Thursday, August 16th, 2007
More Bad News on the ‘Home Front,’ Stocks Fall Again
By Jason Simpkins
Sales of existing U.S. homes plunged nearly 11% in the second quarter as the nation’s real estate market continued its slump – just one in a slew of bad-news reports that emanated from the real estate market yesterday (Wednesday).
In related news:
- Countrywide Financial Corp. (NYSE: CFC) – the largest U.S. mortgage lender – saw its shares fall $3.17 each, or 12.96%, to close at $21.29, on rumors the mortgage company has been unable to raise money from the commercial paper market. Merrill Lynch & Co. raised the possibility of a forced bankruptcy, Bloomberg News reported.
- U.S. homebuilder confidence fell more than forecast to a 16-year low in August, according to the National Association of Home Builders/Wells Fargo Index of builder confidence, reaching lows not seen since 1991, when the U.S. economy was still suffering from recessionary fallout.
- U.S. stocks fell again yesterday after the Federal Reserve again added cash to the U.S. banking system, a move that will undoubtedly help in the long run, but in the short-term seemed to fan fears by reminding investors the credit crunch problems are still extant. The Dow Jones Industrial Average dropped nearly 170 points, closing below the psychologically important 13,000 level.
According to the National Association of Realtors, home prices dropped during the second quarter – the fourth consecutive quarter that they’ve done so – with the price of a typical single-family home reaching $223,800, a decline of 1.5% from the year-ago levels of $227,100. Not surprisingly, confidence among U.S. homebuilders also declined.
The National Association of Home Builders/Wells Fargo index a gauge of industry-wide confidence, dropped two points to an overall score of 22. The reading was the weakest since the index hit a record low of 20 during the 1991 recession. A reading below 50 means most respondents consider conditions poor. The gauge has consistently fallen over the past six months.
Hardest hit by the news may have been Merrill Lynch & Co. (NYSE: MER) and Countrywide Financial Corp. (NYSE: CFC), whose stock plummeted for the fifth-straight day after talk of bankruptcy surfaced. Its shares closed the day at $21.29, after declining nearly 13%. Merrill Lynch was down $2.40, or 3.3%. Somehow, Thornburg Mortgage Inc. (NYSE:TSA) resurrected itself; gaining 38% after its shares lost nearly half their value Tuesday.
The Dow closed at a four month low of 12,861.47, after falling 167.45 points, or 1.29%. That closely watched blue-chip index has now shed nearly 1,000 points since topping 14,000 in July. Meanwhile, the S&P 500 turned negative for the year, closing down nearly 20 points, or 1.4%, to 1,406.70. The Nasdaq composite index dropped 40.29 points, or 1.6%, to reach 2,458.83.
The recently volatile Dow had also risen as many as 90 points Wednesday, as bargain-hunters sifted through pummeled shares. The volatility index of the Chicago Board Options Exchange hit yet another four-year peak.
"The most savvy investors are seeing an opportunity with the increase in volatility,” James Smothermon, active trading and investing strategist for discount broker Charles Schwab (Nasdaq: SCHW) , told The Associated Press. “Individuals not as used to this are having trouble navigating" the rough waters. He said that clients have been changing their strategies through tactics like buying insurance on their portfolios and buying put options, or they are employing contracts that let an investor sell part of an asset at a set price within a certain time period.
And while the central bank again added liquidity to the financial system, it has not shown any signs that it will cut interest rates at its Sept.18 policymakers meeting, the only substantive move that could ignited a stock market rally. But inflation fears have kept the Fed from making such a commitment, especially with energy prices still trading at high levels (albeit lower than peak prices); the Labor Department said yesterday (Wednesday) that its Consumer Price Index (CPI) rose a mild 0.1 percent in July, in line with what was expected, though noting, too, that energy prices remain high.
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