Consider the following news items which came out yesterday:
Sears (NasdaqGS:SHLD - News), which operates both Sears and Kmart stores, blamed slow home appliance sales for its big warning. Shares fell 10%.
Home Depot, the No. 1 home improvement retailer, trimmed its 2007 forecasts. Shares edged higher on its buyback plans.
Major home builder D.R. Horton (NYSE:DHI - News) warned of a loss, too. Orders fell 40% in its fiscal third quarter and cancellations rose thanks to the glut of homes on the market.
Meanwhile, Standard & Poor's said it may cut ratings on some $12billion worth of bonds backed by subprime assets. It announced tougher standards for evaluating mortgage-backed securities.
In addition:
Hours after S&P's move, Moody's Investors Service said it was downgrading 399 mortgage-backed securities issued in 2006 and reviewing an additional 32 for downgrade, affecting $5.2 billion of bonds. It also downgraded 52 bonds issued in 2005.
"The level of losses continues to exceed historical precedents and our expectations," said Susan Barnes, an S&P managing director, in a conference call with investors to discuss the looming downgrades.
Also add:
LOS ANGELES, July 10 (Reuters) - The Ryland Group Inc. (RYL.N: Quote, Profile, Research) warned on Tuesday that it expects to post a second- quarter net loss of $1.25 to $1.35 per share due to continued deterioration in the housing market.
...
Analysts, on average, had been looking for the company to post a second quarter profit, excluding items, of 46 cents per share, according to Reuters Estimates.
And finally:
The Home Depot Inc., the world's largest home improvement store chain, on Tuesday cited continued weakness in the housing market and the sale of its wholesale distribution business as it issued a bleaker-than-expected financial outlook for the year.
...
Home Depot said it now expects its earnings per share to decline by 15 percent to 18 percent for fiscal 2007. In May, the company had projected an earnings per share decline of 9 percent for the year.
So --
1.) The primary method of financing the housing market expansion -- mortgage backed securities -- takes a major hit with a huge wave of ratings downgrades. This will dry-up funding for the more speculative elements of this market, as well as increase funding problems across the board for all mortgages.
2.) 2 major retailers are reporting the consumer is not spending as much as we would like. Remember that consumer spending is responsible for 70% of economic growth.
3.) The homebuilding sector is still experiencing some really big problems. Sales are down, cancellations are up and the business environment is "challenging."
This is a deluge of bad news in one day that has hit literally every possible spectrum of the housing market. Wall Street reacted with a big wave of selling.
Days like yesterday can have a profound impact on market psychology. The breadth of the negative news was profound.
