Boring day for stocks

Many traders may be on holiday or away at the beach as stocks hugged break even pretty much all day. Dow & NAZ were flatish & advancers were slightly ahead of decliners. If my stocks are any indication, gains were usually measured in pennies. NYSE volume was very, very light at only 0.85B. The S&P 500 FINANCIALS INDEX was up 1+ to 270, remaining near its 30 day low. Gloomy news about bank profits in Q2 hardly surprised anybody, allowing for a small gain in financials.

FDIC: Bank Profits Fell by 86 Percent in 2Q- AP

Profits for S&P 500 companies (all but 7 are in) for Q2 were down. After subtracting out the banking group, profits were up 4%. Subtracting out GM & Ford would produce even better numbers. Even though exact numbers aren't available, a chunk of profit gains came from the lower dollar which has been reduced in the last few weeks.

Bloomberg TV had a rep from the mortgage industry taking about their business. After getting burned badly lending institutions are VERY tough on new loans, demanding at least 700 out of 800 credit scores. The premium of mortgage rates over the Treasury bond used to be about 1½ points. Today that premium has doubled reflected added risk priced in by lenders. Loans are being made, but weak candidates are being turned down. No wonder housing sales are in the slump they're in.

Oil was up 1 to 116s on nervousness about the storm in the South Atlantic which won't reach the US until Labor Day.

• Oil Higher as Hurricane Gustav Nears Gulf- CNNMoney.com
  

High Yield Bonds

High yield bonds (more commonly known as junk bonds) funds, like all other financial product companies, have had a rough year. The last few years have been fairly calm as high yields have been relatively stable. Dividends from high yield bond funds yielded 10-11%. In the last few months, as financials collapsed, they were also dragged down. Lower prices for these securities caused their yields to climb over 12%, more than triple the Treasury bond rate at 3.78%.

The spread between these 2 rates is over 800 basis points, what must be at or near an all-time record. Too bad because they have no mortgages & no exposure to mortgage writedowns. They invest in corp bonds rated BB, B & CCC to earn high yields. Typically they have leveraged portfolios. They borrow additional money to gain an advantage on the spread between the rate they pay on borrowings vs the rates earned on high yield bonds. For the very brave, these high yields should prove rewarding, they deserve more respect.

Stocks little changed on light volume

Dow & NAZ are essentially even & advancers are only slightly ahead of decliners. NYSE volume remains very light in this vacation week. As a result, price swings generally do not have a lot of conviction. On insignificant trading, the S&P 500 FINANCIALS INDEX is up 1% from its monthly level reached yesterday.

The Consumer Confidence Index from the Conference Board rose from 77 last month to 81.3, above expectations of 80. Modest good news is always welcome. However, on the home sales front, the news was not so good:

S&P: Home Prices Drop by Record Amount in 2Q- AP

National Home Price Index dropped 15.4%, a record, during Q2 from the prior year. At least some regions in the US are climbing their way out of deep holes. Oil is up on worries about the latest tropical storm:

• Oil Rises as Gustav Approaches Gulf- CNNMoney.com

An analyst estimates that Fannie Mae (FNM)/Freddie Mac (FRE) can survive losses thru the end of the year (only 4 months away):

• Fannie, Freddie Capital Can Absorb Losses: Report- Reuters

He expects losses to represent about 20% of revenues in the last 2 quarters as they are still feeling the effects of massive writedowns.

Today is shaping up as a quiet day on low vacation time volume, a good day to go to the beach.

Financials lead, markets tumble

Dow dropped 241, decliners over advancers 3-1 & NAZ dropped 49. Volume continues quiet, under 0.9B on NYSE. This was a very gloomy day for stocks led by financials:

S&P 500 FINANCIALS INDEX

Value__268.46...Change__(8.63)....% Change__(3.1%)

The financials, compiled for Bloomberg, essentially reached their one month low of 267 (which will drop off the one month grouping tomorrow). Fannie Mae (FNM)/Freddie Mac (FRE) had a good day, rising because they were able to sell more securities. They still are penny stocks selling below 5 (actually - 5.20). Rates on securities they sell keep climbing as buyers price in greater risk.
Bigger news in the financials today was American International Group, (AIG), a Dow stocks, falling 1.09 to a 13 year low!! After $25B in writedowns, they are NOT finished with this mess. It's expected that they will lose money for the 4th straight quarter which will require lower ratings on their securities. Adding insult to injury, they are no longer the largest insurer in North American. The other troubled biggie in the news, Lehman (LEH), may have to go without added financing from the Korean Development Bank, down 96¢.

Oil Rises as Tropical Storm Forms in Caribbean- AP
Ford Shares Fall to 22-Year Low- AP

Oil was up pennies on worries about threats from the tropical storm while Ford fell to a 22 year low. The Alerian MLP index dropped almost 1 to below 267, still hovering near its 52 week low (258) reached a couple of weeks ago.

Markets are clearly on defense & financials look very soggy. Maybe the Federal Reserve will not be able to wait until Friday night to come out with a rescue plan for FNM/FRE.