Battered stocks face another tough week

By Steven C. Johnson

NEW YORK (Reuters) - The bears have been in firm control on Wall Street so far in September, and with anxiety about the health of the U.S. and world economies on the rise, they probably won't choose next week to go into hibernation.

Despite news the U.S. Treasury could finalize a plan to backstop beleaguered mortgage finance companies Fannie Mae (FNM.N: Quote, Profile, Research, Stock Buzz) and Freddie Mac (FRE.N: Quote, Profile, Research, Stock Buzz) as soon as this weekend, the plan, if enacted, was not expected to pull banking stocks out of the doldrums over the long term.

The Wall Street Journal, citing people familiar with the matter, reported that the plan was expected to involve a creative use of authority the Treasury won in late July to pump capital into the two government-sponsored enterprises if it believed it was necessary.

The news sent financial shares higher in after-hours trading on Friday, though shares of Fannie and Freddie fell on concerns any rescue plan could wipe out shareholder value.

"Apparently there may be the resolution we were hoping for in the offing this weekend," said John Schloegel, a vice president of investment strategies for Capital Cities Asset Management in Austin, Texas.

"This will probably be a short-term positive for financials but I don't think this will be an elixir for the entire banking sector," he added.

For the broader economy, recent data that showed the U.S. economy continues to shed jobs and warnings from a raft of companies about diminished global demand slammed equity markets over the past week.

The three main U.S. indexes shed more than 2.8 percent each, with the S&P 500 coming perilously close to a 2008 low set in mid-July. European and Asian markets also fell sharply.

With markets swooning, speculation that troubled hedge funds may be off-loading assets has only added to the unease, which analysts say will persist into next week.

"I'm not real optimistic right now," said Kurt Brunner, portfolio manager at the Swarthmore Group in Philadelphia. "Things are shaded more negatively now, and I don't see a whole lot of indicators that suggest positive momentum."

For one thing, markets have struggled even as the price of oil has continued a steady slide, down about 27 percent from its July record above $147 a barrel. While a positive for consumers, lower oil prices are also seen as a symptom of slowing global demand.

Companies, too, have forecast tougher times ahead, with Dell Inc (DELL.O: Quote, Profile, Research, Stock Buzz) predicting slower corporate technology spending and chip maker Qualcomm (QCOM.O: Quote, Profile, Research, Stock Buzz) saying consumers have grown slower to upgrade their mobile phone handsets.

"There's been a strong contingent of economists who have been feeling that the economy was going to avoid a recession," said Sasha Kostadinov, portfolio manager at Shaker Investments in Cleveland.

"I think now those people who have been holding out are throwing their beliefs out the window. We've got a soft economy, credit is tight and the consumer is really struggling."

EYE ON THE U.S. ECONOMY  Continued...