Worries weigh on markets - Investors focus on subprime loans, tax legislation
Worries weigh on markets - Investors focus on subprime loans, tax legislation
By William Sluis, Tribune staff reporter. Tribune news services contributed to this report
Copyright © 2007, Chicago Tribune
Published June 23, 2007
A combination of worries centering on subprime mortgages and legislation in Washington that could restrict corporate dealmaking staggered traders on Wall Street Friday, sending stocks steeply lower.
The Dow Jones industrial average tumbled 185.58 points, or 1.4 percent, to cap off the worst week for investors since March. The index closed at 13,360.26.
Broader stock indicators also dropped sharply. The Standard & Poor's 500 index slid 19.63, or 1.3 percent, to 1502.56, and the Nasdaq composite index sagged 28.00, or 1.1 percent, to 2588.96.
The week was a rough one on the stock market. The Dow and the S&P 500 lost 2 percent, and the Nasdaq slid 1.4 percent.
"It was an extremely fluky day, with raw emotions taking over," said Chicago investment manager William Hummer.
One of the primary concerns centered on subprime mortgages, thousands of which are going into default. Such defaults prompted efforts by Bear Stearns Cos. to prevent one of its hedge funds from collapsing.
Bear Stearns said it will assume $3.2 billion of loans to the fund. That fueled concern of widespread markdowns of similar investments held by banks, pension funds and other investors. The funds hold large numbers of securities related to subprime mortgages.
Adding to the unease among traders was the prospect that lawmakers in Washington might toughen tax laws to create a less favorable climate for leveraged corporate buyouts.
"The sell-off was catalyzed by events in Washington," said mutual fund manager Henry Van der Eb. "The mass psychology of the stock market was changed by the possibility that the tax laws would change. That would mean the privatization boom is starting to dissipate."
He said that while the events involving the hedge funds "serve as a real black eye for Bear Stearns," it appears that the problems with subprime mortgages are contained, for now.
"But longer term, there will be some ripple effects, and that could prolong the housing slowdown," said Van der Eb, of the Gamco Mathers Fund in Bannockburn.
Such effects would undoubtedly mean higher mortgage rates for home buyers, he said.
The day's events "can't be blamed on higher interest rates because a rally in Treasuries sent bond yields lower," said Hummer, of Wayne Hummer & Co.
The yield on the bellwether 10-year Treasury note ended at 5.14 percent, down from 5.20 percent Thursday.
One concern, however, was that oil prices moved closer to $70 a barrel, Hummer said. A barrel of light, sweet crude for August delivery rose 49 cents, to $69.14, on the New York Mercantile Exchange.
Policymakers of the Federal Reserve will meet Wednesday and Thursday, and though they aren't expected to take any action on interest rates, they are expected to offer comments about inflation.
Any hint that they plan to tighten credit later this year will set off alarms on Wall Street, where there already are concerns about an implosion of the huge debts run up in the mortgage market and in highly leveraged corporate transactions.
"The economy, [excluding] housing, seems to be showing strong signs of recovery, which will prevent the Fed from lowering rates anytime soon," economist Eugenio Aleman of Wells Fargo & Co. said in a report for clients.
Friday's session began with a focus on the initial public offering of a stake in the management arm of Blackstone Group LP.
The most talked-about IPO since Google Inc. went public saw the buyout shop's stock open well above the $31 a share at which it had been priced late Thursday.
The stock finished the day up $4.06, or 13.1 percent, at $35.06. Enthusiasm over the Blackstone offering, however, wasn't broad enough to give the markets a boost.
"Nobody wants to go into the weekend overextended. Once you see start to see momentum push it down, it's hard to stay in the way of it," said Bill Schultz, chief investment officer at McQueen, Ball & Associates.
Losses in the mortgage market might be the "tip of the iceberg," as borrowers fail to keep up with rising payments on billions in adjustable-rate loans in coming months, Bank of America Corp. analysts said Friday.
Homeowners with about $515 billion on adjustable-rate mortgages will pay more this year, and an additional $680 billion worth of mortgages will reset next year, analysts led by Robert Lacoursiere wrote in a research note. More than 70 percent of the total was granted to subprime borrowers.
"When you see a hiccup like this, it's a reminder that there are a lot of potential problems down the road," Jack Kaplan at Carret Asset Management in New York said of Friday's decline. "We may not understand fully what's out there, and we're not going to know for sure until we have more time to really get a feel for what the possible implications are."
------------
wsluis@tribune.com
By William Sluis, Tribune staff reporter. Tribune news services contributed to this report
Copyright © 2007, Chicago Tribune
Published June 23, 2007
A combination of worries centering on subprime mortgages and legislation in Washington that could restrict corporate dealmaking staggered traders on Wall Street Friday, sending stocks steeply lower.
The Dow Jones industrial average tumbled 185.58 points, or 1.4 percent, to cap off the worst week for investors since March. The index closed at 13,360.26.
Broader stock indicators also dropped sharply. The Standard & Poor's 500 index slid 19.63, or 1.3 percent, to 1502.56, and the Nasdaq composite index sagged 28.00, or 1.1 percent, to 2588.96.
The week was a rough one on the stock market. The Dow and the S&P 500 lost 2 percent, and the Nasdaq slid 1.4 percent.
"It was an extremely fluky day, with raw emotions taking over," said Chicago investment manager William Hummer.
One of the primary concerns centered on subprime mortgages, thousands of which are going into default. Such defaults prompted efforts by Bear Stearns Cos. to prevent one of its hedge funds from collapsing.
Bear Stearns said it will assume $3.2 billion of loans to the fund. That fueled concern of widespread markdowns of similar investments held by banks, pension funds and other investors. The funds hold large numbers of securities related to subprime mortgages.
Adding to the unease among traders was the prospect that lawmakers in Washington might toughen tax laws to create a less favorable climate for leveraged corporate buyouts.
"The sell-off was catalyzed by events in Washington," said mutual fund manager Henry Van der Eb. "The mass psychology of the stock market was changed by the possibility that the tax laws would change. That would mean the privatization boom is starting to dissipate."
He said that while the events involving the hedge funds "serve as a real black eye for Bear Stearns," it appears that the problems with subprime mortgages are contained, for now.
"But longer term, there will be some ripple effects, and that could prolong the housing slowdown," said Van der Eb, of the Gamco Mathers Fund in Bannockburn.
Such effects would undoubtedly mean higher mortgage rates for home buyers, he said.
The day's events "can't be blamed on higher interest rates because a rally in Treasuries sent bond yields lower," said Hummer, of Wayne Hummer & Co.
The yield on the bellwether 10-year Treasury note ended at 5.14 percent, down from 5.20 percent Thursday.
One concern, however, was that oil prices moved closer to $70 a barrel, Hummer said. A barrel of light, sweet crude for August delivery rose 49 cents, to $69.14, on the New York Mercantile Exchange.
Policymakers of the Federal Reserve will meet Wednesday and Thursday, and though they aren't expected to take any action on interest rates, they are expected to offer comments about inflation.
Any hint that they plan to tighten credit later this year will set off alarms on Wall Street, where there already are concerns about an implosion of the huge debts run up in the mortgage market and in highly leveraged corporate transactions.
"The economy, [excluding] housing, seems to be showing strong signs of recovery, which will prevent the Fed from lowering rates anytime soon," economist Eugenio Aleman of Wells Fargo & Co. said in a report for clients.
Friday's session began with a focus on the initial public offering of a stake in the management arm of Blackstone Group LP.
The most talked-about IPO since Google Inc. went public saw the buyout shop's stock open well above the $31 a share at which it had been priced late Thursday.
The stock finished the day up $4.06, or 13.1 percent, at $35.06. Enthusiasm over the Blackstone offering, however, wasn't broad enough to give the markets a boost.
"Nobody wants to go into the weekend overextended. Once you see start to see momentum push it down, it's hard to stay in the way of it," said Bill Schultz, chief investment officer at McQueen, Ball & Associates.
Losses in the mortgage market might be the "tip of the iceberg," as borrowers fail to keep up with rising payments on billions in adjustable-rate loans in coming months, Bank of America Corp. analysts said Friday.
Homeowners with about $515 billion on adjustable-rate mortgages will pay more this year, and an additional $680 billion worth of mortgages will reset next year, analysts led by Robert Lacoursiere wrote in a research note. More than 70 percent of the total was granted to subprime borrowers.
"When you see a hiccup like this, it's a reminder that there are a lot of potential problems down the road," Jack Kaplan at Carret Asset Management in New York said of Friday's decline. "We may not understand fully what's out there, and we're not going to know for sure until we have more time to really get a feel for what the possible implications are."
------------
wsluis@tribune.com
posted by Carlos T Mock @ 11:08 AM
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