Market Insider: Tuesday Look Ahead

Inflation and housing data and retailers' earnings could contribute to Wall Street's early direction Tuesday. But the stock market will continue to fret over the financial sector and worry through every move in the oil markets.

The July Producer Price Index is expected to show an increase of 0.5 percent when it's reported at 8:30 a.m. Housing starts and building permits are also expected at 8:30 a.m.


Earnings are expected from Home Depot, Saks and Target before the bell. Hewlett-Packard reports after the bell. Also of interest is Intel's Developers Forum in San Francisco.

Fannie Slaps Stocks

Double trouble from Fannie Mae and Freddie Mac cast a chill over the entire stock market Monday. As those two stocks melted down to near 20-year lows, traders focused on a Barron's story saying it is becoming more likely they will be bailed out by the government. That talk has been around for awhile but it is building momentum as the equity value of the two companies shrinks.

The Dow fell 180 or 1.5 percent to 11,479, the biggest drop since Aug. 7. It is still 4.7 percent from its July 15 low of 10,962. The S&P 500 fell 19.60 points or 1.5 percent to 1278.60. The S&P financial sector was the worst performer, off 3.6 percent. Besides Fannie and Freddie, other financials also sold off. Lehman was lower on reports it could lose $1.8 billion during the quarter.

"Mortgages are down pretty sharply today ... It seems pretty clear that somehow they've got to get more capital," said John Sprow, senior portfolio manager with Smith Breeden. As the stocks of Fannie and Freddie continue to lose ground, the task of raising capital becomes even more difficult.

"To me, it seems like the only end game is for the government to step in, even though they said today they have no intention," he said. "I don't know if they wait for the equities to hit some price before they step in. At some point, there's nothing left."

Sprow said it's unclear exactly how a government take over would work. "When the government steps in, I would look at Ginnie Mae as the model they would work toward ... It's a wrapper. It doesn't have a portfolio," he said.

Could Oil Turn?

Oil continues to trade lower, and on Monday it was at its lowest close since May 1. Crude fell $0.90 per barrel to $112.87.

"We're looking at the 200-day moving average, which stands at $110.27. It's in the neighborhood. It's looking like it's a major breaking point," said John Kilduff, senior vice president of M.F. Global. "If we break through it, it could sell off considerably, or if it holds we could bounce the other way."

Kilduff, a CNBC contributor, says it's more likely it will hold at that level and start to move higher, based on the way some other commodities are now trading. He pointed to corn and gold.

Gasoline, meanwhile is down 6.9 cents per gallon last week, to $3.74 per gallon, the lowest pump price since May 12, according to the EIA.

Jolted by Financials

Brian Stutland, president of Stutland Equities LLC, trades the VIX at the CBOE, and said it moved in response to speculation the government could step in to help out Fannie and Freddie. He said Monday's move could be the start of a new trend in its trading pattern.

"You saw Fannie and Freddie go down about 20 percent. You saw spillover in the options market volatility, and you saw a spike up in the VIX. I would have expected it to get to 24 or 25," he said. The VIX closed at 20.98, which was a 7.2 percent move. He said the idea that the government is there to step for Fannie and Freddie seems to have muted the volatility, ie market fear.

"This was definitely a pretty big move," he said. "We saw 7 to 10 percent moves pretty consistently in early July but since we had an uptrend in the market, and the volatility has come down."

"Typically, what you se is when there's credit issues happening in the financial world, you tend to see a little increase in volatility in the stock market, and it's typically reflected in the VIX," he said. In March, for instance, the VIX got as high as 30 on the Bear Stearns news. "So now I think there's confidence in the government" plan to back stop Fannie and Freddie, he said.

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