With the Dow’s drop of 148 on Tuesday together with much news, we thought we should at least make a few comments this evening. First of all, 148 points doesn’t get us too excited about the bear returning. Secondly, we still think there needs to be a new high in the Dow before we see a downturn. Third, with so much news on Tuesday, the likelihood of a turn is pretty low.
The news list seems to be fairly long and it starts with early earnings returns. As the quarter is now complete, earnings have started to pour in. The early reports include AA (Alcoa) and they announced a little lower revenue than expected but turned in earnings that matched estimates. In the early going, AA didn’t seem to suffer much on price.
Home Depot (HD) cut its 2007 outlook saying that the continued weakness in housing was going to hurt its annual earnings. Their estimate dropped about 15% but the price of the stock was up on the day, ok not by much but the market was down 148 and HD was one of the excuses for the drop. Sears also slashed its estimates in half but the real news was over in the real estate world…
DR Horton said orders fell over 40% with the dollar value dropping 47% and that this would lead to their first fiscal quarterly loss since it listed on the NYSE back in 1995. Chairman Donald Horton said that “Market conditions for new home sales declined in our June quarter as inventory levels of both new and existing homes remained high, and we expect the housing environment to remain challenging.” The company indicated that California saw orders fall 62% and that it will take significant asset impairments in the next few quarters.
And, if that wasn’t enough, the news about the bond rating agency, S&P, was salt in the wound. We have reported here and you probably have read in other places about the subprime problems as it relates to the securities that back the mortgages. Today S&P announced that it would be looking at the debt instruments used for these risky loans. This is a big deal because they are the ones who can Downgrade those securities. According to an article in CNN Money, the rating service said it would put many securities backed by subprime mortgages on “credit watch negative” and that it expected most of them to be downgraded soon because of high delinquency and foreclosure rates. Moody’s, another rating service, made similar announcements. The news continues to deteriorate in the housing market, even though so many are calling for a bottom.
Probably the biggest item on Tuesday was the Fed chairman’s speech. Bernanke was speaking to the National Bureau of Economic Research and did mention inflation in his speech. He was basically defending the Fed’s position that relies mainly on “core” inflation rather than total inflation. He said, “Inflation is less responsive than it used to be to changes in oil prices and other supply shocks.” Ok, that might be if you look strictly at the numbers. Our question is, “Who is calculating the numbers?” Are the inflation numbers accurately reflecting inflation or not? [We do have some bias towards deflation over the coming years but for now we think the inflation picture is muddy due to the way the numbers are massaged.] At any rate, the market seemed not to like his comments and closed on the low of the day.
This report from Bernanke gave the dollar some cold shivers as it traded a record low against the Euro and oil and gold moved up on that news. The bond market, Treasuries only, liked the housing news and put in a big up day.
We still need to be patient as this decline on Tuesday does Not feel very strong, even though there were some ugly things going on in housing related issues. News related declines rarely will follow through. We do think that the next move will be up due to the fairly weak nature of the decline on Tuesday.
Our thanks to CZ for his birthday wish. We appreciate the kind words, my friend.