San Francisco-based Wells Fargo, the second-biggest U.S. home lender, has stopped issuing so-called Alt-A loans, made to people with near-prime credit ratings or to borrowers with the best credit who don't document their incomes. Memphis, Tennessee-based First Horizon has raised rates ``significantly'' on such loans in the past two weeks and is curtailing the number of loans it's making, said Pete Makowiecki, the head of its mortgage unit.
``The credit crunch is here,'' said Keith Shaughnessy, president of Foundation Mortgage Corp. in Littleton, Massachusetts.
Nonfarm payroll employment continued to trend up (+92,000) in July, and the unemployment rate (4.6 percent) was essentially unchanged, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Employment grew in several service-providing industries. Average hourly earnings rose by 6 cents,or 0.3 percent.
Employers in the U.S. added a fewer-than-forecast 92,000 workers to payrolls last month and the jobless rate unexpectedly rose, a sign the labor market is cooling.
The increase in jobs followed a 126,000 gain in June that was smaller than previously reported, the Labor Department said today in Washington. The jobless rate rose to 4.6 percent, the first increase since April, from 4.5 percent. Wages gained 3.9 percent from a year earlier.
The U.S. labor market softened slightly in July, according to the latest government statistics released Friday.
Nonfarm payrolls grew by a lower-than-expected 92,000 in July. This is the lowest amount of payroll jobs since February. The unemployment rate rose to 4.6%, the highest since January, the Labor Department reported Friday.
Economists were expecting payroll growth of about 133,000, according to a survey conducted by MarketWatch. The jobless rate was expected to remain at 4.5%. See Economic Calendar.
Some of the weakness came from a surprising 28,000 drop in government jobs in July. Excluding the government, private sector payrolls rose 120,000.
Lenders say they are being forced to raise interest rates and stop offering certain loans because mortgage-bond investors have lost their appetite for a broad range of mortgages considered risky. That includes those dubbed Alt-A, a category between prime and subprime that often involves borrowers who don't fully document their income or assets, or those buying investment properties. Notably, American Home Mortgage Investment Corp., which stopped making loans earlier this week, said late yesterday it would cease most operations, slashing its work force to about 750 from more than 7,000.
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Lenders are tightening standards and "raising rates like crazy," said Melissa Cohn, chief executive of Manhattan Mortgage, a New York mortgage broker. She said Wells Fargo & Co. is charging 8% for a prime jumbo 30-year fixed-rate loan that carried a 6 7/8% rate late last week. (Jumbo loans are those too large to be sold to government-sponsored mortgage investors Fannie Mae and Freddie Mac.) A Wells spokesman said rates are lower on loans made directly by the bank than on those through brokers.
The market for mortgage-backed securities is "very panicked," Michael Perry, chief executive of IndyMac Bancorp Inc., another big lender, said in a message on the lender's Web site yesterday.
Axa SA's asset management unit told investors last week that it would allow clients to sell shares in two bond funds that had fallen in value. Axa will buy the shares and hold onto them at its own risk to avoid selling holdings at prices that it deems to be below their ``intrinsic value.''
The company's Axa World U.S. Libor Plus Fund fell 12.6 percent between July 18 and July 19, while the Axa Investment Managers Fixed Income Investment Strategies U.S. Libor Plus Fund fell 13.5 percent over the same period, the Paris-based company said on its Web site.
Hypo Real Estate Holding AG and Depfa Bank Plc, lenders that reached a takeover agreement in July, haven't been hurt by the U.S. subprime turmoil, they said today.
Union Investment Asset Management Holding AG, Germany's third-largest mutual fund manager, halted redemptions from a fund holding subprime mortgages after clients withdrew 100 million euros ($137 million) in the past month.
The Frankfurt-based company also closed the 950 million-euro ABS-Invest Fund to new investments, spokesman Markus Temme said today. The fund, sold to institutional investors across Europe, has about 6 percent of its assets in securities related to subprime mortgage loans, Temme said.
The fund has taken the steps ``because of illiquidity in the market,'' Temme said in a telephone interview today. Union Investment, which is owned by Germany's cooperative banks, hasn't priced the fund since July 24.
ones' Tudor Investment's $9 billion Raptor Fund dropped 9 percent in July when the prices of U.S. stocks exploded lower in the last two weeks of the month.
The Boston-based Raptor's loss wiped out its year-to-date gains. It is now down 2.89 percent, according to a fund official.
A spokeswoman would not comment on what led to the losses.
The other fund, Tudor's $10.3 billion Tudor BVI Fund - which he manages personally - dropped 3.1 percent in July. It is up 4.6 percent so far this year.
Despite the sharp losses, and continuing deterioration in credit and derivative markets where Jones' portfolios are active, Greenwich, Conn.-based Tudor Investments, which has $20 billion in assets, remains profitable for the year.
Meanwhile, Caxton Associates' $3 billion Global Bond Fund dropped just under 3 percent, according to Bloomberg.
US mortgage turmoil hit investor confidence on the other side of the Atlantic on Wednesday as details emerged of a German government rescue of a domestic lender that suffered heavy losses on subprime investments.
The rescue of IKB, a specialist lender based in Düsseldorf, began on Sunday when Peer Steinbrück, German finance minister, called top banking executives to discuss a bail-out. According to people who took part in the conference call, Jochen Sanio, head of Germany's financial regulator, is said to have warned of the worst banking crisis since 1931.
IKB surprised investors this week with a profits warning after a multi-billion euro fund it managed was hit by problems stemming from its US subprime exposure. The news sent its shares plunging and prompted KfW, the state-owned development bank, to step in with a pledge to guarantee obligations of more than €8bn ($10.9bn) – more than five times IKB's stock-market value.
Prudential Financial Inc., the second- largest U.S. life insurer, said it's still buying securities backed by subprime mortgages and expects turmoil in the market to cost the company no more than $150 million over five years.
Prices of some subprime securities rated AAA and AA are now ``disproportionate to the underlying risk and are primarily liquidity-driven,'' Prudential Vice Chairman John Strangfeld said on a conference call with analysts today. ``As a consequence, we see selective opportunities to take advantage of that.''
Prudential is capitalizing on a faltering market for mortgage bonds that's making it difficult for sellers to unload even the most highly rated securities. The secondary market ``is not functioning,'' Michael Perry, chief executive officer of Indymac Bancorp Inc., the ninth-largest mortgage lender, said in an e-mail to employees yesterday.
"Error at the bell last night (clarification): This error at the bell last night really did contribute to the rally. Bottom line is that one of our competitors inadvertently sold 5346 too many of the SPX Sep 1450 calls and needed to cover them in a hurry. At the time the mkt was down 1% on the day.
In covering, it is likely the crowd front ran the order, exaggerating the move.
Once the move got going, the variance hedging phenomenon kicked in. Most dealers place MOC (Mark on Close) orders to hedge their daily delta risk.
If this theory holds, then they would have put in large sell orders yesterday MOC at around 3:40PM. Once the mkt started to run, their delta position would've changed from net long to net short and they would have needed to buy that much more SPX exposure into the bell. Our index trading desk predicts that for every 2 pt move up in the SPU, dealers needed to buy approx 500MM notional in delta.
With liquidity being lousy right now, that created the violent move."
Here's what happened: fear levels are so high that traders are reluctant to even consider buying into the close. But many bulls can smell that the market is oversold, so they want to buy, but they need some signal, even a feeble one.
At 3:40 pm ET each day Market On Close (MOC) orders are posted that indicate if there are unusually high levels of buy or sell orders for individual stocks at the close. The purpose is to let market participants know what kind of orders are around and to attract buyers or sellers to imbalances. These orders are revised again at 3:50 pm
These MOC orders normally make little difference in the market close, but with fear so high investors look for some sign of what is going on. When they saw that the MOC orders were relatively benign (about even buys to sells, not heavy volume), they came in and bought heavily.
The American Trucking Associations’ advanced seasonally adjusted For-Hire Truck Tonnage Index decreased 0.1 percent in June, marking the third consecutive month-to-month drop. Tonnage fell 1.3 percent in May and has dropped 3.5 percent since March. The not seasonally adjusted index dropped 3.3 percent from May to 114.1.
On a seasonally adjusted basis, the tonnage index declined to a seven-month low of 110.5 (2000 = 100) in June from 110.6 the previous month. Compared with a year earlier, tonnage was down 3.4 percent in June, which is just a slight improvement from the 3.6 percent year-over-year decrease in May.
ATA Chief Economist Bob Costello said that while the government reported the economy grew at a 3.4 percent annualized rate in the second quarter, that strength did not filter into the transport sector. “Our tonnage index fell 1.8 percent during the second quarter from the first quarter and was 3.2 percent lower than the same quarter in 2006,” he said.
General Motors Corp. and Ford Motor Co. said U.S. sales plunged in July, leading declines at the five largest automakers as a housing slump and gasoline prices damped demand for new cars and trucks.
GM and Ford, the two biggest, said sales slid at least 19 percent. Toyota Motor Corp. and Honda Motor Co., Japan's biggest automakers, each posted a drop of more than 7 percent from a year earlier, while DaimlerChrysler AG fell 9.1 percent.
The five largest U.S. automakers by sales hadn't posted declines in the same month since May 2005. The companies account for more than three-quarters of U.S. vehicles sold.
``No one was immune to the weaknesses in the marketplace in July,'' said Jesse Toprak, an auto analyst at Santa Monica, California-based Edmunds.com. ``The demand for new cars is not unlimited.'' The slowing U.S. housing market, he said, ``has an impact on the psychology of the consumer.''
So we go from the west coast blow ups of subprime names like New Century to a big fish on the east coast which specialize in near prime (Alt-A) and prime lending. AHM was not a fly by night company, it was a top-10 mortgage company with a Q1 book value of over $20 bln. It is based in Melville, NY (Long Island) where a variety of money center banks have back office operations. It had over 7,000 employees, nearly 1,500 in Melville.
Oddo & Cie, a French stockbroker and money manager, plans to close three funds totaling 1 billion euros ($1.37 billion), citing the ``unprecedented'' crisis in the U.S. asset-backed securities market.
Oddo said it will wind down the funds within the ``shortest possible time frame'' because of a plunge in prices for collateralized debt obligations, notes backed by other bonds, loans and their derivatives.
The highest level of defaults in 10 years on U.S. mortgages drove the risk premium on corporate bonds in Europe to the widest in at least three years yesterday, based on prices for credit-default swaps. Commerzbank AG, Germany's second-biggest bank by assets, yesterday said it expects to make provisions of about 80 million euros for potential loan losses tied to the U.S. subprime mortgage market, and IKB Deutsche Industriebank AG in Dusseldorf said it was scrapping its earnings forecast as ``massive uncertainty'' threatens access to funding.
``Like many actors, we have tried to revitalize the performance of our funds by investing in CDOs,'' Arnaud Ploix, a spokesman for Paris-based Oddo, said in an interview today. ``Like others, we noticed recent problems with short-term liquidity and were caught out by the subprime dilemma.''
Volatility in global credit markets has hit another Australian high-yield fund, Macquarie Bank Ltd.'s Fortress Investments Ltd., which said that investors in the funds face losses of up to 25%.
Fortress is the third fund manager in Australia to flag serious problems and is the latest sign that the fallout from U.S. subprime mortgage sector woes is spreading ever wider. Australia has the largest hedge-fund industry in Asia, according to the Australian government, and Australian hedge funds have been some of the first to say that the global widening in yield spreads has cut deep into their value.
Investors in Fortress had put in 220 million Australian dollars (US$188 million), which was then leveraged to create a fund of between A$1.2 billion and A$1.3 billion, according to Fortress. The funds weren't directly exposed to U.S. subprime mortgages, but problems in that sector have pushed down the value of riskier investments in credit markets generally.
Bear Stearns Cos., already forced to shut two hedge funds that bet heavily on the risky subprime-mortgage market, is now facing big losses in a third fund that has roughly $900 million in mortgage investments, according to people familiar with the matter.
The fund, known as the Bear Stearns Asset-Backed Securities Fund, ran into trouble in July and has refused to return investors' money for the moment, according to these people. One of these people said the redemption requests were postponed in hopes that the fund's assets would rebound in value. The fund contains a range of mortgages, but only a small slice of them that are considered subprime, the area that has given so many firms heartburn in recent weeks. Unlike the two other Bear funds that are being closed, this fund is not leveraged.
The asset-backed fund was up about 5% between the beginning of the year and the end of June according to these people. But faced with a slew of mortgage markdowns in July, its performance appears to have plummeted. It is not known how much, if anything, Bear owns of the fund. Its shares were down about 5% Tuesday, to $121.22.
American Home Mortgage Investment Corp. shares plunged 90 percent after the lender said it doesn't have cash to fund new loans, stranding thousands of home buyers and putting the company on the brink of failure.
Investment banks cut off credit lines, leaving American Home without money yesterday for $300 million of mortgages it had already promised, the Melville, New York-based company said in a statement today. It anticipates that $450 million to $500 million of loans probably won't get funded today, and the lender may have to sell off its assets.
``They can't function without access to capital,'' said Bose George, an analyst with KBW Inc. in New York. ``The company either has to file for bankruptcy or go through some type of rescue or restructuring, and either way will leave almost nothing for the common shareholders.''
U.S. stocks fell after troubled American Home Mortgage Investment Corp. said it lacks cash to fund new loans and traders speculated Apple Inc. will cut production of its widely touted iPhone. The Standard & Poor's 500 Index posted its biggest monthly decline in three years.
Lehman Brothers Holdings Inc., Bear Stearns Cos. and Goldman Sachs Group Inc. led the brokerage industry to a 10-month low because the prospect of American Home liquidating assets threatened to depress the value of mortgage securities traded on Wall Street. The concern that Apple overestimated demand for its unique mobile telephone helped send the S&P 500 Information Technology Index to its lowest level since March.
The Dow Jones Industrial Average erased a gain of 140 points and fell 146.32, or 1.1 percent, to 13,211.99. The S&P 500 slipped 18.64, or 1.3 percent, to 1455.27. The Nasdaq Composite Index slumped 37.01, or 1.4 percent, to 2546.27.
``Anyone invested in the market is struggling because their portfolio is underperforming and they are wondering how long this is going to last,'' said Sam Rahman, who oversees $1.3 billion as head of U.S. equities at Baring Asset Management Inc. in Boston.
Consumer spending in the U.S. increased in June at the slowest pace in nine months as near- record gasoline prices and falling home values forced Americans to cut back.
The 0.1 percent rise in spending followed a 0.6 percent increase in May, the Commerce Department said today in Washington. The increase matched the median forecast of economists surveyed by Bloomberg News. The Federal Reserve's preferred measure of inflation rose less than forecast.
Consumer spending, which accounts for more than two-thirds of the economy, will cede its role as a mainstay of the expansion as increases in exports and business investment propel a rebound in manufacturing. At the same time, more jobs and rising incomes will prevent spending from slowing even more, economists said.
Core consumer inflation increased 0.1% for the fourth consecutive month in June, pushing the yearly gain in core inflation down to the lowest level in three years, the Commerce Department said Tuesday.
The core personal consumption price index rose 1.9% in the past year, the lowest inflation since early 2004, and just within the Federal Reserve's unofficial comfort zone of 1% to 2% for core inflation. Core inflation excludes volatile food and energy prices. Read the full government report.
Overall inflation also increased 0.1% in June, the lowest monthly inflation since November. Overall inflation is up 2.3% in the past year.
• Mortgage insurers MGIC Investment Corp. and Radian Group Inc. said they might write off their combined $1.03-billion stake in a venture that invests in sub-prime mortgages on which payments were past due.
• American Home Mortgage Investment Corp., which lends to people close to the sub-prime category, postponed payment of its dividend, took "major" write-downs and said its lenders were demanding that it put up more cash. Its stock plunged 39%.
• Insurer CNA Financial Corp. wrote down $20 million in sub-prime-backed securities.
• A German bank with U.S. sub-prime exposure cut its profit forecast and replaced its chief executive.
In all, 573,397 properties across the nation reported some sort of foreclosure activity in the first half of this year, including receiving notices of default, auction sale notices or being repossessed by lenders, Irvine-based RealtyTrac Inc. said.
That was 58 percent higher than the 363,672 properties in the first six months of 2006 and 32 percent higher than the 433,504 in the last six months of 2006.
"We could easily surpass 2 million foreclosure filings by the end of the year, which would represent a year-over-year increase of over 65 percent," said RealtyTrac CEO James J. Saccacio.
Sowood Capital Management told its investors that the hedge-fund firm suffered dramatic losses of more than 50% this month and that it will wind down its two funds -- becoming the most high-profile player to be cut down by the troubles roiling many parts of the bond market.
The losses dropped the Boston hedge-fund firm's assets to about $1.5 billion from what had been $3 billion, the firm told investors in a letter. Sowood, which was started by Jeffrey Larson, who helped pick investments for Harvard Management Co. before launching his own hedge-fund firm, said it will distribute its remaining cash to investors, closing down the hedge-fund firm.
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The Citadel transaction, likely worth hundreds of millions of dollars, is a sign that for all the recent troubles in the markets, and losses at a number of big investors, there remains ample money on the sidelines waiting to step in to buy cheap assets. That is potentially bullish for the markets.
GMAC Financial Services, General Motor Corp.'s part-owned financing arm, reported a 63% drop in second-quarter profit as its Residential Capital LLC home-lending unit weighed on results, though the losses from the unit narrowed markedly from the first quarter.
The company, which significantly scaled back its nonprime portfolio during the quarter, said it expects continued improvement in earnings performance in the second half.
"We are encouraged to see that the aggressive risk-mitigation initiatives implemented in the first half of this year have reduced ResCap's losses -- quickly and significantly -- despite increasing challenges in the U.S. mortgage market," said GMAC Chief Executive Eric Feldstein.
Stronger investment in nonresidential structures, up 22.1%, and government spending, up 4.2%. Neither of these are remotely sustainable.
Don’t read too much into the sharp moderation in real consumer spending — it is entirely attributable to the spike in gasoline prices… While the housing market is likely to show further deterioration, the biggest source of uncertainty in the outlook at this point is actually the future direction of gasoline prices.
"Maybe the equilibrium we had where jobs, wages and equities were offsetting the negatives of higher energy price and housing head winds has shifted to where we move to a slower growth profile for consumer spending," Gregory said. "We'll see in the next month or two, but that's definitely the risk that's out there."
Earnings among the 313 members of the S&P 500 that reported second-quarter results rose 9.7 percent, twice the average of analysts' estimates on July 13. One hundred one members are scheduled to report results this week.
-- The 10, 20 and 50 day SMAs all have a downward pull for the foreseeable future.
-- The SMAs will become technical resistance rather than support