Why Stocks Are Weaker

The markets are having trouble holding their gains for a very simple reason: the decline in building permits suggests further decreases in housing starts in the months ahead. Here is a point where the bears may have some traction: they have argued that the housing slowdown will have insidious effects, influencing earnings of companies not normally associated with housing.

This is indeed happening: IBM and United Technologies are just the latest companies who have seen earnings, while still strong, impacted by the housing slowdown.

Second, the foundation of the bull story has been that weakness in the U.S. housing market would not spread to the global markets. However, the IMF lowered its global growth rate this morning to 4.8% (from 5.2%), noting that that "risks to the outlook are firmly to the downside" because "financial market strains could deepen and trigger a more pronounced global slowdown." This is an implicit recognition that global growth could be impacted by weakness in the U.S. housing market.

Chinese and Indian Stocks rally
Meantime, look at the gyrations in Chinese and Indian stocks. Chinese stocks are up roughly 8% here in the U.S. on reports that China may allow eliminate the strange price discrepancy between mainland Chinese stocks and Hong Kong stocks by allowing them to exchange shares.

And Indian stocks are rallying here after being down big yesterday. Indian regulators began talking about limits on the amount overseas investors could invest in their market. After trading was suspended for an hour on the Bombay stock exchange, regulators quickly tried to clarify that they were not against foreign investment.

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