Gregory Thomas
Sun
U.S. markets took a beating Tuesday and the U.S. dollar dropped to a record low against the euro as Moody’s Investors Service slashed its ratings on 399 bond issues backed by residential mortgages, and Standard & Poors said it may cut ratings on $12 billion US in mortgage-backed securities.
Home Depot, the parent company of Sears, and D.R. Horton, the largest U.S. homebuilder, slashed earnings and revenue forecasts, blaming the housing slowdown in the U.S. for falling consumer spending.
With rising levels of delinquencies and late payments on mortgages in the U.S., S&P says it has “further evidence of lower underwriting standards and misrepresentations in the mortgage market.” Mortgage bonds moved lower on the news, with an index of the lowest-rated issues, known as subprime, falling to nearly 50 cents on the dollar.
The Dow Jones industrial average dropped 148.27, or 1.1 per cent, to 2,639.16. The S&P 500 fell 21.73, or 1.4 per cent, to 1510.12. The Nasdaq composite moved lower by 30.86, or 1.2 per cent, to 2,639.16. The U.S. dollar fell to $1.3729 against the euro.
Shares of Sears Holding Corp., parent company of Sears and Kmart, had their biggest drop in four years, plunging $17.20, or 10 per cent, to $154.21. Sears now expects second-quarter earnings to fall as much as 46 per cent from a year ago. Same-store sales fell four per cent, with appliance sales the hardest hit.
Home Depot slashed its full-year earnings forecast, saying it expects profits to fall as as much as 18 per cent from last year, while sales drop one to two per cent. The big-box retailer also announced the first half of a $22 billion US share buyback. Shares rose two cents to $40.25 US.
Shares of D.R. Horton fell 39 cents to $19.40 US after the company sold 8,559 homes in the third quarter, down from 14,316 a year ago. Revenue dropped 48 per cent to $2 billion and 38 per cent of sales orders were cancelled.
The S&P homebuilders group fell three per cent to its lowest level since October 2003. Financials lost 2.2 per cent, accounting for nearly a third of the decline in the S&P 500. Retailers ended lower by 2.4 per cent.
Canadian markets performed better Tuesday, buoyed by rising energy prices. The Bank of Canada raised its key lending rate a quarter point, as expected, to 4.75 per cent, but a softer tone from the central bank on inflation sent longer-term yields lower. The Canadian dollar fell 0.19 cents to 95.04 US cents, down from Monday’s 30-year high of 95.74 US.
The S&P/TSX composite shed 45.59, or 0.3 per cent, to 14,131.93, from Monday’s record high. The S&P/TSX venture composite gained 23.59, or 0.7 per cent, to 3,248.29.
The Standard & Poor’s/TSX Composite Index slipped 45.59 from a record, or 0.3 per cent, to 14,131.93 in Toronto. It rose in four of the previous five sessions.
In New York, the August gold contract rose $1.90, or 0.3 per cent, to $664.40 US an ounce, while August crude climbed 62 cents, or 0.8 per cent, to $72.81 US a barrel. Hot summer weather in the northeastern U.S. helped send August natural gas up 29 cents, or 4.5 per cent, to $6.70 US per million Btu. Next day gas at Spectra Energy’s Huntingdon tolling station sold for $5.75 US per million Btu.
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Gregory Thomas is an investment adviser and Certified Financial Planner. His market commentary is broadcast on all-news radio News1130. Views expressed are the author’s alone, and not necessarily those of his employer, BMO Nesbitt Burns Inc., member CIPF. [email protected] Tel 604-631-2693 www.gregorythomas.ca
© The Vancouver Sun 2007