Market Insider: Thursday Look Ahead

Wall Street's bears roared back Wednesday, and stocks will have to face down tepid chain store sales and testimony from Fed Chairman Ben Bernanke in Thursday's session.

Wednesday was more violent on the downside than Tuesday was on the upside. This time, the S&P 500 joined the Nasdaq and Dow, closing in bear market territory for the first time in this rout. The Dow lost 2.1 percent to 11,147 and the S&P fell 2.3 percent to 1244.

Like most terrible days in this market, the financials were right there at the heart of the selling and fear mongering. Traders say there is lingering concern Fannie Mae and Freddie Mac will be looking to raise billions of dollars in new capital, even after James Lockhart, director of the Office of Federal Housing Enterprise Oversight, said Tuesday the firms are adequately capitalized.

The S&P financial sector was down 5.2 percent, its worst performance since July, 2002. Brokerage stocks had their worst day since March 17, when Bear Stearns was bailed out.

Freddie Mac fell 23 percent and Fannie Mae fell 13 percent. Bloomberg reported that Fannie paid a record yield over benchmark rates on $3 billion of two-year notes. It reported the 3.25 percent benchmark notes priced to yield 3.27, or 74 basis points more than comparable Treasuries.

Lehman, a perennial rumor target, fell 11 percent. Wachovia was off 8 percent. The bank named Treasury Undersecretary Robert Steel as its new CEO. Bank of America was also lower but its stock was helped after the close by comments from CEO Ken Lewis, who said he didn't see a need to cut the dividend or raise new capital.

Thursday's Agenda

Testimony from Fed Chairman Ben Bernanke and Treasury Secretary Hank Paulson before the House Financial Services committee Thursday will certainly get attention. They are expected to discuss how to improve the regulatory structure and avoid future events like the collapse of Bear Stearns. We heard some of that when they spoke to the FDIC forum Tuesday.

Weekly jobless claims are reported at 8:30 a.m., and natural gas inventories are reported at 10:35 a.m.

San Francisco Fed President Janet Yellen speaks at 3:30 p.m. in Oregon. Fed speakers are being watched closely. Late Wednesday, Kansas City Fed President Thomas Hoenig said the Fed should raise rates "as quickly as possible" to get back to a neutral in order to fight inflation, according to Reuters.

Oil's Spill

Oil failed to regain much traction Wednesday even with news of an Iranian missile test. it ended the day at $136.05, up just one cent barrel. Gold rose $5.40 per troy ounce, or 0.6 percent to $927.30.

John O'Donoghue of Cowen and Co said some of the talk on the street is that select stocks are being sold off because of fund redemptions. "Then there's the continued great unwind of the financials," he said.

O'Donoghue, who heads equities trading, said he looked back at the last bear market -- from August 2000 to March 2003. "The S&P was down 49 percent in that period of time. It was quite ugly and nasty. You had the tech blow up. You had 9/11. You had Worldcom. You had Sarbanes Oxley and the Gulf War," he said. But there were also six bear market rallies during that period of time.

He said he will be watching the chain stores sales Thursday and they should be pretty lousy. "There's a different dynamic that's going on within the whole retail sector and that's the migration to downscale," he said. He said Wal-mart has been seeing a different demographic of more well heeled shoppers in its stores and McDonald's has been seeing traffic from other restaurants for consumers seeking cheaper meals.

O'Donoghue says he expects to continue to see relief rallies which can be played by the opportunistic, but "it's going to be rough sledding for awhile.

Questions? Comments?