The last two weeks has seen US stocks suffer their worst loss in nearly 5 years!
While Some reassuring economic data helped lift the market earlier in the week, the market ended the week with a broad based sell off. The Dow has lost over 800 points since it flirted with 14,000+ a week ago! The flight to safety following this massacre has lowered yields but lifted bond prices. The yield on the benchmark 10-year note fell to 4.71% from 4.96%. Good news for fixed income investors.
This sharp drop isn’t inlike others we have witnessed during this 5 year bull run. Afterall, February saw a 6% decline, sparked by an international sell off and there has been at least one decline of 5% or more each year since 2003.
This drop however was driven by different forces than previous market declines. Continued trepidation facing the mortgage industry specifically sub prime lenders has sparked credit concerns thus causing a liquidity crunch among lower quality issuers. As mortgage defaults and delinquencies rise in tandem, investors are worried that this liquidity problem will eventually spill over to larger mortgage companies and banks as consequently affecting the whole stock market. Summer trading volumes are traditionally low so this will intensify the volatility problem with uncertainty and fear dominating the hearts and minds of many.
Synopsis:
The worst has yet to come. One sub prime lender American Home Mortgage (AHM) announced on Thursday that it was shutting down its doors and laying off several thousand employees in the process. The stock lost 90% in one day! Expect many companies to follow suit. Top on my list is Accredited Home Lenders (LEND) and Novastar Financial (NFI). Also Look for shares of housing companies eg Tol Brothers (TOL), Centex Homes (CTX), DH Horton (DHI) and businesses that tangentially rely on home sales such as improvement companies like, Home Depot (HD), & Lowes (LOW) to be negatively impacted by ongoing woes in this sub-prime fall out. I am short LEND.
Overall, the outlook isn’t rosy. Weakness in lenders and homebuilders extended to the other 10 economic sectors with the materials and financial sectors performing dismally.
On Financial stocks, I expect the downward trend to continue in the summer. Of particular concern in Bear Sterns which has been overexposed to sub prime lending through one of its Hedge Funds. Lehman Brothers (LEH), Bear Stearns (BSC) and Merrill Lynch (MER), have all recently dropped to below their 52 week lows! Base fundamentals haven’t changed significantly but expect credit risk concerns to overshadow corporate earnings news.
Busy week ahead- the Feds open market committee convenes and investors will be all ears seeking guidance on the state of the credit markets which the Fed is likely to touch address on its statement. Productivity and consumer credit economic numbers will also be out this week.
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2 comments:
Definately not a recession, the government will bail out mortgage co's to avoid the domino effect. Some states are already offering programs to folks who took out ARM's a few years ago to avoid them going into foreclosure as those rates reset and payments rise. good synopsis.
slow down then recession. I think there will be a recession after next years olympics in china that will be the peak for china. the US will slow down to and hit recession. im shorting everything.
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