Freddie Mac Loses His Friends

With year-end rapidly approaching, the U.S. stock market is back roughly to the level at which it began 2007. Bearish news abounded this week. The quasi-governmental mortgage bank affectionately known as Freddie Mac reported heavy losses in its loan portfolio and may need a multi-billion dollar bailout soon. We won't be surprised if taxpayers are left holding the bag; Wall Street seems to have little interest in taking on even more risk at this point, especially after a new economic forecast from the Federal Reserve suggested more economic weakness is probably ahead. Corporate news shows no hints of recovery, either.

All the bad news is causing another wave of near-panic buying of Treasury securities. This has the effect of driving down the effective yield. The U.S. 10-year bond yield dropped below 4% for the first time since 2005. Two-year notes dipped below 3% as well. The yield curve is steepening in anticipation of further interest rate cuts by the Fed. Rising crude oil prices did little to help energy or any other sector. Today even the defensive equity sectors that had been market leaders retreated amid the flight to quality. This may have something to do with holiday trading schedules, but we won't know until next week.

Our indicators continue to suggest that stocks are at a critical juncture. A great deal of technical damage has been done in the last few days, and if it is not repaired soon then further losses seem likely. On the other hand, the market benchmarks are clearly approaching oversold conditions and due for at least a short-term bounce. We should know more next week when normal trading resumes. Happy Thanksgiving.