MIDDAY ACTION, August 28

Stocks fall on sharp drop in consumer confidence and downgrade of bank stocks. Volumes have fallen off this past week with traders waiting for further data on the economy and interest rates. However, after solid gains last week, profit taking has ensued. The housing market continues to be a drag on the economy and traders are looking for the Fed to lower interest rates to help offset this weakness.

With housing struggling and the credit markets in turmoil, consumer confidence has taken a hit. The Conference Board reported this morning that its confidence index fell 6.9 points in August to a level of 105.0. This was in line with estimates with the 12-month inflation expectations remaining at 5.1 percent. Readings on the jobs market reversed from the prior month as well, easing expectations for jobs growth during the month. On Friday, traders will get the University of Michigan consumer sentiment report, which is also expected to see a sharp decline from July’s figure.

Standard & Poor’s reported that U.S. home prices fell 3.2 percent in the second quarter. This was the largest year on year decline for home prices in the 20 year history of the home price index. One year ago, home prices were up at a pace of 7.5 percent. This report continues to show that a bottom in the housing market is still not in sight.

Banking stocks have been under pressure of late as well on problems in the credit markets. Bad news continued Tuesday when Merrill Lynch cut its rating on Lehman Brothers (), Bear Stearns () and Citigroup () to “Neutral” from “Buy”. Merrill is concerned about the banks’ exposure to the debt-market. All three stocks are down about two percent in midday trading. Shares of State Street () are also down after the London Times reported that the company has exposure to $22 billion in asset-backed commercial paper.

In merger news, PolyMedica () has agreed to be purchased by Medco Health Solutions (). The deal is worth $1.2 billion and has sent shares of PLMD up more than 14 percent. Even shares of MHS have gained ground, up half a percent in midday trading.

It will be interesting to see how stocks react to the FOMC minutes due out later this afternoon. The bulls are hoping that these minutes show the Fed is ready to cut rates to help spur economic growth. If this is the case, the stock market could recover from the triple digit loss it is seeing in midday action.

Jody Osborne
Senior Writer & Options Strategist
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