The S&P's Sub-Prime Mortgage Warning Sparks A Sell Off
Tuesday, July 10, 2007SUSIE GHARIB: A steep sell-off on Wall Street today on new warnings about the housing sector. The Dow dropped 148 points, the NASDAQ fell 30. Stocks tumbled after Standard & Poor's said it was preparing to cut the ratings on $12 billion of mortgage securities backed by sub-prime loans. For now, those securities have been placed on negative credit watch, and S&P says it could begin downgrading them later this week.
And then late today, Moody's Investors Service said it cut ratings on nearly 400 mortgage-backed securities worth more than $5 billion. It's also considering a similar move for 32 other securities. Lower ratings could cut off a major source of funding to the housing market.
Also adding to the worries about housing, earnings warnings today from Home Depot, Sears Holdings, and D.R. Horton, that's the big U.S. home-builder. The three companies lowered their profit targets due to the continued weakness in the housing market.
Suzanne Pratt reports.
SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: It was not a great start to earnings season. A trio of negative pre-announcements put investors on notice about the health of second-quarter profits. The warnings also highlighted one of Wall Street's biggest fears, how the weak housing market could weigh on the consumer and spill over into the economy.
Still, S&P equity strategist Alec Young is not particularly concerned.
ALEC YOUNG, EQUITY STRATEGIST, STANDARD & POOR'S: Because everyone knows housing has been a weak spot, to really get investors worried, they would have to see that the negative earnings trends were spreading into areas of the economy that have nothing to do with housing. And, so far, we haven't seen that yet.
PRATT: Citing "headwinds" from the housing market, Home Depot lowered its earnings targets for the second half of the year. Home-builder D.R. Horton also stoked housing fears, saying orders for new homes are off 40 percent from a year ago. The company is now forecasting a quarterly loss.
And Sears stock fell sharply today after the retailer warned of weak second-quarter profits, noting soft June sales of home appliances. Market strategist David Katz views the Sears news as company-specific.
DAVID KATZ, CHIEF INVESTMENT OFFICER, MATRIX ASSET ADVISOR: We think that's a one-off event. It's a retailer that has been struggling. Their comp store sales have been pretty negative. So it's just catching up to earnings. We think retail is going to have a difficult period, pretty much in-line or close to expectations.
PRATT: Despite the negative nature of today's pre-announcements, most experts believe corporate profits will still be decent.
YOUNG: Given that the market has discounted roughly a 5 percent gain in earnings in the second quarter, were we to see a 6 percent again or a 7 percent gain, we think the market would take that positively. So we continue to have a moderately positive outlook on the second-quarter earnings season for the S&P 500 companies.
PRAT: Experts say it's natural in the heart of earnings season for earnings to drive the stock market. But they say investors could still get distracted by inflation worries and problems in the sub-prime mortgage market.
Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.
