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By Tom Walker
Atlanta Journal-Constitution
Wednesday, March 14th, 2007
An already nervous stock market suffered its second big loss in two weeks on Tuesday as cascading problems in the vulnerable subprime mortgage lending market heightened fears of widespread troubles in the U.S. housing industry.
The Dow Jones industrial average fell 242.66 points, or almost 2 percent, to 12,075.96 as part of a broad sell-off in the wake of news that subprime borrowers fell behind on their mortgage payments at the highest rate in 3 1/2 years.
It was the Dow's biggest loss since plunging 416 points on Feb. 27. Trading collars designed to prevent a selling stampede were triggered Tuesday afternoon when the New York Stock Exchange composite index lost more than 180 points.
The subprime market, which serves borrowers with low credit ratings, is a relatively small part of the U.S. economy. But the housing industry assumed such importance to the overall economy after the 2001 recession that any hint of trouble creates anxiety about the possible economic impact.
The market opened with news the New York Stock Exchange suspended trading in New Century Financial Corp. and moved to delist the stock. The lender disclosed more details about its financial troubles Tuesday.
The Mortgage Bankers Association, meanwhile, reported that delinquencies increased in all types of U.S. housing loans while foreclosure rates reached an all-time high of 0.54 percent at the end of 2006.
By day's end, the shares of subprime lenders were broadly lower.
The Standard & Poor's financials index of 88 lending institutions fell 3.2 percent and is down 3.5 percent for the month.
Shares of Accredited Home Lenders Holding fell by 65 percent; American Home Mortgage Investment by 10 percent; Washington Mutual by 5 percent; and Countrywide Financial Corp. by 4.7 percent.
Home builders also suffered. Atlanta-based Beazer Homes USA traded at a 52-week low for the second straight day and closed down 6.4 percent, and similar losses occurred at D.R. Horton, Centex and Toll Brothers.
There was not much good news elsewhere on Tuesday to offset news from the subprime market.
The government said retail sales increased less than expected last month and, not counting auto sales, actually declined 0.1 percent compared with a January rise of 0.2 percent.
Analysts said frigid February weather was a big reason.
Wachovia economist Gina Martin also said that "ongoing weakness in the housing market is a big drag on sales of [big-ticket products] related to the home."
Three indexes of business sentiment showed increased pessimism, with indications of a downturn in hiring. A Manpower hiring outlook index dipped for the second quarter of 2007.
"Taken collectively, these reports gave additional concern that the economy may slip into a recession," said Phil Larkins, senior portfolio manager for Northern Trust's Atlanta office.
But Larkins added that the "odds still favor a nonrecessionary slowdown in economic growth."
Emily Sanders, chief executive of Sanders Financial Management in Atlanta, said the latest slide on Wall Street is "the second leg down" for a market that displayed investor fear for the second time in two weeks.
"I don't think there will be a third leg down, although the second could be a bit protracted," said Sanders.
"The market probably should be down 10 percent from its highs."
Such a drop would meet most Wall Street definitions of a correction and is the kind of loss that has not occurred since 2002.
As for what investors should do at this time, SunTrust Robinson Humphrey quantitative analyst Gary Tapp said in a message on Tuesday that "at this point, we see no reason to be aggressively buying. Our model portfolios are at 7.5-10 percent cash positions."
According to Tapp, investors are likely to look beyond the weak February retail sales numbers, "but they still have to deal with growing concerns about the ripple effect from subprime lending, as well as weak corporate spending."
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