Posted on 03/13/2007 7:33:47 PM PDT by TigerLikesRooster
Stocks plummet on subprime lending woes
By MADLEN READ, AP Business Writer
8 minutes ago
Stocks plunged Tuesday, driving the Dow Jones industrials down more than 240 points to their second-biggest drop in almost four years, as troubles piled up for subprime lenders.
Investors, bracing for a wilting economy, fled the already deflated subprime mortgage sector on more news that lenders New Century Financial Corp., Accredited Home Lenders Holding Co. and General Motors Acceptance Corp.'s residential unit are facing financial problems. The Mortgage Bankers Association bolstered the belief that the struggles are widespread after it said new foreclosures surged to an all-time high in the last quarter of 2006.
All three major stock indexes were knocked down about 2 percent.
Japanese stocks followed suit, and the benchmark Nikkei 225 index fell nearly 3 percent Wednesday morning in Tokyo.
"The market's still jittery, and they're starting to get full-blown concerns over a bleed in the larger subprime mortgage market," said Matt Kelmon, portfolio manager of the Kelmoore Strategy Funds.
Subprime lenders provide mortgages to people with poor credit. Though they are a relatively small part of the U.S. economy, their difficulties raise larger concerns about the housing market, which until its slowdown in recent years was a big source of money for consumers. That, coupled with the Commerce Department's report Tuesday that U.S. retailers eked out a meager 0.1 percent rise in sales last month, led Wall Street to reconsider whether Americans' buying power will withstand an economic slowdown.
Tuesday's selloff was accentuated by options expiring soon and by volatility that has increased since the market's big plunge on Feb. 27 — a 416-point drop in the Dow that was caused partially by the escalating distress among subprime lenders.
The Dow fell 242.66, or 1.97 percent, to 12,075.96. On March 24, 2003, the index dropped 307 points when U.S. casualties began mounting in Iraq.
The blue chip index is now down about 710 points, more than 5 percent, from its record close reached Feb. 20. Many market watchers suspect that the market's correction is not over.
The Dow is still above the low for the year of 12,050.41 reached March 5 and has yet to slip below the 12,000 level, which it reached for the first time last October.
Broader stock indicators also fell by their largest amounts in two weeks. The Standard & Poor's 500 index fell 28.65, or 2.04 percent, to 1,377.95, and the Nasdaq composite index slid 51.72, or 2.15 percent, to 2,350.57.
Consolidated volume on the New York Stock Exchange, where declining issues outnumbered advancers by 5 to 1, was high at 3.49 billion shares — more than the 2.62 billion shares traded a day earlier, but lower than the 4.56 billion shares traded on Feb. 27, when the Dow took its largest plunge since Sept. 17, 2001.
Trading collars were triggered Tuesday afternoon when the New York Stock Exchange Composite index lost more than 180 points. The collars put a chokehold on certain orders, forbidding transactions that capitalize on discrepancies in prices.
Subprime lending jitters and sluggish retail sales drove up bond prices. The yield on the benchmark 10-year Treasury note fell to 4.50 percent from 4.56 percent late Monday.
Gold prices fell, and the dollar was lower against most major currencies. A drop in the dollar versus the yen renewed anxiety about traders unwinding their yen "carry trades," or taking money out of high-yielding dollar assets bought with the low-yielding yen.
On the Tokyo Stock Exchange, the Nikkei fell 512.04 points, or 2.98 percent, to 16,666.80 points Wednesday morning. The index had fallen 0.66 percent to finish at 17,178.84 points Tuesday.
Foreign investors and individual players who bought up stocks during the market's recent rally led the selling in Tokyo, traders said.
The subprime worries have been mounting for weeks now, but came to a head when the New York Stock Exchange took steps to delist shares of New Century, which said Tuesday that the Securities and Exchange Commission would be probing accounting errors that inflated its loan portfolio.
"Investors are poking around to see how much rotted wood there is here," said Jack Ablin, chief investment officer for Harris Private Bank. "It looks like the notion was subprime was contained, and now we're starting to see that maybe this problem has moved into other areas of the market. That's causing investors great concern."
Accredited Home contributed to the anxiety after it said it is in need of cash. Its shares plunged $7.43, or 65 percent, to $3.97.
Wall Street sold off further when the Mortgage Bankers Association's quarterly report on the mortgage market seemed to confirm investors' worries that the entire sector is floundering and could weaken further: not only did new foreclosures hit a record high in the fourth quarter of last year, but late mortgage payments soared to a 3 1/2-year high.
Late in the session, General Motors Acceptance Corp. — General Motors Corp.'s part-owned financing arm — reported that its fourth-quarter profit rose, but struggles in its Residential Capital LLC unit were eating into earnings. That news gave investors extra motivation to sell.
"The fear index is rising," said Steven Cochrane, senior managing director for Moody's Economy.com. "(Subprime mortgages) are our No. 1 concern right now."
That anxiety hit stocks of homebuilders, as lending obstacles could further cripple the lagging housing market. D.R. Horton Inc. fell 86 cents, or 3.7 percent, to $22.31; Centex Corp. lost $2.15, or 4.8 percent, to $42.76; and Toll Brothers Inc. dropped 67 cents, or 2.4 percent, to $27.34.
Investors trying to gauge how far problems in the subprime sector have spread pounced on comments from Goldman Sachs Group Inc. The investment bank said that while the subprime sector showed "significant weakness," the broader credit environment "remained strong." Goldman Sachs fell $3.57 to $199.03, despite record first-quarter profit thanks to strong revenue from trading and investment banking.
Government data on Tuesday suggested that consumer spending might be getting crimped. The Commerce Department said sales at U.S. retailers rose 0.1 percent in February as wintry weather in much of the country kept shoppers away from stores. Investors had expected an increase of 0.3 percent from January.
"I think a big question mark on this is how much of this is weather-related," said Rob Lutts, chief investment officer at Cabot Money Management. "We had two or three days during the month which knocked out activity. ... I think it is causing a little bit of alarm short-term."
Several retailers stumbled following the Commerce Department's report. Federated Department Stores Inc., parent of Macy's and Bloomingdale's, fell 85 cents to $44.09; Wal-Mart Stores Inc. slid $1.08, or 2.3 percent, to $46.18; and Target Corp. fell $1.76, or 2.8 percent, to $60.47.
Traders now await the producer and consumer price indexes, scheduled to be released Thursday and Friday, respectively. The two inflation gauges should give investors a better idea of whether costs are escalating too fast, and if the Federal Reserve might give consumers some relief by lowering interest rates later in the year.
Of the Dow's 30 blue chip stocks, the only gainer was AT&T Corp., which rose 20 cents to $37.26.
The Russell 2000 index of smaller companies fell 19.88, or 2.52 percent, to 769.12.
Overseas, Britain's FTSE 100 fell 1.16 percent, Germany's DAX index fell 1.36 percent, and France's CAC-40 fell 1.15 percent.
Light, sweet crude fell 98 cents to settle at $57.93 per barrel on the New York Mercantile Exchange.
If this doesn't drive down the price of gasoline, nothing will.
"Weather-related". Uh huh. That's it.
Maybe it is reaction of our stocks going nuts today
All your house are belong to us!
When the Japanese economy started REALLY tanking, the rose-tinted glasses set trundled out excuses like, "It's WEATHER RELATED..."
All kinds of crazy stuff like that.
One time a famous model got married to a famous Sumo wrestler. They said, "this will send the stock market north for sure..."
Yeah, sure...
Someone set us up the loan! Reset zig! Make your time.
The current spike up in gasoline prices has much to do with refineries switching over production to spring/summer blends.
Stocks to watch/short
CFC
HBAN
WM
LEND
NDE
I'm not a player. I have 2 401k accounts. I can move money in and out of my accounts at will.
Today, I pulled back from my equities by 15% and moved it into bonds. I'm a coward. I made like 30k on my international equities from 2005 to 07...but this latest drops..I'll live with the safety margin. I'll move another 300k if it goes recession.
LOL!
All Your House Are Belong To Us
I'm sure it'll just be another reason for gas prices to go up instead.
Interesting. Gold is behaving more like stock, the dollar falls and yet the yield on US Treasuries decreases due to higher demand, with all three being attributed to the same event. It's peculiar behavior for a "flight to safety."
I am a mortgage broker in Michigan and do quite a few subprime mortgages. I can see the lenders doing a few things to tighten up new originations:
-Higher FICO scores
-Cash down versus no money down 100% loans
-Lower LTV loans
-Lower DTI ratios
-Elimination of stated income and limiting cash out loans in deteriorating markets....ie Michigan
This is certainly something Jenny Granholm cant solve.....but you can bet your bootstraps that the Dems will try to make this a centerpiece of the next election cycle.
Is it because it is viewed as a "safe haven" or you think we are getting closer to a full blown correction and everyone selling their stocks will also move into bonds. You are betting that the increased demand for bonds will drive up the price of bonds and plan to sell at the bottom of the correction?
Wells Fargo
Bank of America
JP Morgan (chase has a massive subprime and Alt-A portfolio)
All of them are just as big of targets. But I would say the companies that are non-banks are going to get hit the hardest like Countrywide. The banks with retail banking, credit card businesses, etc... They will survive. But companies like Countrywide.....THey are in big trouble. Check out the insider selling at countrywide the past year. You think the execs knew the party was coming to an end?
I moved 15% of my pathetic portfolio into guaranteed bonds. I don't think the world is coming to an end. I won't need my 401k for 20 years or so. I moved it because I believe that the Chinese adjustment is coming due. I think that when the chicom's bad paper hits completely, it's going to tank my 401k by about 10%. So I put 15% into guaranteed performing bonds and I'm sitting on a bunch of bad chinese paper.
Shrug.
Yeah, it could be a way of covering up latent anxiety.
Not sure what you mean here. Are you referring to the Chinese stock market crash probably caused by the unraveling of the Yen carry trade?
I'm sitting on a bunch of bad chinese paper.
bad chinese paper = Chinese stock certificates? Or are you referring to bad business/investment loans in China? If so, how did you buy those in your 401(k) plan?
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