MARKET WRAP: US Housing Takes Its Toll

US

The falling US housing market continues to beleaguer the stock market. Unsold homes reached a 15-year high, with July sales dropping 0.2% for the fifth consecutive decline. Consumer confidence saw its biggest drop since Hurricane Katrina.

Financial stocks saw marked volatility this week. Negative news from the financial sector includes a 45% fall in net income for Freddie Mac 2Q. The H&R Block Option One sale is in doubt after its quarterly loss more than doubled.

Markets recovered after a letter was released on Wednesday in which Fed Chairman Ben Bernanke reiterated that the Fed was “prepared to act as needed” to alleviate the impact of credit market problems on the economy. Bernanke’s speech today (Friday) will be watched closely, with the market looking for indications of an interest rate cut.

In company news, CIT group closed its mortgage lending operations. Home Depot said that the sale price of its wholesale supply business would be 18% less than initially agreed due to the state of the US housing market and credit markets.

In deal news, Medco Health Solutions said that it would buy PolyMedica for $1.22 billion.

In earnings news, Dell reported higher than expected profits due to lower costs for computer components.

Asia Pacific

The Australian fund Basis Yield has filed for bankruptcy. The hedge fund, which specialises in corporate and structured debt, has fallen prey to the increasing spreads in credit markets. The fund managed $1 billion earlier this year, but the bankruptcy filing showed about $100 million in assets and more than $100 million in liabilities.

In Japan, Nippon Paper is reportedly planning to integrate cardboard production with Rengo to boost productivity.

Toyota Motor’s President said that its US sales were set to outperform the market in August. The company is hoping to meet its annual sales targets despite the potential for decreased demand due to a tighter credit market.

UK

The market was closed on Monday for a public holiday.

Barclays denied a Financial Times report that said that the bank faces exposure to hundreds of millions of dollars in losses stemming from problems in the credit markets.

Rio Tinto received clearance for its $38.1 billion acquisition of Alan from US anti-trust authorities.

Diageo, the world’s largest alcoholic drinks group, posted a 13% rise in annual earnings and increased its forecasts on the back of a recovery in Europe and better trading in the US.

End note

The turmoil in the US housing market continues, though soothing words from Ben Bernanke have had a calming effect. The announcement of an interest rate cut in Bernanke’s speech in the US tonight – if it occurs – will come as very welcome news to the markets. The US subprime market problem is still unfolding. The first real casualty in Australia this week came with Basis Capital’s Yield fund filing for bankruptcy. The volatility in the markets will likely continue until the extent of the US housing market problems and the squeeze in credit spreads is known. Financial stocks continue to have the bumpiest ride on the markets due to weak US housing data and bad news from US financial stocks.

Happy investing!

Julia Lee
Head of Fundamental Analysis
HUBB Financial Group
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