Market Intelligence: Mortgage Woes Continue to Spread

While the blue-chip Dow Jones Industrial Average has managed to surge over 100 points for two consecutive days, indexes measuring the health of the mortgage market continue to tumble.

And that has left stocks tied to the industry a smoldering mess, spurring speculation about the extent of mortgage losses.

American Home Mortgage is the latest meltdown among mortgage lender stocks, though trading Thursday featured a pre-death rally above $4. Then, Friedman Billings early Thursday afternoon lowered its price target on the stock to $0 deflating the rally and sending the stock to a 4 p.m close of $1.45. The news of its shutdown came during after hours and the stock promptly fell to below $1.

As the mortgage lender turmoil picks up more speed with American's Home's demise and a collapsing Accredited Home Lenders share price, the Markit.com ABX indexes continue to tumble.

The highest rated "AAA" 07-1 index which gauges investment risk on mortgages made in the second-half of last year, sank to a record low of 89-cents on the dollar.  The worst rung on the ladder, the "BBB-" 07-1 index, fell nearly 5 points to 34-cents on the dollar.

"The market is nervous because everyone feels they've been lied to" by regulators who say the subprime problems are contained, says Tavkoli Structured Finances', Janet Tavakoli on CNBC's "Squawk Box". Compared with Fed estimates of $100 billion in subprime related losses, Tavakoli believes the total will exceed $300 billion.

She says, "nobody has solid good data, but they are grossly overestimating the recovery rates in subprime. In the past when we've seen high stress mortgage scenarios we've seen recovery rates of 30% and less on the dollar. Tavakoli is estimating subprime losses of up to $340 billion on $1.5 trillion in loans."

And, if you thought mortgages were traditionally tied to certain yields in the bond market, like the 10-year treasury, think again.

The Wall Street Journal reports home mortgage lenders are tightening lending standards to protect their own balance sheets and lifting interest rates for people well above weak subprime credit score levels. Wells Fargo, for example, has lifted the rate on a 30-year fixed rate on prime jumbo loans to 8% from 6.875%.

Employment Report

As debate rages on whether today's weaker than expected 92,000 rise in non farm payrolls matters to the markets, Northern Trust Chief Economist Paul Kasriel says the monthly employment data doesn't deserve the attention it gets.

"It's still the biggest market mover, I never thought it should have been, since there are so many assumptions built into it that are later revised." Kasriel says, "at best the employment data is a late coincident indicator and doesn't tell you where the economy is going."

The July unemployment rate ticked up to 4.6%.

Kasiel also points to a few big distortions in the report.

"In this cycle, we’ve seen an unusual behavior of the 'participation rate' - the number of people in the labor force, who potentially could be in the labor force."  He says in most expansions we see the participation rate rise and "that means more people are coming into the labor force which tends to restrain drop in unemployment rate. In this cycle the participation rate hasn’t risen much at all" helping to keep the unemployment rate low.

Kasriel also points to "an add factor known as the 'birth/death' rate, an attempt by the Bureau of Labor Statistics to estimate the number of new jobs created by startup businesses not in survey, or jobs extinguished in an estimate of businesses that die."

Kasriel says the 'birth/death rate' is a formula that might be overstating jobs growth but still has a big impact on the report.

"During the 12 months through June "the contribution from the birth/death adjustment was 56% percent" of the non farm payrolls number.

Adds Kasriel, "had employment been weaker the Fed would have already started to cut rates, or would be taking about it. The Fed has indicated its been a little confused by the divergence from the employment data and behavior in the rest of the economy."

Analyst Actions

Pacific Crest has upgraded eBay to with a target of $42 on a pickup in listing in Europe.

Network Appliance has been downgraded to Underperform from Peer Perform Bear Stearns following its 1st quarter earnings pre-announcement that earnings will be lower than expected.  However, Citigroup upgraded the company's shares to a Buy from Hold.

Radiation Therapy gets a downgrade to Neutral from Outperform following weak quarterly results.

Gabelli downgrades Boston Beer to Hold from Buy citing the value its the company's shares.

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