Fed Chairman Ben Bernanke's testimony before a Senate committee takes on even greater importance for Tuesday's markets, now that the Fed and Treasury have promised to backstop mortgage giants Fannie Mae and Freddie Mac.
There's plenty of other news to watch, including producer price inflation data, retail sales and some key earnings from financial institutions and blue chip Johnson and Johnson. General Motors also has a before the bell announcement on its plans to reshape itself. Intel reports after the bell.
Fed Speak and More
Bernanke has been scheduled to give his semiannual testimony on the economy before the Senate Banking Committee Tuesday morning, but he will now be joined by Treasury Secretary Hank Paulson and SEC Chairman Christopher Cox after his initial testimony.
All three are expected to answer questions about the Fed and Treasury plans to make sure Freddie and Fannie are well capitalized. Bernanke gives the Fed's latest economic forecast at the beginning of the 10 a.m. hearing, before moving on to Freddie and Fannie.
"We may learn a little more about the motivation for the move -- how severe the situation is for Fannie and Freddie," said Mark Zandi, chief economist at Moody's Economy.com. "I'm really curious to see how Congress will react to this."
"I think the bond holders are okay with it. They are convinced they are going to be fine, but the stock holders are very nervous about what it all means and how diluted it will be," he said.
Bernanke is also scheduled to spend Wednesday morning giving his economic testimony before the House Financial Services Committee.
There are several key events on the economic calendar. The Producer Price Index, an important inflation gauge, is reported at 8:30 a.m. and retail sales for June are at 8:30 a.m. The Empire State survey is reported at 8:30 a.m. and business inventories are at 10 a.m. San Francisco Fed President Janet Yellen speaks on stabilizing communities at 3:30 p.m.
Blood on the Street
What started Monday as a halfway decent morning for financial stocks turned quickly into a blood letting with the KBW banking index diving 8.5 percent, the worst one day decline in its 16 year history. Downgrades, earnings reductions and speculation surrounded the group, taking on a more dire feel after the federal takeover of Indy Mac Bank Friday.
"What's going on is people are worried about the regional banks. You've had a couple of brokers talk about whether they can sustain the dividends. One of the interesting things is the preferreds are selling off sharply," said Art Cashin, UBS director of floor operations.
The stocks of Fannie Mae and Freddie Mac both jumped in an early relief rally but moved lower, each finishing with a loss on the day. Freddie successfully floated $3 billion in securities, a relief to the credit markets.
"What is really stunning about this ... is the Treasury threw the full faith and credit of the U.S. government behind those two stocks, and the stock market yawned. That's a little wary," he said.
The major stock indices did not show the ravaging felt in the financials. The Dow was off 45 at 11,055, and the S&P was off 11 at 1228. But the S&P financials were down 5 percent.
Among the worst hit bank stocks was Washington Mutual , down nearly 35 percent on the day. But Washington Mutual said after the bell it had sufficient capital, reversing its stock decline. Earlier in the day, Lehman said WaMu will need to add to reserves in the second quarter and over the balance of the year from some $26 billion in losses on its balance sheet. National City, which defended its capital position during the trading day, was down 14 percent at the close after a much steeper decline earlier.
Goldman put Zion on its conviction sell list, slicing the target to $21 from $39. That stock lost 23 percent.
Worries that other banks could fail surrounded the sector. The FDIC's Sheila Bair appeared on "Closing Bell," and said her agency has 90 troubled banks on its watch list. IndyMac was put on that list in June, she said.
"I think there's going to be other institutions that are in trouble, and I don't think the Fed and Treasury are going to be there to help," said Zandi. He said he expects the FDIC to handle them unless there are too many big failures.
I asked Zandi about his expectations for a rebound in the weak housing market, which acts to reinforce the deterioration in mortgages. "I was more hopeful before Fannie and Freddie, and everybody was hoping for them to provide more credit, not less," he said. "There's just so much foreclosed property and there's just no credit."
Zandi said this negative feed back loop is self-reinforcing, and he expects there will not be a recovery in housing prices until late next year.
Stocks to Watch
General Motors says it will brief employees at 8:30 a.m. and then hold a 9 a.m. press conference on how it plans to "align the business to current market conditions."
Genentech reported earnings after the bell, and its stock rose after it raised its earnings forecast for 2008.