upside as any GSE catastrophe might have been (and may yet be) for the downside.

The market ran with the good news! Financial sector stocks like Citigroup (NYSE: C), which also did less worse than expected this quarter, regained some investor confidence after their values had overcompensated for risk. The market retained its new found favor, despite a blunt blow taken from Tech Sector stalwarts Google (Nasdaq: GOOG) and Microsoft (Nasdaq: MSFT), and we take this opportunity to remind you about our pre-earnings season article "Technology Stocks, Underweight Tech Now!." Heck, the haunting black cloud of the Hindenburg Omen would not even deter the market!

We told you earnings data would drive stocks last week, but it is our duty to remind you that the week also offered ominous inflation metrics. Both the Producer Price Index (PPI) and Consumer Price Index (CPI) came in hot for June, by our interpretation. However, inflation concerns were quelled by oil and its backtracking to $128.50 per barrel (NYM August Contract). Energy conscious Americans benefited this week from a soft Chinese GDP report, an increase in our oil inventory and Iran's NOT launching any new missiles. Can you bear another I told you so? See our piece, "Oil Prices and Refiner Stocks;" it's very prescient if I do say so myself.

The Week Ahead (in brief... "The Greek's Week Ahead" is on tap)

The coming week's news flow should be dominated by corporate earnings reports, as the season gets into full swing. Please see our site, Market Moving News to keep up with each day's individual schedule. We'll note a handful of reports of interest here: Monday – American Express (NYSE: AXP), Apple (Nasdaq: AAPL), Bank of America (NYSE: BAC), Merck (NYSE: MRK); Tuesday – Caterpillar (NYSE: CAT), DuPont (NYSE: DD), Halliburton (NYSE: HAL), Washington Mutual (NYSE: WM), Yahoo! (Nasdaq: YHOO); Wednesday – Amazon (Nasdaq: AMZN), ConocoPhillips (NYSE: COP), GlaxoSmithKline (NYSE: GSK), McDonald's (NYSE: MCD); Thursday – Cash America Int'l (NYSE: CSH), Daimler (NYSE: DAI), Eli Lilly (NYSE: LLY), Encana (NYSE: ECA), Ford (NYSE: F), VCA Antech (Nasdaq: WOOF); Friday – Coventry Health (NYSE: CVH), Fortune Brands (NYSE: FO) and Honda Motor (NYSE: HMC).

The relatively quiet economic schedule includes the Leading Indicators Report for June on Monday; measures of confidence, the State Street Investor Confidence Index on Tuesday and University of Michigan Consumer Sentiment reading on Friday; Existing and New Home Sales for June on Thursday and Friday, respectively; and Durable Goods Orders on Friday.

Article also interests AMEX: DIA, AMEX: SPY, AMEX: SDS, AMEX: DOG, AMEX: QLD, Nasdaq: QQQQ, NYSE: NYX. Please see our disclosure at the Wall Street Greek website.