Investors run for shelter
Financial markets may be facing their biggest challenge yet from the housing sector’s woes.
Stocks tumbled Tuesday, yields on corporate junk bonds surged and the dollar’s value plunged amid fresh warnings about falling home sales and rising losses on bonds backed by risky mortgages.
The Dow Jones industrial average, which on Monday was 27 points away from a record high, slumped 148.27 points, or 1.1%, to 13,501.70.
For most of this year, the real estate industry’s problems had not fazed many investors, who bet that troubles there would be trumped by strength in other parts of the economy.
That may be changing, said Peter Boockvar, market strategist at brokerage Miller Tabak & Co. in New York. He believes that the market on Tuesday signaled growing concern about the effects of sinking home prices and rising mortgage delinquencies on consumers’ ability and willingness to spend money.
The bullish bet on stocks, Boockvar said, has been that “the economy is going to get better in the second half. But I think you will see a lot of disappointed people come September.”
One key catalyst for the markets’ sell-off was an admission by bond rating firm Standard & Poor’s that it had underestimated the level of losses on mortgage-backed securities, which are growing as more homeowners miss payments and home values decline.
Many analysts, however, say the broader economy has yet to show signs of serious stress from housing. The government Friday said the economy created a net 132,000 jobs in June, slightly more than had been expected.
Housing is “a slow-moving train wreck,” said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities in New York. But “it just doesn’t seem at this point that it’s spilling over” into the rest of the economy.
Still, the news from the housing and mortgage markets on Tuesday was more dire than Wall Street could stand:
* Investors dumped many bank and brokerage issues after Standard & Poor’s said it might soon cut ratings on $12 billion of sub-prime-mortgage-backed bonds, conceding that it failed to see the extent of potential losses on the bonds when it originally rated them.
Later in the day, S&P;’s rival, Moody’s Investors Service, said it downgraded 399 sub-prime-mortgage bond issues, also citing higher-than-expected delinquencies.
The moves fueled fears of a rising tide of red ink for brokerages, banks and investment firms that trade in and own mortgage bonds. Lower ratings on the bonds could spur more investors to jettison them, further slashing the securities’ value.
Bear Stearns slid $5.93 to $137.96, Lehman Bros. dropped $3.76 to $71.10 and Countrywide Financial sank $1.39 to $35.86.
* D.R. Horton, the largest U.S. home builder, said it would report a loss for the quarter ended June 30 after orders dived 40% from the period a year earlier. The company’s stock sank 39 cents, or 2%, to $19.40, a three-year low.
Among other builders, KB Home fell $1.68 to $36.16 and Ryland Group dropped $1.45 to $36.31. After the markets closed, Calabasas-based Ryland also warned that it would post a loss in the latest quarter after sales fell 17% from a year earlier.
* Home Depot, the biggest home-improvement retailer, said 2007 earnings would fall more than initially forecast, in part because of the housing market’s continuing slide.
Home Depot said it expected 2007 earnings per share to decline 15% to 18%. The company said that would include the lack of a contribution from its wholesale building materials unit, which is being sold, and reflect “weaker conditions” in housing.
The company also announced a tender offer to buy back 250 million shares, which helped support its stock. The shares inched up 2 cents to $40.25.
In the market overall, losers topped winners by more than 3 to 1 on the New York Stock Exchange. The Nasdaq composite index fell 1.2% to 2,639.16. The S&P; 500 lost 1.4% to 1,510.12.
Every one of the 10 major industry groups in the S&P; 500 declined, including energy stocks -- even though crude oil prices in New York rose 62 cents to $72.81 a barrel, matching the 10-month high set Friday.
Analysts noted that the stock market recovered quickly from other setbacks this year, and said this one might play out the same way.
But two headwinds could make a fast rebound more difficult this time. One is that jittery investors are demanding higher interest rates on the junk bonds that have played a crucial role in financing the boom in corporate takeovers. The yield on an index of 100 junk issues tracked by KDP Investment Advisors surged to 7.94% on Tuesday, up from 7.84% on Monday and the highest since September.
The rise in junk yields is threatening to turn off the “liquidity spigot” that has helped drive stocks, said Richard Bernstein, investment strategist at Merrill Lynch in New York.
As some investors retreated from high-risk bonds, they bought Treasury issues, the classic choice in a fearful market. The 10-year T-note yield fell to 5.02% from 5.14% on Monday.
A second worrisome issue is the tumbling dollar, which suggests that foreigners are losing their appetite for U.S. assets. The euro currency’s value soared Tuesday to a record $1.373, up from $1.362 on Monday. The British pound hit a 26-year high of $2.027, up from $2.015.
The global economy’s strength is pushing up interest rates abroad, presenting more competition for dollar-denominated assets. The Bank of Canada on Tuesday raised its key short-term rate to 4.5% from 4.25%.
“Right now the momentum is very much against the dollar,” said John McCarthy, head of foreign exchange at ING Financial Markets in New York.
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