The index of leading economic indicators fell for the third time in four months in November, signaling an increasing risk of a U.S. recession. The deepest housing slump in 16 years is likely to worsen as foreclosures mount and banks restrict lending, economists said. Declining property values and rising energy costs may also hurt consumer spending, which accounts for more than two-thirds of the economy. The economy is projected to grow at a 1 percent annual rate this quarter and at a 1.5 percent pace in the first three months of 2008.
More people signed up for unemployment benefits last week, suggesting that the job market is softening as the economy loses speed. The Labor Department reported Thursday that new applications filed for jobless benefits rose by a seasonally adjusted 12,000 to 346,000. It was a larger increase than economists were expecting.
House Of Pain
Moody’s Investors Service cut its rating for home builders D.R. Horton Inc (DHI) and Ryland Group Inc (RYL) to junk status, citing persistent troubles in the U.S. housing market. Moody’s does not see a sector recovery beginning before well into 2009 at the earliest, with any housing recovery likely to be very measured for some time thereafter. Moody’s cut the senior unsecured debt of D.R. Horton and Ryland one notch to “Ba1,” one step below investment grade, from “Baa3.” The outlook for both builders is negative, indicating an additional cut may be likely over the next 12 to 18 months.
Mortgage Application Dropped
Mortgage application volume plummeted 19.5 % during the week ending Dec. 14, according to the Mortgage Bankers Association’s weekly application survey.
A trade group for home builders said thursday that home-price declines won’t stop until early 2009, as a lethargic economy and troubled mortgage market drop the bottom even lower. David Seiders, chief economist for the National Association of Home Builders, said he agrees with what he called an emerging consensus about the housing market: that median U.S. housing prices will drop by 10 to 15% from a peak in 2005 to its eventual bottom.
U.S. homeowners increasingly failed to keep up with their home loan payments in November, as the number of foreclosure filings surged 68% nationwide compared with the same month a year ago. In all, 201,950 foreclosure filings were reported last month, compared with 120,334 in November 2006.
Bear Stearns (BSC), the No. 5 U.S. investment bank, said a bigger-than-expected writedown in its mortgage portfolio caused the first quarterly loss in the company’s 84-year history. The fiscal fourth-quarter loss after paying preferred dividends was $859 million, compared to a profit of $558 million, a year earlier. The company had negative net revenue of $379 million, compared to revenue of $2.41 billion a year earlier.
Merrill Lynch (MER), the third-biggest U.S. securities firm, may post an additional $8.6 billion in writedowns of subprime-related debt during Q4. The new writedowns would follow Q3 $7.9 billion reduction that the firm booked on the value of U.S. subprime home loans and collateralized debt obligations.
Morgan Stanley (MS), the No. 2 U.S. investment bank, reported a $9.4 billion writedown from bad bets on mortgage-related debt, leading it to take a $5 billion infusion from an arm of the Chinese government. The writedown, nearly triple what Morgan Stanley warned of in November, pushed the investment house to the first quarterly loss in its 73-year history. For the full year, Morgan Stanley’s profit plunged 62% to $3.44 billion from $9.10 billion in 2006. Revenue fell 6% to $28.03 billion from $29.84 billion in 2006.
MBIA (MBI) world’s biggest bond insurer said it has exposure to $30.6 billion of collateralized debt obligations it insures, including a large exposure to risky bonds known as CDO squared, sending its stocks plummeting 26% in a day. MBIA also is vulnerable to $8.1 billion of CDOs backed by high-grade collateral, 85% of which are risky bonds known as CDOs of CDOs, or CDO squared.
Drug store operator Rite Aid Corp (RAD) posted a wider-than-expected quarterly net loss and cut its full-year estimates, citing a slow flu season and a more cautious consumer. Rite Aid said its net loss in Q3 was $84.8 million, compared with a year-earlier net profit of $1.1 million, but a per-share loss of 1 cent.
Discover Financial Services (DFS) posted a loss in Q4 after taking a $391 million charge because of its struggling card business in Great Britain. The credit card issuer reported a net loss of $84.1 million. Reason cited for the loss was bad consumer credit environment and housing slump. The company reported a profit in the same period last year of $186.5 million.
FedEx (FDX) Q2 profit falls 6% largely due to high fuel costs and a sluggish U.S. economy, and they offers Q3 outlook below Wall Street estimates.
The only saving face for the economy is the tech sector, but is it going to be enough to save the economy from a recession ?
Oracle (ORCL) Q2 profit jumped 35% on increased sales. Research In Motion (RIMM) reported that its quarterly earnings more than doubled to $370.5 million, beating expectations, thanks to strong uptake of the company’s products and services in the business and consumer user market segments. Wireless chip and technology developer Qualcomm (QCOM) raised its outlook for its fiscal first quarter, amid strong demand for advanced phones.
Conclusion: With plethora of bad news, each and every day, all points towards a mild recession which eventually leads to 15-20% drop in the stock market indexs. Invest with caution !!
Recommendations: Go long on tech/mining/energy sector. Go short on financials/housing/mortgage/credit affected companies/airline.