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What a Week: Bear Raid

Bear Stearns' balky call tops off a woeful week bombed by subprime.

Fear stalked the markets again this week, even if results for major averages didn't truly reflect the damage.

Fears of a subprime mortgage "contagion" accelerated, embodied by the failure of

American Home Mortgage

(AHM)

and a "going concern" letter from

Accredited Home Lenders

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. At the same time, worries about an economic slowdown were revived by some weak data, most notably Friday's employment report.

Major averages tumbled Friday following disappointing July payroll data, news of AHM's shutdown and a downgrade of

Bear Stearns'

(BSC)

credit outlook by Standard & Poor's. Meanwhile, Bears' CFO Sam Molinaro spooked Wall Street by saying the credit market is "about as bad as I've seen it in 22 years."

On Friday, the

Dow Jones Industrial Average

slumped 281.42 points, or 2.09%, to 13,181.91. The

S&P 500

tumbled 39.14 points, or 2.66%, to 1433.06, and the

Nasdaq

ended down 64.73 points, or 2.51%, at 2511.25. Friday's drop left the S&P 500 below its 200-day moving average, an important

technical level it violated intraday Wednesday, before rebounding with a furious late-day rally.

Wednesday's final-hour bounce and a copycat session Thursday helped mitigate the damage of heavy losses Tuesday and Friday in terms of the weekly results for major averages. Further aided by a decent advance Monday following last week's losses, the Dow dipped 0.6% for the week, while the S&P shed 1.7% and the Nasdaq fell 2%.

As the stock market swooned and corporate debt yields jumped, investors sought the safety of Treasuries, sending the yield on the benchmark 10-year Treasury to 4.70% Friday, down from 5.30% in mid-June. Lost in the shuffle of the credit-related issues, crude futures hit an all-time high above $78 per barrel earlier in the week before retreating to settle at $75.66 Friday.

"Maybe it's a Rorschach test of sorts," says Scott Frew, general partner at Rockingham Capital Partners, "in the sense that how you choose among the explanations

for market action perhaps says as much about how you view the markets at the moment as it does anything else."

Maybe so, but recent action has been enough to shake even some of the most bullish market watchers.

"I am worried, and I've been a raging bull since we dropped dividend taxes four years ago," John Rutledge, chairman of Rutledge Capital, a Greenwich, Conn.-based

private-equity investment firm, said in an exclusive interview on

The Real Story podcast. "I think we are having the beginning of a credit crunch

and this is the kind of thing that can trip up the economy. It's like sticking a broomstick into a bicycle wheel."

Rutledge says it is the availability of credit, which is shrinking, not absolute levels of rates that will determine whether the "red flags" now evident turn into a full-blown credit crunch. That's a crucial distinction for those clamoring for a

Federal Reserve

rate cut in a week in which several Fed speakers took pains to discourage market participants that any "rescue" plan is afoot.

There was no rescue, emotional or otherwise, this week for American Home Mortgage, which

laid off most of its 7,000 employees Friday after having its credit lines pulled and failing to find a buyer for its operations. This week's mortgage nightmare also featured

NovaStar

(NFI)

suspending funding of some mortgage loans, while firms such as

RAIT Financial Trust

(RAS)

were slammed by fears about their exposure to the crumbling mortgage market.

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The selling was certainly not isolated to such second-tier firms as pretty much any housing- or mortgage-related security got hammered again this week, along with major brokerages including Bear,

Goldman Sachs

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and

Lehman Brothers

(LEH)

.

Beazer Homes

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stock plummeted intraday Wednesday amid rumors the homebuilder was facing bankruptcy, which the company vigorously denied.

Beazer rebounded Thursday on news hedge fund Citadel has added to its position in the homebuilder, but Beazer shares tumbled another 13% Friday as fears of a "credit crunch" waylaid the market.

On Monday, news Citadel was buying some positions of Sowood Capital, one of several distressed hedge funds in the news this week, helped quell concerns about a liquidity crunch as did upbeat results at GMAC, the lending arm of

General Motors

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. But those hopes proved fleeting Tuesday, which brought big losses at

MGIC Investment

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and

Radian

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because of their exposure to Credit Based Asset Servicing and Securitization, an investment vehicle known as C-Bass. Wednesday brought news of another Bear Stearns hedge fund in trouble and reports of losses at two funds run by Australia's Macquarie Bank.

Major averages were able to overcome their early declines and close solidly higher Wednesday, a pattern repeated on Thursday.

Head Games People Play

Late Wednesday I somewhat euphemistically noted on

RealMoney.com

's columnist conversation how

the late-afternoon spike seemed futures driven, but nobody (or few) were complaining as opposed to the more recent "futures-driven" declines.

One rumor making the rounds is that a "local" (i.e. individual) trader in the S&P 500 futures pit in Chicago "accidentally sold 5,400 mini S&P futures instead of the intended 54 contracts," writes Carley Garner of Alaron Research.

Garner couldn't identify the trader's name or affiliation, but said in a phone interview she heard the local "didn't realize

the mistake until the rally whipped back in his face."

Richard Bieber, managing director of Dominick & Dominick, heard a similar rumor and says that when the source of the alleged mistake "realized his error and put in to cover, people realized what was going on -- and they ran ahead of his order, buying Dow stocks."

Garner agreed "a lot of people benefited from the poor guys' mistake."

Why front-runners would buy Dow stocks for an error in the S&P mini, or whether that's really enough to explain a 250 point intraday Dow move is unclear. But Bieber, Garner and others say this error/reaction in a "thin market" helps explain the ferocity of Wednesday's late-day drama.

Such violent moves, both overall and in individual names like Beazer and

Apple

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-- knocked midweek by unsubstantiated rumors of iPhone production cuts -- contribute to the view of many individual investors that "the equity markets have absolutely no credibility any more," as one emailer declares. "They are merely a way for the wealthy, self-aggrandized elite to openly steal from everyone else."

That may be a bit harsh, but the midweek advance only served to put lipstick on the proverbial pig the four-year old bull market is starting to resemble.

Aaron L. Task is editor at large of TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He appreciates your feedback;

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