Wall Street's three-week winning streak came to an end this week -- save for the


-- amid a selloff in oil and commodity stocks. And as the fallout of the

General Motors

(GM) - Get Report

debt downgrade continued, tremors from the hedge fund world were felt on Wall Street, while signs of economic resilience pushed the case for higher interest rates.

Reflecting those jitters, the

Dow Jones Industrial Average

posted triple-digit losses on Tuesday and Thursday. It was down by that much on Friday too before paring some of the losses by the close, as did the

S&P 500


The retracement came after billionaire investor Carl Icahn disclosed new positions and changes in his porfolio via regulatory filings. Among his positions, shares of


(RAD) - Get Report


Siebel Systems




(HPQ) - Get Report

rose after the announcement.

Meawhile, the Nasdaq finished Friday in positive territory, gaining 0.66% to 1976.80, thanks to stronger-than-expected earnings from


(DELL) - Get Report


It was a similar story for the week, as the DJIA fell 2% to 10,140.12 and the S&P fell 1.5% to 1,154.05. The Nasdaq, meanwhile, rose 0.4% to 1976.80.

Besides Icahn, dollar bulls and Treasury bond holders were among the few who could still smile Friday night. The dollar pushed above seven-month highs against the euro. Strong April retail sales and an improved March trade deficit, together with last week's strong employment report, confirmed the view that the economy is resilient enough to allow the Fed to continue raising rates.

That's not good for the prices of short-term government bonds, perhaps, but the 10-year Treasury note is doing just fine, thank you. Rumors that several hedge funds may be in big trouble due to some of their more complex debt instruments sparked a flight to quality and a widening of credit spreads. The financial sector got hammered.

The yield of the 10-year Treasury is down to 4.12%, back to its pre-"conundrum" level in mid-February

The Treasury market is usually happy when things are bad for the rest of the world and this week was no exception. In spite of strong headline numbers for U.S. growth, there was further evidence of waning consumer confidence, as shown by the latest survey by the University of Michigan. And while retail sales shot higher in April,


(WMT) - Get Report

posted disappointing earnings and warned of more to come.

Perhaps underpinning the upbeat mood for government bondholders was the continued slide in crude oil prices, which fell below the key $50-a-barrel level to finish the week at $48.67, down 4.5%. Rising U.S. inventories were cited for the continued drop, but there was also evidence, in an International Energy Agency monthly report, that global demand for oil, including from China, is waning.

Energy stocks, along with raw-materials producers, got hammered.

Exxon Mobil

(XOM) - Get Report

lost more than 8% and


(AA) - Get Report

fell more than 10% this week.

As the market's weak performance so far this year has made clear, investors seeking aggressive returns have been having a hard time. Energy and materials were the sectors still posting stellar growth, but even that appears bound to change. Merrill Lynch chief North American economist David Rosenberg has been among the most vocal in noting that oil and related stocks were behaving like bubble-era Internet stocks. It used to be the unlimited promises of the Internet; more recently it's been the never-ending growth in China and Asia.

Even cautious mutual fund money managers have been unable to resist the temptation of piling up energy stocks to add some frills to their otherwise defensive porfolios made up of health care, utilities, and consumer staples stocks.

Much has been said over the speculative run-up in oil prices. Even Fed Chairman Alan Greenspan pointed out -- when oil seemed that it was heading to $60 per barrel -- that price levels were not reflecting fundamentals in the oil market.

Hedge funds -- those again -- were believed to be taking large positions. Perhaps it was no coincidence that the price of oil dropped drastically this week at the same time that noises about hedge funds losses circulated. Hedge fund managers, bound by promises to wealthy investors to deliver above average returns, also were rumored to be unloading rich positions in energy and materials to meet their redemptions. Other rumors had funds taking huge losses on steel. No one knows for sure.

What is known is that the performance of hedge funds has not been good in April, as many fund positions were squeezed between rising short-term rates and volatility in the corporate bond market after GM's March downgrade.

There are systemic issues in the U.S. credit markets, according to Andrew Roberts, Merrill Lynch's head of fixed-income strategy in London. He noted that a big weight on corporate issues remains ever-increasing pension liabilities amid rising health care stocks, which also were a major factor in GM's debt downgrade to junk.

But the corporate bond market got a break on this issue this week after


(UAL) - Get Report

unit United Airlines won a legal battle to transfer its pension liabilities over to the government. "For me, that was the highlight of the week," says Roberts.

Yet this one victory won't necessarily be repeated by others, unless the government decides to bail out the auto industry as it did the airlines several years ago, says IDEAGlobal corporate bond strategist John Atkins.

Delphi Automotive


, which posted a first-quarter loss on Thursday, also mentioned that fixed legacy costs remained its main challenge going forward. Fundamentals remain negative for corporate issues going forward, Atkins says.

According to Citigroup analysts, the "credit contagion" has spread to Europe, where spreads between corporate and government bonds have widened drastically. Should more shocks cause abrupt changes in spreads, it is possible that some hedge funds may finish belly-up, they say.

The tremors also are pointing to something else. The historically very low U.S. rates of the past few years have fueled the carry trade, which involves short-term borrowing at low rates to invest in higher yielding long-term investments. Hedge fund speculation, emerging market growth and the U.S. housing bubble are the main symptoms of this environment, according to Stephen Roach, Morgan Stanley's chief economist.

Perhaps the retail spending spree in April was still fueled by home equities. "Equity extraction" from rising property values amounted to more than $710 billion over the past four years, Roach notes. "That is hardly an inconsequential supplement to consumer purchasing power," he writes, adding that the growth in equity extraction was 35% larger than wage income growth over the same period.

In the meantime, real estate remains red hot. On Tuesday,

Toll Brothers

(TOL) - Get Report

said that demand for luxury homes boosted the value of its contracts and backlog to the highest levels in its history for the second quarter.

All this is accompanied by extraordinary levels of household sector debt, which amounts to a record 90% of GDP, says Roach. That means that as the Fed is forced to raise interest rates just to return them to normal levels, there could be a painful end to consumption.

And the pursuit of high-yield returns, fed by the low rates of the past few years, also may crack along the same fault lines, according to Roach.

In keeping with TSC's editorial policy, Godt doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send

your feedback.