Wednesday, March 24, 2010

Nervousness about European debts sinks stocks

Markets remained under water all day on gloomy housing numbers & problems from European borrowings (which may be coming to center stage). Dow was down 52, decliners over advancers 2-1 & NAZ lost 16. Banks found buyers taking the Financial Index up a fraction to yet another interim high even though there was more talk about greater financial regulation.


% Change

The Alerian MLP Index lost only a fraction, still in the 299s. But the Dow Jones REIT Index was up 1 to 201, giving a YTD gain of over 10%. While quality bonds had a major sell-off, junk bond funds attracted buying interest & rose. Worries about credit defaults in Europe caused European debts & Treasuries to sell off. The 10-year Treasury bond PLUNGED today causing the yield to spike up 15 basis points to 3.84% (a change of 10 points is considered an extremely big change in the world of Treasury bonds). Last year, 4% was the highest yield on the bond (shown in the chart below) & that figure is regaining importance. Today, a record-tying $42B sale of 5-year Treasury debt drew a higher-than-forecast yield & lowest demand since July.

Alerian MLP Index --- YTD

Dow Jones REIT Index --- YTD

10-Year Treasury Yield Index - 1 year

Oil fell but held the 80 level. Gold did not do as well, dropping below its 1100 support line.

CLK10.NYM...Crude Oil May 10...80.58 Down 1.33


Lennar (LEN), a top 5 home-builder, reported a narrower-than-expected loss & said it was on track to make a profit in 2010. LEN reported a Q1 loss of 4¢ per share versus 98¢ last year. Revenue fell 3% to $574M beating estimates of $568M. The average home sale prices rose 6% while expenses fell, resulting in higher gross margins of 19.2% (up from 6.5% last year). Orders rose 18% despite a reduction in sales incentives offered to home buyers. Stuart Miller, Chief Executive, said, "We believe that our core business will continue to improve as we deliver homes from our recent strategic land acquisitions and volume levels increase as the recovery of the housing market continues." Of the biggest home-builders, Lennar's shares have risen the most in the past year (up 81%). Today the stock was up 63¢ to 17.69.

Lennar posts narrower-than-expected loss Reuters

Lennar --- 2 years

Dick Bove, a key banking analyst, said he expects banks to quadruple in the next 2-3 years as defaults decrease. The Standard & Poor’s 500 Financials Index (see above) has risen 162% from its 17-year low (82) reached last year. Keeping it in perspective, the index would have to go over 500 for an all time record. Banks benefited from gov spending, lending or guaranteeing loans while the Federal Reserve (FED) kept its benchmark interest rate near zero. Higher interest rates & unwinding of positions the FED has taken may put a crimp in his forecast.

Bulls will not be discouraged by this setback, saying it's just a pause which the markets need after recent gains. The Dow is up 10%+ in the last 5 weeks & that has been pretty much straight up. But European debt problems look like they are becoming more serious.

Dow Jones Industrials --- YTD

Nasdaq --- YTD

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