But of a rally or a meltdown? Fannie Mae and Freddie Mac may sound more like a backwoods folk duet than linchpins of the US financial structure, but their fate next week may well be a turning point in the current phase of the bear market (Indymac, a supporting act in California, was booed off the stage on Friday night after a classic run on the bank). Lax financial oversight and dubious political patronage have made this crisis of confidence an accident waiting to happen and with $3bn in short term securities due for auction on Monday, the situation is deeply unsettling for markets. Federal intervention now seems inevitable and will probably take the form of a recapitalisation via an issue of preferred stock.

Crucially, foreign holders of US agency debt such as Russia and China, are not as panicked as equity investors and seem happy to continue to retain their exposure to what they regard as premium yielding Treasuries. Panic headlines about financial cataclysm are misplaced; these institutions are simply too big and fundamental to the US economy to be allowed to fail (owning or guaranteeing $5.3 trillion or nearly half all outstanding US mortgages), and a range of measures are on the table, although full scale nationalization is a remote possibility. Nonsense media analysis to the effect that nationalizing these institutions would raise US government debt by that full $5.3 trillion thus causing a crisis in US creditworthiness and the dollar etc is simply wrong, because the net liabilities to be covered are a small fraction of this figure. For large shareholders like the once legendary but now merely hapless US value fund manager Bill Miller at Legg Mason (down 40% in a year) it's going to be a wash-out, but the key is to stabilise the financial sector and support a nascent recovery in the US housing market.

Sales of existing homes (about 85% of all U.S. housing sales) peaked at an annual rate of 7.25 million in the fall of 2005 and fell to 4.89 million in January; in May, it was 4.99 million. Sales of new homes, have also flat lined in the last couple of months. They might fall again, though probably not by very much. Having peaked at a 1.4 million annual rate in the summer of 2005 before dropping to a 512,000 rate in March, a decline of that magnitude literally can't be repeated. In terms of sales volumes, momentum is turning, although the recovery is likely to be a grinding one. As for sliding prices, the most qualified commentator is the academic who co-founded the benchmark Case-Schiller US house price index: ``I'm beginning to hope that there are going to be some surprises in the next few months that would indicate we are at or near a bottom in probably a third to half the country,'' according to Professor Case a couple of weeks ago. The financial architecture of the US mortgage market dating from the New Deal era in the 1930's now needs radical overhaul, but that can wait for an incoming administration. Right now, as with Bear Stearns, the market needs another line drawn in the shifting sands of investor fear. If that is successfully executed by the Fed and Treasury this week, the Freddie and Fannie show may be seen in hindsight as a cathartic moment setting the scene for a sharp rally in coming weeks, particularly in unloved financial stocks.