Stocks Fall on Housing Worries
Stocks finished lower Tuesday after home builder Lennar (LEN) reported a drop in earnings and won't achieve its earnings target this year. A drop in a key home-price index also sparked fears that problems in the housing sector could spread to other areas of the economy.
The Dow Jones industrial average fell 71.78 points, or 0.58%, to 12,397.29. The broader Standard & Poor's 500 index was down 7.89 points, or 0.55%, to 1,429.61. The tech-heavy Nasdaq composite lost 18.2 points, or 0.74%, to 2,437.43.
Looking ahead to Wednesday's JEC testimony by Federal Reserve Chairman Ben Bernanke, he is expected to be questioned on subprime home loans and the housing sector, as well as inflation and consumer spending. "This testimony will give Bernanke the opportunity to sort of set the markets straight on the FOMC's statement, and we may be able to get a better sense from his remarks just how worried, or not, he is with respect to contagion risk," says Action Economics.
Also coming Wednesday is a report on durable goods orders, which is expected to rise 3.3%, while shipments jump 1.5%. Inventories are expected to be flat. "While the market remains focused on the downside risks to the economy primarily from the housing market, soft equipment spending in recent months is probably getting just as much attention at the Fed," says Action Economics.
In economic news Tuesday, the Conference Board's March Consumer Confidence index dropped to 107.1 from a revised 111.2 in February.
The S&P Case/Shiller 10-City Composite home price index was down 0.6% in January from December (and off 0.7% from a year ago), adding to the bearish mix for housing. "The annual declines in the composites are a good indicator of the dire state of the U.S. residential real-estate market," said Robert Shiller, chief economist at MacroMarkets LLC, in a press release. "The dismal growth in the 10-city composite is now at rates not seen since January 1994."
A few companies related to housing issued bad news. Lennar (LEN) reported first-quarter earnings per share of 43 cents, vs. $1.58 a year ago, on a 14% revenue drop. The home builder says given the state of the housing market, it does not expect to achieve its previously stated 2007 EPS goal, and is not comfortable providing new EPS goal at this time.
Ethan Allen (ETH) sees lower-than-expected third-quarter EPS of 53-56 cents. The retailer says the economic environment for home furnishings retail remains challenging.
On the positive side, video game retailer GameStop (GME) headed higher after it posted a sizable fourth-quarter EPS gain vs. a year ago on 27% higher same-store sales and 38% higher total sales, as consumers snapped up software for new videogame consoles such as Nintendo Wii, Xbox 360 and PlayStation 3.
In deal news, the Detriot Free Press says Daimler-Chrysler's (DCX) Chrysler unit could be sold to private equity firms, and that General Motors (GM) won't compete for it. The newspaper says a private equity investor is teaming up with Magna International Inc., an auto-parts maker based in Canada, to offer $4.6 billion to $4.7 billion for Chrysler. Blackstone Group and Cerberus Capital Management could also jump into the ring, the newspaper reported.
Electronic Clear (ECHO) and Intuit (INTU) have mutually terminated their acquisition agreement entered into on Dec. 14, which called for cash payment of $18.75 per ECHO share.
In the energy markets, May NYMEX crude oil was up 6 cents to $62.97 a barrel, still supported by Iran tensions, says Action Economics. Britain's prime minister Blair warned Iran on Tuesday that a "different phase" could develop if Iran did not release the 15 sailors it kidnapped, reports Actoin Economics.
European stock markets were slightly higher Tuesday. In London, the FTSE-100 index rose 0.7 point, or 0.01%, to 6,292.6. Germany's DAX index gained 29.52 points, or 0.43%, to 6,858.34. In Paris, the CAC 40 index was up 10.76 points, or 0.19%, to 5,587.06.
China's stock market rallied to new highs Tuesday. The Shanghai and Shenzhen 300 Index, which tracks yuan-denominated A shares listed on China's two exchanges, gained 19.99 points, or 0.7%, to a record 2784.02 -- capping a seven-day, 6.9% climb, according to Bloomberg.
But other Asian markets lost ground. In Japan, the Nikkei 225 index fell 156.91 points, or 0.9%, to 17,365.05. In Hong Kong, the Hang Seng index lost 59.06 points, or 0.3%, to 19,706.79.
Treasury prices fell after the Chicago Fed's Moskow said inflation is too high and that incoming data will determine Fed policy. The 10-year note yield rose to 4.61%.
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