Wall Street Reacts to Bad News

The markets are gyrating on more negative reports from the housing sector and some disappointing earnings announcements

It's been a topsy-turvy week so far for the markets. Countrywide Financial's (CFC) reduced earnings outlook added more fire to the concerns about the housing, mortgage, and credit markets, contributing to a 226-point drop in the Dow Jones industrial average on July 24. The next day, news that existing-home sales fell 3.8% in June (down 11.4% from a year ago) stole some thunder from the robust earnings and outlooks from Amazon.com (AMZN) and Boeing (BA).

One of the big worriers that a bottom in housing is nowhere in sight and will hurt the overall economy is Barry Ritholtz at The Big Picture. He gives evidence that subprime troubles are spreading to higher-grade mortgages. As for Countrywide's troubles, he quips: "It was beyond ugly." The hedge fund manager wonders how "no one saw the deterioration of real estate values coming." In other words, if you think the housing situation is going to get better anytime soon, think again.

How Housing Affects LBOs

It's worth reading Ritholtz's explanation of how housing, LBOs, and stock buybacks are related and easy credit is drying up. Bond guru Bill Gross warned about this on July 24. Says Gross: "No longer will double-digit LBO returns be supported by cheap financing and shameless covenants. No longer therefore will stocks be supported so effortlessly by the double-barreled impact of LBOs and company buybacks. The U.S. economy in turn will not benefit from this tidal shift and increasing cost of financing."

To give you a sense of how big buybacks have been, Birinyi Associates' TickerSense says there were 414 stock buyback announcements totaling $228.9 billion in the second quarter. That pace probably won't continue if companies keep pulling back on their buyback plans, as Expedia (EXPE) did on July 23, sending its stock down 10%.

Another example of the credit crunch cited by a few blogs was news that bankers have postponed a sale of $12 billion in debt for Chrysler Group's auto business because of a lack of investor interest.

Earnings: Up or Down?

For the pulse on the flood of earnings, there were some big disappointments from companies ranging from Caterpillar (CAT) to Google (GOOG) that came right along with the strong ones. TickerSense says many companies are beating analysts' estimates and earnings forecasts are still going up. As of July 23, "the top down consensus estimate for the market was raised a full percentage point," says TickerSense. "Strong earnings numbers and the positive revision of the market's forecast provides a foundation for the large gains made so far this year."

However, Bespoke Investment Group's Think B.I.G. points out that its earnings and stock price "heat map" shows "most stocks, especially the bigger ones in the index, have been going down, regardless of whether or not they beat estimates." After the steamy summer rally, culminating with the Dow's climb above 14,000 last week, this is no surprise.

Another big topic on some investing blogs was Apple's (AAPL) earnings report coming after the market close July 25. 24/7 Wall St., for one, pointed out that analysts are usually more optimistic about Apple's sales numbers than the company. You can bet that there will be even more analysis of each Apple number in the days to come.

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