Wall Street stocks declined sharply on Thursday as disappointing company earnings and housing data compounded growing fear over the US credit market.
Bad earnings news from the housing sector continued as DR Horton, the homebuilder, reported its first-ever quarterly loss. Its shares were down 1.8 per cent at $17.16. Beazer Homes also posted a $123m quarterly loss, sending its shares down 8.7 per cent at $15.56. This followed second quarter losses reported late on Wednesday from Pulte Homes, whose shares sank 3.1 per cent to $20.04 on Thursday. Ryland Group bucked the trend in the sector and its shares gained 1.3 per cent to close at $33.36.
“The credit market does not feel great. Liquidity and sentiment are the worst since 2002,” said Tom Murphy, corporate sector team leader at Ameriprise Financial. He said the speed of the repricing seen in credit valuations and the decline in liquidity had made investors question their overall investment thesis. “The market has issues and people are rethinking their views on valuations,” he said.
At the close of trade in New York, the S&P 500 index was down 2.3 per cent at 1,483.17 having rebounded from its low of the day of 1,465.30, while the Nasdaq Composite was 1.8 per cent down at 2,599.34. The Dow Jones Industrial Average was 2.3 per cent lower at 13,473.82.
“The S&P 500 has steadily appreciated for nearly five years without a 10 per cent correction and the market is concerned that a pullback of that magnitude is due,” said Tobias Levkovich, chief US equity strategist at Citigroup.
The CBOE’s Vix index of market volatility hit a new high for the year of 23.36 during the day before settling at 20.79.
Purchases of new homes in the US dropped more than forecast in June, signalling no end to the real estate slump and further hurting investor estimates.
Sales fell 6.6 per cent, the sharpest drop since January, to an annual pace of 834,000 last month from a revised 893,000 rate the prior month. It was less than previously estimated, the Commerce Department said.
Investors were further rattled when Standard & Poor’s said in a Sydney conference call that US subprime losses were exceeding their expectations and historical losses.
“Prices and spreads have become much more volatile as traders and portfolios back away from markets that they used to know and love,” said William O’Donnell, strategist at UBS.
A barometer of bank risk in the derivative market is the 10-year swap spread. It was trading at 73 basis points early on Thursday, its widest level over the 10-year Treasury yield since 2003.
“There is zero confidence among market traders as to whether 10-year swap spreads are 20bp too wide or too narrow,” said Mr O’Donnell. “Treasuries remain the one market still functioning and, as such, the place where most desire to be these days.”
In other earnings news, Exxon Mobil reported a 1 per cent decline in in second-quarter net income, hurt by weakness in natural-gas. Its shares fell 5.4 per cent to $87.81, despite rising crude oil prices.
3M posted a quarterly profit rise of 4 per cent and also raised its outlook for 2007 profit. The stock was 0.5 per cent higher at $90.05.
Shares in recently floated private equity and hedge fund groups Blackstone and Fortress Investment Group also suffered, although Blackstone later recovered.
Shares of Fortress tumbled 6.6 per cent to $19.3 but Blackstone closed 0.7 per cent higher at $25.70, from a low for the day of $23.27.
Financials were once again hit by continuing subprime concerns. Bear Stearns shares were down 3.9 per cent at $124.25 while Citigroup lost 2.9 per cent to close at $47.81, JP Morgan fell 2.6 per cent to $44.08 and Goldman Sachs fell 4 per cent to close at $195.12.
Ford swung a second-quarter profit sending its shares up 1.5 per cent to $8.09.
Apple was the one bright spot. Its announcement that its profits had jumped 83 per cent in the second quarter prompted a gain of 6.4 per cent to $146.00.
In economic news, durable goods rose 1.4 per cent in June after a decline of 2.3 per cent in May. Orders for non-defence capital goods excluding aircraft, a gauge of business investment, fell 0.7 per cent after a decline of 1.5 per cent in May.
Bristol-Myers Squibb raised its earnings outlook, but the midpoint of its new range was still below Wall Street estimates. Its shares fell 5.5 per cent to $29.85.
Comcast declined 4.7 per cent to $27.21 amid a large number of cancelled subscriptions despite largely positive results.
Dow Chemical narrowly beat estimates with a 2 per cent profit rise but still fell 4.9 per cent, to $43.45.