Trader Talk

Housing Weakness Trips Tech Run Ups


The good news that tech stocks are, for the most part, living up to the recent price run ups is being slightly overshadowed by the growing evidence that the weakness in the U.S. housing business is spreading into other areas:

1) IBM , though it beat earnings expectations, is down today because sales to its largest customer group--financial companies--was weaker last quarter. The financial companies cut back due to losses in subprime and other areas.

2) United Technologies , despite being one of the undisputed darlings of the global growth story (reporting 20% growth in earnings), is down this morning, partly because they see 2008 as a "challenging" year but also because Carrier (#1 in heating and air conditioning worldwide) had slower sales in the U.S. because of the housing slowdown. Watsco, one of the largest independent distributors of residential central air conditioners in the U.S., hit a new low yesterday on the same concerns.

3) Yesterday, financials were under pressure because credit quality continues to deteriorate, largely around weakness in home and commercial mortgages. Many regional banks are underreserved against losses in construction and residential loans, and now that traders realize that problems in housing (and maybe even commercial construction) are not going away immediately, there is concern that reserves for losses at many of the regional banks may not be adequate.

4) While companies with direct links to housing have been weak for some time--companies like Valspar (paints and coatings) or Interline Brands (plumbing & electrical supplies)--even companies that are at first glance far removed from the housing industry are being affected. For example, Microchip Technology , which makes chips used in consumer appliances (microwave ovens, garage door openers, keyless locks), dropped last week after the company said its earnings would be below expectations.

5) Yesterday, wood furniture maker Stanley Furniture missed for the quarter and lowered earnings expectations, whose CEO said "We do not foresee any improvement in the demand environment any time soon." Remember competitor Furniture Brands lowered its outlook last month.

6) On Monday, publisher Primedia lowered it 2007 forecast, hurt by reduced ad spending around the housing slowdown.

Questions?  Comments?