Stocks Drop on New Credit Concerns

HOWARD SCHNEIDER & TOMOEH MURAKAMI TSE
Washington Post 9aug2007

Problems at a French bank stoked fresh concern about world credit markets this morning and pushed U.S. stocks sharply lower in early trading, with the Dow Jones industrial average dropping more than 200 points in its opening minutes.

The announcement by BNP Paribas Investment Partners that it had temporarily suspended trading in three funds unnerved investors already worried about problems in the U.S. mortgage industry.

The company, a subsidiary of French bank BNP Paribas, said that the "complete evaporation of liquidity" in certain segments of the U.S. mortgage and securities markets made it difficult to place an accurate value on U.S.-based assets. As a result, the company stopped trading in three of its funds and said it would not resume until "liquidity returns."

To ease concern that problems in the U.S. mortgage industry are spilling over to Europe, the European Central Bank this morning committed $130 billion in fixed-rate loans to European financial institutions. Although taken as an effort to ensure investors of an adequate flow of cash into European markets, it also signaled that the credit problems are real and potentially serious.

"Shock waves are reverberating from Europe," said Les Satlow, portfolio manager at Cabot Money Management. "It just illustrates how on edge the market it is."

"We would be putting our heads in the sand to think that's it," he added, referring to problems with risky subprime loans and turmoil in the credit markets. "We're in the process of washing out and it may occur in increments. I think it contributes to a feeling in the market that there may be a big shoe to drop."

Rising default rates among risky "subprime" home loans have forced some U.S. mortgage lenders into bankruptcy and prompted others to tighten their lending standards. With home values dropping and sales crimped by the stricter credit standards, it becomes harder to estimate the value of other investments linked to those home loans.

Similar problems recently led the investment company Bear Stearns to declare that two of its hedge funds were basically worthless. Difficulties in the mortgage industry were also the focus of extended comments President Bush made to reporters on Wednesday.

Although rising default rates and other issues have forced some major mortgage lenders out of business, Bush yesterday said that they did not threaten the broader economy and that the current situation is a natural reaction to years of easy credit.

But the problems in the mortgage industry have, nevertheless, left investors nervous, and put the Dow and other markets on a roller coaster in recent days. After touching a record high above 14,000 last month, the exchange has been oscillating between triple digit gains and losses.

After adding 150 points on Wednesday, the Dow was down around 100 points after the first hour of trading.

source: 9aug2007

Stocks Plunge on Rising Credit Anxiety

TIM PARADIS / AP 9aug2007

Wall Street fell sharply again Thursday after a French bank said it was freezing three securities funds that struggled to find liquidity in the U.S. subprime mortgage market. The Dow Jones industrials were once more down by triple digits.

The announcement by BNP Paribas raised the specter of a widening impact of U.S. credit market problems. The idea that anyone — institutions, investors, companies, individuals — can't get money when they need it unnerved a stock market that has suffered through weeks of intense volatility triggered by concerns about available credit and bad subprime mortgages.

A move by the European Central Bank to provide more cash to money markets perhaps intensified Wall Street's angst. Although the bank's loan of more than $130 billion in overnight funds to banks at a bargain rate of 4 percent was intended to calm investors, Wall Street saw the step as confirmation of the credit markets' problems.

The Federal Reserve followed suit, adding $12 billion to U.S. markets to help ease liquidity constraints, according to Dow Jones Newswires.

"This is a mini-panic," said Joseph V. Battipaglia, chief investment officer at Ryan Beck & Co., calling the banks' injection of money into the system an unprecedented move, and evidence that the problems in subprime lending are, in fact, spilling into the general economy.

"All the things that had been denied up until this point are unraveling," Battipaglia said. "On top of this, retail sales were mediocre, which shows that indeed, the housing collapse is affecting the consumer."

Retailers were releasing their July sales figures Thursday, and overall, the figures were disappointing.

Bonds rose sharply as investors again sought the relative safety of Treasurys, with the yield on the benchmark 10-year note falling to 4.79 percent from 4.89 percent late Wednesday. Bond prices move opposite yields.

Thursday's plunge continued an erratic pattern of triple-digit moves in the Dow for several weeks. There has been more panic and gambling in those moves rather than conviction — even when the Dow has finished up more than 280 points in a session, those gains have evaporated at the first mention of trouble in housing, subprime lending or the credit markets.

In morning trading, the Dow fell 143.24, or 1.05 percent, to 13,514.62 after earlier falling more than 240 points.

The Dow on Wednesday finished 2.45 percent below the record close of 14,001.41 reached on July 19. Since passing 14,000, the blue chip index has been highly volatile — in the 14 trading days since that record close, 10 have seen a triple-digit gain or loss.

Some on Wall Street have been calling for a textbook correction — a pullback of at least 10 percent. At its lowest close since the market's high last month, which was Friday's finish of 13,181.91, the Dow was 5.85 percent below the record.

Also Thursday, the broader Standard & Poor's 500 index fell 17.01, or 1.14 percent, to 1,480.48, while the Nasdaq composite index fell 8.09, or 0.31 percent, to 2,604.89.

The dollar was mixed against other major currencies, while gold prices fell. Light, sweet crude fell 80 cents to $71.35 per barrel on the New York Mercantile Exchange.

News that Home Depot Inc. might amend the terms of the sale of its HD Supply business added to Wall Street's foul mood. The company said it could end up making substantial changes to the terms and financing of the deal and could reduce the $10.33 billion price tag. Home Depot said in June it would sell the business, which serves contractors, homebuilders and other business customers, to a group of private equity firms.

Home Depot, which fell $2.11, or 5.6 percent, to $35.69, also said it plans to lower the price of a modified Dutch tender offer to $37 to $42 per share from $39 to $44. In July, Home Depot announced the tender offer to repurchase up to 250 million shares.

But the subprime and credit market concerns dominated investors' minds in the U.S. and abroad.

In afternoon trading, stocks in Europe fell but came off their lows. Britain's FTSE 100 fell 1.90 percent, Germany's DAX index fell 2.01 percent, and France's CAC-40 fell 2.24 percent.

The pullback came as the BNP Paribas unit, BNP Paribas Investment Partners, said it was suspending three funds together worth about $3.79 billion and wouldn't make investor redemptions until it could determine a net asset value for the fund. The funds are Parvest Dynamic ABS, BNP Paribas ABS Euribor and BNP Paribas ABS Eonia. The suspended funds represent about 0.79 percent of the $482.79 billion in assets the Paribas division holds.

"The complete evaporation of liquidity in certain market segments of the U.S. securitization market has made it impossible to value certain assets fairly regardless of their quality or credit rating," BNP Paribas said in a statement.

The funds invest in subprime mortgages through a process known as securitization. Investment banks bundle together mortgages — including those from subprime borrowers — and sell them off to investors such as hedge funds, mutual funds and other institutional investors. Buyers of such securities are seeking the steady flow of income from homeowners making their mortgage payments.

With credit concerns dominating Wall Street, investors appeared little moved by a Labor Department report that the number of workers seeking jobless benefits rose 7,000 to 316,000 last week.

In corporate news, American International Group Inc., one of the world's largest insurers, said Wednesday its second-quarter profit jumped 34 percent amid growth in its general and life insurance businesses and its asset management group. The company said it remains comfortable with its exposure to the U.S. residential mortgage market. AIG rose 81 cents to $67.29.

Internet telephone company Vonage Holdings Corp. on Thursday reported a narrower second-quarter loss as it trimmed marketing costs. However, the company also saw a sharp drop in new subscribers. The decline now puts Vonage behind cable company Comcast Corp. in the number of Internet-based telephone customers. The stock rose 26 cents, or 11.8 percnet, to $2.46.

Declining issues outnumbered advancers by about 3 to 1 on the New York Stock Exchange, where volume came to 537.6 million shares.

The Russell 2000 index of smaller companies fell 0.23, or 0.03 percent, to 795.43.

source: 9aug2007