Stocks Dive 208 on Credit Problems

User Forum Topic
Submitted by CAwireman on August 14, 2007 - 4:03pm


By JOE BEL BRUNO, AP Business Writer,AP
Posted: 2007-08-14 18:12:27

The downturn in stocks was first triggered by a report from Wal-Mart Stores Inc. that profit will fall below expectations this year as consumers rein in spending. Home Depot Inc., the world's biggest home improvement chain, added to the slide when it said weakness in the housing market caused quarterly profit to slide.

Confirmation that Sentinel Management Group Inc., which oversees $1.6 billion in assets, is seeking to halt investor redemptions exacerbated the selling. Other funds are said to have similar problems as they face withdrawal demands at a time it has become difficult to value low-quality debt.

Hedge funds and other big institutional investors have taken a beating in recent weeks due to the market turbulence. On Monday, Goldman Sachs Group Inc. said three funds it manages have had significant losses — and infused $3 billion in capital into one of them.

Wall Street has been pummeled as a deepening credit crunch spooked the market, and led to unease about potential losses at financial firms and funds. The Federal Reserve, which has injected some $64 billion of liquidity into the U.S. banking system since Thursday, said Tuesday it stood ready to act again should market conditions warrant.

While the market seemed to be looking past most economic news in recent weeks, on Tuesday the earnings reports and their implications for consumer spending compounded an already high state of anxiety on Wall Street.

"The market is very, very sensitive at this point, and any news about a potential financial problems is going to affect the way that the market trades," said Scott Fullman, director of investment strategy for I.A. Englander & Co. "We've been seeing extreme sensitivity in the financials, but also in the consumer stocks and industrials during the session."


Submitted by rb_engineer on August 14, 2007 - 4:11pm.

Basically subprime and credit is the new oil/Iraq and media and wallstreet will ride it until there is nothing left to squeeze. Average people will once again suffer through higher rates, higher rents, lower home prices, and loss of jobs. Half the volume in wallstreet is hedge funds and no one I know has ever even invested in MBS.

Submitted by HereWeGo on August 14, 2007 - 4:14pm.

Right, but when the hedge funds sell to cover their bond losses, they drive stock prices down, which whacks all small-timers portfolios. A pity the Old Gray Lady is too dense to understand that point, but she's been in decline for some time now.

Submitted by rb_engineer on August 14, 2007 - 4:32pm.

Old lady should be fine since she's mostly likely in for the long haul... Its the novice investors residing in Piggington-land who are getting squeezed.

Submitted by JWM in SD on August 14, 2007 - 4:58pm.

"higher rents"

How do you get higher rents out of that situation??? It would be just the opposite. Rents are tied to income since you can't pay your rent with an I/O loan.

Submitted by Andy on August 14, 2007 - 4:58pm.

Unless the old lady is trying to live on the income from the investments and has a mortgage to pay etc... Gonna be tough if her portfolio is down 20% instead of up 10% a year.

Submitted by PerryChase on August 14, 2007 - 4:59pm.

rb_engineer, you're blaming the press for Iraq and for the stock market?!

What about when they were telling us that Iraq would pay for itself and home prices can only go up?

Submitted by HereWeGo on August 14, 2007 - 5:09pm.

Some might want to Google "The Old Gray Lady"

Submitted by BubbleNinja on August 14, 2007 - 5:18pm.

Holy Jebus, people. Old Gray Lady = The New York Times. I have no idea what the heck some of you are talking about, and I guess neither do you.

Submitted by rb_engineer on August 14, 2007 - 5:24pm.


Inflation (which Ben's fighting). There's price pressure in everything now, from gas, food, credit, salaries. Rents are not immune.

Submitted by rb_engineer on August 14, 2007 - 5:27pm.


Not sure your question is relavant anymore since old lady is NYT...

My point was that the so called dumb investors have long market horizons. They don't usually plan to use it for mortgage payments. Especially since its tied up in 401K.

Submitted by rb_engineer on August 14, 2007 - 5:30pm.


No, I'm saying it used to be their favorite whipping boy. Now, its not and we hardly hear about it anymore. Now the media is milking subprime story which probably is not as significant as Iraq. Nevertheless its fun!

Submitted by Andy on August 14, 2007 - 5:49pm.

lol - The Old Gray Lady. That went right over my head...

Submitted by bsrsharma on August 14, 2007 - 5:55pm.

I think today marks the start of a Recession

When Wal-Mart customers start reducing their consumption, tough times have arrived. Since this is the mid-point of Q3, there may or may not be a shrinking of GDP for Q3. If so, the official declaration has to wait till April 1, 2008. (Two back to back quarters of -ve growth).

Submitted by rb_engineer on August 14, 2007 - 6:06pm.


Aren't you being a little over the top? Recession is 2 quarters of negative gdp growth. We just had about 2.5-3% growth last quarter and prediction is about 2% this quarter.

I think hoping for a correction in housing is very reasonable thing. But your expectations have to be realistic.

Submitted by Wiley on August 14, 2007 - 6:13pm.


Factor in inflation and your growth disappears.

Submitted by rb_engineer on August 14, 2007 - 6:15pm.


I don't think recession is calculated with gdp growth adjusted for inflation. Correct me if I'm wrong.

Submitted by tangouniform on August 14, 2007 - 7:18pm.

Engineer, you're mistaken if you think the fragments from imploding leveraged funds are less important than IEDs in "The Iraqi Oilcapades (Smart People on Sand!)".

Like the newer IEDs found propped in the roadside rubble, the whole MBS market looks like a copper EFP aimed right at Mr/Mrs America's tricked out, bought on HELOC-money Hummer. Bummer.

We've seen the central banks' liquidity body armor in action the past few days but if you're getting body armor hits then you're too close to the fight, pardner, and you're one lucky shot away from a body bag.

The other problem with being too close to the fight is air support is more difficult to direct. Sure, you can call in Helicopter Ben for a drop but some of your guys are going to get killed...

The bottom line is that while we may be using billions of OPM in Iraq and enslaving our kids, we don't see the immediate effects. When the credit market and the housing market finally get marked back to rational levels we are going to see the effects first-hand and personally.

Submitted by rb_engineer on August 14, 2007 - 7:40pm.


Not sure how to respond. I'll try your last paragraph:

"The bottom line is that while we may be using billions of OPM in Iraq and enslaving our kids, we don't see the immediate effects. When the credit market and the housing market finally get marked back to rational levels we are going to see the effects first-hand and personally."

Result of things going on in the credit market will mean just one thing: higher rates. That will hamper demand and cause prices to come down to compensate. This has been happening for the last 3 years and will continue to happen until supply and demand is met. Basically, this is market at work and not very surprising. Not as scary as you think...

Submitted by HereWeGo on August 14, 2007 - 8:21pm.

I now find myself agreeing that a slowdown is in the cards. I did not agree with the whole MEW-consumer slowdown-etcetc bottom-up recession scenario, but this massive hit to the confidence of the credit markets could indeed squeeze the economy from the top down, especially if the Fed continues to sit on the sidelines. Consumer confidence hit a record high in July; I'd be willing to wager it will take a record 1 month drop from July to August.

Submitted by bsrsharma on August 14, 2007 - 9:48pm.


The credit crunch, its impact on home buying, bankruptcies of mortgage lenders with attendent unemployment of thousands, distress among home builders etc., are all strong indicators of downturn. But when the largest low end retailer has problem meeting expectations, I think we are in severe distress. What you are seeing is the result of households running out of spendable cash flat out. Obviously, it will take a while to restore normal spending pattern again. Since consumer spending is 2/3 of economy, the jump from Wal-Mart's distress to general Economic distress is pretty easy. I am fairly confident in predicting a recession before middle of 2008.

Submitted by CAwireman on August 15, 2007 - 9:20am.

Stocks are basically flat on Wednesday at noon, Eastern
time (actually down 9 pts on the Dow).

Stocks Edge Up After Fed Adds Liquidity [??]
08/15/07 11:23 EDT

NEW YORK (AP) - Stocks recovered some ground Wednesday, drawing some reassurance from the Federal Reserve's announcement that it was adding more cash to the banking system.

The market changed course several times in early trading amid conflicting announcements from the New York Fed over its plans to make a repurchase agreement - in which it arranges to buy securities from dealers, who then deposit the money the Fed has paid them into commercial banks.

Ultimately, the Fed said it would buy $7 billion, following the Canadian central bank's announcement that it has temporarily expanded the list of eligible collateral it will accept when it makes injections. Central banks worldwide have supplied billions of funds to banks over the past week to make cash available for lending and keep interest rates stable amid signs that credit was drying up.

Now, Wall Street is curious if the Fed will cut interest rates at its Sept. 18 meeting. On Wednesday, the Labor Department said its Consumer Price Index - a gauge of price inflation on food, energy and consumer products - rose 0.1 percent in July, meeting the consensus forecast of economists polled by Thomson Financial.

Price pressures have been keeping the Fed from lowering rates - a move that would free up more cash and that could trigger a rally in the Dow, which is now nearly 1,000 points below its record close in mid-July above 14,000.

"Yes, the market would probably move dramatically higher if they made a cut," said Linda Duessel, market strategist at Federated Investors in Pittsburgh. "But I think it's more prudent to allow this correction to continue to unfold. After all, we're in the month of August and coming into September - historically, the weakest months of the year. The market has been in need of a correction."


Submitted by rb_engineer on August 15, 2007 - 10:08am.


Its not clear to me that Walmart's troubles are caused by Walmart or the subprime mess. Their profits are shrinking which could mean that their costs are rising or they messed up with their pricing. Not sure they forecasted their sales. The point is gdp growth globally is >5%, how do you see this changing?

Submitted by bsrsharma on August 15, 2007 - 11:15am.

About half the country is running on fumes. This is not some blip. These are some quotes:

“It’s a red flag,” said Jay Bryson, global economist at Wachovia. “If consumer spending starts to weaken, the overall outlook for economic growth will diminish.”

That, Wal-Mart executives said, is precisely what has begun to happen in its 4,000 United States stores over the last three months — even after the chain cut prices on 16,000 products this summer.

“Many customers are running out of money at the end of the month,” said H. Lee Scott Jr., the chief executive of Wal-Mart.

Mr. Scott said Wal-Mart’s shoppers, who generally earn less than $40,000 a household, are “under difficult pressure economically.”

He added that “the paycheck cycle is more pronounced now than ever before,” meaning that customers are left with little cash by the end of the month.

Submitted by Nostradamuses on August 15, 2007 - 11:36am.

they should offer their customers payday loans so they can buy their stuff sooner, dontchathink?

Submitted by bsrsharma on August 15, 2007 - 11:47am.

Don't they all already do that sort of thing? Hold stuff for a while till you get money (I haven't used it, so I don't know)

Submitted by PerryChase on August 15, 2007 - 11:58am.

rb_engineer, a recession is staring us in the face. The warning signs are here. I guess you won't accept it until it's here.

Combine a liquidity squeeze with a recession and you get house prices falling like a rock.


I don't that Walmart does layaways anymore. I think they used to do that when not everyone had a credit card.


I don't think that the plunge protection team is able to work its magic anymore.

Submitted by Wiley on August 15, 2007 - 12:24pm.

We are just at the start of a full blown banking crisis. Theres a saying that everyone gets what they deserve.

Submitted by Ozzie on August 15, 2007 - 12:29pm.

A recession? Hmmmm, while the front page of the WSJ talked about subprime losses and how Wall St. and the rating agencies once again conspired to screw investors (by issuing high ratings to suspect CDO's) you had to flip the page to read a small story that our trade gap narrowed in Q2 and that the economy expanded greater than previously thought for Q2 and will likley exceed most economists forecasts in Q3. As I have previously said, the subprime debacle is more to do with Wall St. fleecing investors once again than with homeowners defaulting on mortgages. Just as you saw stock anlaysts taken to the woodshed after the internet bubble broke you'll see the boys at Moody's and S&P take some lashes as well they should.

Sticking a positive story on the front page wouldn't sell papers. Looks like Murdoch already has taken over the layout of the Journal.

Submitted by sdrealtor on August 15, 2007 - 12:31pm.

Toro! Toro!

Submitted by PerryChase on August 15, 2007 - 1:29pm.

Ozzie, why would the MBS ratings even be a problem if, as you claim, the homeowners are still paying their mortgages? And how then do you explain the record foreclosures?

Do you think that foreclosures will only be small ripple in the economy?

I don't know about the rest of the country, but San Diego will definitely have a painful recession.

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