Late Sell-Off Slams Stocks

Once again, worries about subprime loans sparked selling, as lender American Home Mortgage said it is unable to borrow on its credit facitilites

by David Bogoslaw

Renewed worries about subprime loans and credit markets drove stocks lower Tuesday, sending major indexes into a tailspin in the final hour of trading after they had been solidly higher for most of the session. The chief culprit was an announcement from troubled subprime lender American Home Mortgage (AHM), indicating it is unable to borrow on its credit facilities or access its warehouse financing agreements to fund its obligations. The news exacerbated concerns over the deterioration in subprime mortgages and a potential spillover of the troubles into the broader credit market.

The AHM news trumped earlier optimism prompted by strong earnings from Sun Microsystems (SUNW), General Motors (GM), and others, and a round of mostly encouraging economic reports.

Another source of agita for the markets: A sharp drop in Apple (AAPL) shares on an unconfirmed report that said the company may be cutting production of iPods and iPhones.

As if traders didn’t have enough to worry about, oil prices continued their dizzying ascent Tuesday. September West Texas Intermediate crude futures rose $1.38 to $78.21 per barrel on expectations Wednesday’s weekly U.S. petroleum data would show further declines in energy stockpiles. Some analysts say they see no reason to sell oil with potential for hurricanes approaching, according to S&P MarketScope.

On Tuesday, the Dow Jones industrial average fell 146.32 points, or 1.1%, to 13,211.99. The broader S&P 500 index shed 18.64 points, or 1.26%, to 1,481.02. The tech-heavy Nasdaq composite index was the worst performer among the major indexes, falling 37.10 points, or 1.43%, to 2,546.27, paced by the downdraft in Apple shares.

AHM plunged 90% on Tuesday to trade just above $1. Trading in the shares had been halted Monday after the company’s initial announcement that it had suspended its dividend to preserve liquidity, and much of Tuesday until the company provided an update on its liquidity. The news was not good. The company said that due to disruptions in the secondary market, it has been unable to resell many of its loans and has seen the value of assets held in its portfolio decline, generating margin calls from its lenders. The company has retained Milestone Advisors and Lazard to evaluate alternatives.

The AHM, Apple, and oil-market developments overshadowed mostly positive economic and corporate news. Leading the raft of new economic data Tuesday, U.S. personal income rose 0.4% in June as expected, while a 0.1% increase in consumption spending matched the forecast and the core PCE deflator climbed 1.9% from a year ago. The employment cost index increased 0.9% in the second quarter, vs. 0.8% in the first quarter.

The personal income report showed gains in income and spending that were largely in line with the June employment and retail sales reports, along with the big upward income revisions and lower consumption trajectory over the last three years evident in the advance second-quarter GDP report, according to Action Economics.

U.S. Chicago Purchasing Managers survey fell to 53.4 in July from 60.2 in June as activity continued to slow following a surge to the 61.7 level in May. The subcomponents of the report were mixed, however, with the employment index climbing to 61.6 from 52.7, the new orders index dropping to 53.4 from 65.7 and prices paid rising to 73.1 from 68.1. The jump in the employment statistic ahead of Friday's payroll report might be slightly negative for bonds, according to Action Economics.

The Conference Board's Consumer Confidence index rose to 112.6 in July from a downward-adjusted 105.3 in June, while construction spending slipped 0.3% in June after a 1.1% in May.