Fed, subprime jitters on tap
NEW YORK (Reuters) - One of Wall Street's oldest maxims will be put to the test next week: markets don't hit bottom on a Friday.
Stocks closed out their worst week in more than three months on fears that trouble at two Bear Stearns hedge funds may signal bigger problems ahead for credit markets.
Whether investors worry through the weekend and remain in a selling mood on Monday remains to be seen after the main stock indexes all fell by more than 1 percent Friday.
The week ahead brings no shortage of other events to test investors' nerves, with the foremost being a two-day Federal Reserve meeting on interest rates. Data on inflation and home sales are also on the slate.
For the stock market, a rise in bond yields has stalled a long-running rally. Some are worried that two troubled hedge funds managed by Bear Stearns Cos. Inc. BSC.N may only be the tip of the iceberg.
"I'm not sure this is the only mispriced device that has been created," said Marc Heilweil, president of Spectrum Advisory Services Inc. in Atlanta.
The hedge funds held subprime mortgages, a risky segment of the credit market that has been pummeled by rising defaults. Subprime borrowers are less creditworthy than other borrowers.
Heilweil, who manages about $390 million, said he has been using put options and inverse exchange-traded funds in client portfolios to get some downside protection. Those instruments increase in value when the market declines.
For the week, the Dow Jones industrial average .DJI fell 2.0 percent, the Standard & Poor's 500 index .SPX declined 2.0 percent and the Nasdaq Composite Index .IXIC retreated 1.4 percent.
SUBPRIME CONTAGION A WORRY
"People are concerned that this is a contagion that could spread elsewhere," said Stephen Massocca, co-chief executive at San Francisco-based investment bank Pacific Growth Equities.
Referring to Friday's sharp drop, he said it was a case of "Sell first, ask questions later."
Assuming no more major hedge fund problems surface, investors will be back to Fed-watching in the next week.
"Over the past 18 months, the market has really focused on the Fed and what the Fed says about the economy," said Brian Gendreau, investment strategist at ING Investment Management in New York.
The Fed has held the target for overnight interest rates steady at 5.25 percent since last June. When the two-day meeting ends on Thursday, only minor changes are expected in the Fed's official statement. Continued...
