Housing and Credit Woes Continue to Weigh on Wall Street
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The stock market by mid-day on Monday was heading toward another hefty loss and
analysts were blaming - what else - fallout from the sub-prime market
for the bearish behavior of investors.
Two big housing related corporations seemed to be causing most of the concern,
but there were ancillary contributions from an overseas corporation and from
the National Association of Home Builders.
First of all, Lowe's Companies reported a 10 percent
decrease in its third-quarter net income and cut its projections for the entire
year for the fourth time in recent months.
Lowe's reported that its net income for the quarter ended November 2
would be $643 million or .43 per share compared to $716 million or .46 a share
one year earlier. Earnings would have been even lower was it not for some reported
savings in workers compensation and other safety related expenses.
Sales were up 3 percent to $11.57 billion but same-store sales were down 4
percent. It was the fifth straight quarterly decrease in same store sales.
Last week the nation's number 1 home improvement store, Home Depot, reported
a 27% drop in net income drop. It also reduced its full-year earnings outlook
and delayed the rest of its stock repurchase program.
Lowe's had, as recently as September, forecast 2007 earnings between $1.97
to $2.01 per share but is now looking at full year earnings of $1.83 to $1.87
per share.
If Lowe's sales are down, a part of the reason may be the mood of builders,
and as that housing market variable goes, the monthly National Association of
Home Builders/Wells Fargo Home Market Index which results from
a survey of builders' attitudes and confidence was also not encouraging.
The HMI is derived from a survey that NAHB has conducted for over 20 years.
Home builders are asked to measure their perceptions of current single-family
home sales, their expectations for sales over the next six months, and the current
prospective buyer traffic. The first two categories are rated as "good,"
"fair," or "poor," while the traffic question calls
for responses of low to very low, average, or high to very high. Scores for
each category are rated on their own and then combined for the seasonally adjusted
HMI. Any number over 50 indicates that more builders view sales conditions as
good than view them as poor.
The figures for November were little changed from those in October which, in
the face of all of the bad news the last month, might actually be good news,
but NAHB views it as a negative. The portion of the index measuring current
sales conditions was unchanged at 18 and the index measuring expectations for
the next six months was down one point to 25. However, the index measuring buyer
traffic was actually up two points to 17.
"Consistent with what builders said in last month's survey, many
are reporting that their special sales incentives are having
limited success in terms of getting buyers in the door," said NAHB President
Brian Catalde, a home builder from El Segundo, Calif. Of particular concern,
he noted, is that negative media reports are dissuading buyers and fueling unrealistic
expectations regarding home price discounts.
To be more specific," he said, "builders are worried that the national
media has tended to report negative housing stories as if there is one real
estate market. All housing markets are local. As a result some healthy markets
are being unfairly impacted by this negative media coverage."
What really sent the market skittering, however, was a downgrade of
Citi by Goldman Sachs which recommended that investors sell Citigroup
stock because the bank may have to write of $15 billion in mortgage losses over
the next two quarters. Adding to the impact of the Goldman Sachs recommendation
is that it is highly unusual for one bank to make such a recommendation regarding
another.
Citi, a Wall Street darling, has been the subject of much discussion over the
last month because of fears that its healthy dividend of $2.16 per year might
have to be cut or eliminated in the face of Citi's increasing and/or potential
losses.
At the closing bell on Monday Citi shares were down $1.76 or 5.18 percent while
the Dow Jones was off 232 points.
And just to prove that not all real estate is truly local, European based Swiss
Re, the world's biggest reinsurer announced it would be taking
a $1.07 billion write-down because of its subprime credit exposure.
The company, however, quickly added that it will register a year end return
on equity that would be above its long term target of 13 percent.
On Tuesday the Census Bureau and HUD will release the latest data on housing
starts and building permits.
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