The major indices traded in a narrow range today, with volume on the light side. Indeed, we have gone from 3 billion share days at the NYSE to 1 billion share days in less than a week and a half. Housing and brokerage stocks were the weak links today. In brokerage, Bear Stearns and Lehman both down about 4%; Goldman Sachs out with a note over the weekend noting that "Bear Stearns will see the greatest reduction in earnings this quarter given its high concentration in mortgages."
Indeed, Goldman notes that August in general has been ugly for brokers. In addition to mortgage losses for Bear (and probably Lehman), Goldman noted that brokers saw a weak investment banking climate ( M&A down 31%, debt issuance down 33%), as well as a weak fixed income environment (trading revenues declined, unknown amount of mark-to-market losses). Bear, Lehman, Morgan reporting Q3 earnings in about 3 weeks.
This over-exposure to the mortgage business by Bear and Lehman is causing a split in brokers; Bernstein noted this morning that "According to our calculations, Merrill Lynch and Morgan Stanley will be the least affected by the fixed income market events." Bear and Lehman are down 7% this month, Merrill up 1%, Morgan is flat.
Finally, for an indication of the problems associated with subprime mortgages, take a look at Houston. Deutsche Bank, in a note this afternoon to clients, noted the plusses:
--above-average job growth
--high levels of affordability & contained supply
Yet home prices there appear to be down 5%-10%, and order volumes are down 20%-25%. Deutsche Bank lays the blame mostly on the subprime problem, which has affected Houston more than the rest of the country. Subprime loans accounted for 32% of Houston purchases in 2006, compared to 22% nationwide. They note that most of the weakness is concentrated in the entry level, where much of the subprime buyers reside.
The good news is that builders there have successfully lowered inventories, and Deutsche Bank thinks Houston "should be one of the earlier markets to turn around once the housing market does begin to recover."
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