Wednesday, August 15th, 2007
Credit, Consumer Worries Slap Stocks
By Jason Simpkins
The credit crisis may get worse before it gets better in the coming months, as more than 2 million adjustable rate mortgages (ARMs) are ready to “re-set” – industry parlance for boosting their rates.
Credit worries pummeled stocks worldwide again yesterday. The Dow Jones Industrial Average dropped 207.61 points, or 1.6%, to close at 13,028.92 – just above the “psychologically important” barrier of 13,000, which was first traversed back in April. The Standard & Poor’s 500 Index fell 26 points (1.8%), and the Nasdaq Composite lost 43 points (1.7%). The FTSE 100 index dropped 1.1% and the Dow Jones Stoxx 600 index fell 1.2%, its third drop in four sessions.
Credit fears drove the declines, although lackluster reports from several retailers, including Wal-Mart Stores Inc. (NYSE: WMT) and Home Depot Inc. (NYSE: HD) put a chill in investors’ confidence about consumers.
In a move some economists fear will cause defaults to soar and the U.S. economy to stumble, borrowers who took out these ARMs in 2004 and 2005 – with low introductory “teaser” rates – will now see those rates climb by 35% or more. [For a Money Morning analysis of the credit market problems, click here.]
Two years ago as the housing market boomed, the number of sub-prime ARMs being underwritten was peaking just as lending standards were bottoming out. That means many lenders approved borrowers with questionable credit and little or no proof of income or assets. These buyers may have struggled just to make the low teaser rate payments and will now be saddled with higher adjusted rates. It’s likely this will cause another large spike in delinquencies.
Also the Securities and Exchange Commission is looking into whether or not many Wall Street firms have been hiding losses from the sub-prime meltdown. According to the Wall Street Journal, regulators will be investigating brokerage firms for any signs of impropriety concerning their mounting losses.
Jim Rogers: China’s Expansion Depends on Water
Oil isn’t China’s most precious resource. China must spend $162 billion in the next five years to clean up its polluted rivers-as nearly 40% of them are undrinkable. "China has a huge water problem," Legendary investor Jim Rogers says. "…If they don’t solve it, or if they don’t solve it in time, then China has failed." Find out which six global water treatment powerhouses are set to make “liquid profits.”
