The Kitchen Sink Stock Market
Kurt Brouwer March 6th, 2008
On Wall Street there is a phrase called the ‘kitchen sink’ earnings report. It works like this. ABC company is struggling and they know a really bad quarterly earnings report is inevitable, so they toss in everything negative they can find — up to, and including, the kitchen sink. Today felt like one of those kitchen sink days as stocks got pummeled amid a bevy of bad reports on a host of economic issues:
Stocks Drop Amid Credit Concerns (Associated Press, March 6, 2008, Joe Bel Bruno)
“Stocks tumbled Thursday as the ailing credit market and a spike in home foreclosures intensified the market’s worries about a sagging economy. The Dow Jones industrials gave up 214 points.
Concerns about credit grew after Thornburg Mortgage Inc. and a Carlyle Group bond fund revealed troubles with investments backed by mortgages. The entities failed to make margin calls, which are payments to guarantee much larger debt or investments.
And the genesis of the credit concerns that erupted last year — souring mortgage loans — dealt investors another blow after the Mortgage Bankers Association reported that home foreclosures rose to record levels in the fourth quarter. Worries about defaults have made lenders hesitant to extend credit, preventing the credit markets from functioning normally.
Wall Street’s sense that credit troubles are seeping further into areas of the financial sector once deemed safe weighed on financial stocks and the broader market…
The mood on Wall Street is sour these days and on Main Street people are worried because they do not understand much of what is going on and there is a sense that no one else does either. In fact, most of the problems confronting mortgage companies, banks, insurance companies and even hedge funds could be resolved with time. Unfortunately, owing to the negative climate, time is in short supply. Compounding the problem is leverage — that is borrowed money. Many of these institutions are operating on leverage or margin and that puts them under the gun.
“I think these are near-term, unfortunate events that if they had the luxury of time and capital they could probably weather but unfortunately with this leverage-based system we have, time is a very expensive luxury,” Jack Ablin, chief investment officer at Harris Private Bank in Chicago, said in reference to the difficulties at Thornburg and Carlyle.
The Dow fell 214.60, or 1.75 percent, to 12,040.39 — almost slipping below the 12,000 level, which it briefly did in January for the first time since November 2006.
Broader indexes also retreated. The Standard & Poor’s 500 index fell 29.36, or 2.20 percent, to 1,304.34, and the Nasdaq composite declined 52.31, or 2.30 percent, to 2,220.50.
The Russell 2000 index of smaller companies fell 20.96, or 3.07 percent, to 662.78.
Bond prices jumped as stocks fell. The yield on the benchmark 10-year Treasury note, which moves opposite its price, sank to 3.59 percent from 3.69 percent late Wednesday…
Even the positive movement in Treasury bonds is not entirely positive because Treasuries are rallying due to a so-called ‘flight to quality’ stampede that has driven Treasuries very low, but most other bonds have languished (see Pimco March Investment Outlook).
As if this wasn’t enough, the dollar is still falling and oil is still rising. Now, in all fairness, the falling dollar and rising oil are two side of the same coin because oil is denominated worldwide in dollars. As a result, as long as the dollar goes down, oil is likely to go up. And, when the dollar turns around, oil should fall.
…Investors are also fretting as they watch the dollar scrape new lows against the euro. The greenback’s weakness is a big culprit behind a recent string of new highs for oil prices.
Light, sweet crude rose to a fresh record Thursday after an unexpected decline in U.S. crude supplies and a widely anticipated decision by OPEC not to increase production. Oil shot up 95 cents to settle at a record $105.47 per barrel.
Finally, we found out that home foreclosures are jumping into record territory while home equity has fallen below 50% for the first time in 63 years. Phew.
…Bad news about the housing market further dented sentiment. The Mortgage Bankers Association said the proportion of all mortgages nationwide that fell into foreclosure jumped to a record 0.83 percent in the final quarter of 2007. The group also warned that foreclosures are likely to continue to rise as the number of homeowners behind on their mortgage payments has jumped to its highest level since 1985.
The Federal Reserve added more unwelcome housing news in reporting that Americans’ debt on their homes exceeds their equity for the first time since the central bank began tracking the figures in 1945. Homeowners’ percentage of equity fell to 47.9 percent in the fourth quarter…”
Now, it must be pointed out that none of these issues are shocking or startling. Rather, it is the steady drumbeat of negative news that is making optimism a scarce commodity. And, as homeowners and businesses and everyone else takes on this pessimism, the tendency is to pull back, to cut back, to reduce. And, collectively speaking, that will have an impact on the overall economy.
As a result, we can be pretty sure the economy is contracting right now. It remains to be seen whether or not we are in a protracted economic downturn — that is a recession — or just a short-term slump (see Recession 101).
Update: Watch out for another startling and negative headline in the next couple of days. Last year’s monthly deficit for February was $120 billion. This year’s deficit for the month will almost certainly be higher due to declining tax revenues and higher tax refunds. So, we will probably see headlines about the record monthly deficit of $140-50 billion.
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