Coming Week: Panic Button?

Bear Stearns Chief Financial Officer Sam Molinaro said the credit market is "about as bad as I've seen it in 22 years," adding that likening the current environment to market dislocations like the 1987 stock market crash and the debt crisis of the late 1990s are not unwarranted.

Molinaro said that revenue in July was "under significant pressure," and the first days of August are no different, but he refused to break out exactly what portion of Bear Stearns' revenue comes directly from the mortgage-backed and asset-backed securities markets.

S&P cited Bear's particular reliance on these business lines as reason enough for singling out the brokerage firm. Moody's has taken no action on the brokers, all of which have stable outlooks there, but for Lehman (LEH Quote), which has a positive outlook.

While S&P analyst Scott Sprinzen said in an interview that the weaker outlook for Bear Stearns does not reflect any concern about its prime brokerage business, the reins on leverage have gotten tighter for several hedge funds in the market this past week, and there are likely to be more.

"People are liquidating and prices are declining," notes T.J. Marta, fixed income strategist at RBC Capital Markets. Such behavior was visible not only perhaps in Friday's stock market decline, but in more than 2% drops that day in metals, like nickel and copper, that had been popular among speculators.

Also, the Japanese yen continues to appreciate as traders unwind the "carry trade," in which investors borrowed money in low-interest yen to invest in higher yielding currencies. But, as credit markets seize up, investors must liquidate positions to meet margin calls.

"At some point this ends in tears, because that's what always happens," says Marta, who wonders when the market will start to see more heavy-hitting large institutions like insurance companies or pension funds unload their alternative investments.

The headline risk remains, he says, noting that more negative news or rumors like this week's from lenders Accredited Home Lenders (LEND Quote), American Home Mortgage (AHM Quote), Countrywide Financial (CFC Quote) or Beazer Homes (BZH Quote) could easily set off another round of woe.

Traders hope the Fed will come to the rescue of the markets, but the central bank's chief concern is inflation, and an ever-weaker dollar likely puts the kibosh on any rate cut.

The fed funds futures market puts odds of a reduction at Tuesday's meeting at 5%, and 40% odds on a cut in September, according to Miller Tabak. The market puts 62% odds on an easing in October and 100% odds on a cut by the end of the year.

"Those clamoring for a Fed rate cut are doing nothing less than begging the Fed to inflate in order to ease the pain in certain sectors of the economy and financial markets," says Michael Darda, chief economist at MKM Partners. "It's not the Fed's job to bail out the mortgage market or to prevent equities from having a correction."

By many accounts it was the so-called Greenspan put, or his quickness to move rates to 1% in the wake of the Nasdaq crash and to keep them there too long, that encouraged the easy lending standards and risk-taking that became commonplace.

1 What would best describe your stance heading into the coming week of trading? Bullish Bearish Neutral 2 Which of these sectors do you think is set to move up in the coming week? --Choose One--Aerospace and DefenseAirlinesAutomobilesBeverages and Food ProductsBiotechnologyCommercial BanksComputers and PeripheralsConsumer NondurablesEnergy Equipment & ServicesHMOs and HospitalsHomebuildingInsuranceIntegrated OilInternet, Software ServicesInvestment Bankers and BrokersMediaMultiline RetailPharmaceuticalsPrecious MetalsSemis, Semi EquipmentTelecom EquipmentTobacco and AlcoholWireless CommunicationsUtilities 3 Which of these sectors do you think is set to move down in the coming week? --Choose One--Aerospace and DefenseAirlinesAutomobilesBeverages and Food ProductsBiotechnologyCommercial BanksComputers and PeripheralsConsumer NondurablesEnergy Equipment & ServicesHMOs and HospitalsHomebuildingInsuranceIntegrated OilInternet, Software ServicesInvestment Bankers and BrokersMediaMultiline RetailPharmaceuticalsPrecious MetalsSemis, Semi EquipmentTelecom EquipmentTobacco and AlcoholWireless CommunicationsUtilities View the results without voting