Thread: This Week in Stocks: 7/28 - 8/3/07

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Weekly Wrap

Last Update: 03-Aug-07 16:40 ET

The major averages suffered their third straight weekly decline thanks to a significant and broad-based sell-off in late-afternoon trading on Friday. Once again, concerns about the deteriorating credit market and the health of the economy weighed heavily on sentiment.

Investors have been concerned that problems in the sub-prime mortgage market and the housing sector could curb economic growth and weigh further on US equities. Last week, stocks suffered their worst week in nearly five years.

With some investors moving away from equities and into safer investments, Treasury yields continued to fall. The yield on the benchmark 10-year note fell to 4.71% from 4.79% last Friday.

In the latest indication that the lending environment is worsening, Accredited Home Lenders (LEND) acknowledged that its business is in jeopardy and may file for bankruptcy. Another mortgage lender, American Home Mortgage Investment Corp. (AHM), also said it has stopped accepting mortgage applications and is laying off the bulk of its 7,000 employees. Shares of both companies plummeted on the news.

Persistent credit fears were also evident in the market's reaction to unconfirmed rumors that homebuilder Beazer Homes (BZH) would file for bankruptcy protection due to liquidity issues. Shares of the company fell as much as 40%, dragging down the rest of the industry and the broader market, before management said the information was unfounded. The reaction to the news further underscores the deteriorating lending climate and investors' growing jitters.

Some reassuring economic data helped lift the market earlier in the week. The Core Personal Consumption Expenditure index, a favored inflation measure by the Fed, showed moderating price pressures, while Consumer Sentiment rose in July to its highest level in nearly six years. Actual consumer spending in July, however, was up just 0.1%.

Separately, the Chicago PMI declined to 53.4 in July from 60.2 in June, but still implied expansion in manufacturing in the Chicago Fed district.

The Labor Department's latest report showed non-farm payrolls rose a lower than expected 92,000 last month, exacerbating investors' concerns about the economy. That was below the 132,000 jobs created in June and below the average forecast of 135,000. Also, the unemployment rate rose to 4.6% from 4.5% in June. Still, overall unemployment remains low.

The market, though, didn't respond favorably on Friday to the softer than expected data. It also felt some discomfort after S&P lowered its debt rating outlook on Bear Stearns (BSC) to negative from stable citing recent developments that could impact the investment bank's performance. Bear Stearns did its part to alleviate such concerns on a subsequent conference call, but with the acknowledgment that it won't repurchase stock in order to preserve liquidity, it failed to turn the tide of negative sentiment.

The comment from Bear Stearns reinvigorated concerns about a credit crunch and prompted a late, broad-based sell-off in the market, sending stocks to their weekly lows. The sharp decline on Friday contrasted the late-day rallys seen in the prior two sessions that produced consecutive triple-digit gains in the Dow Jones Industrial Average.

In corporate news this week, Dow components General Motors (GM), Verizon Communications (VZ), Walt Disney Co. (DIS) and Procter & Gamble (PG) all reported strong earnings results. Other bright spots included Sun Microsystems (SUNW), Wrigley Co. (WWY), Electronic Arts (ERTS), Viacom (VIA.B) and Chipotle Mexican Grill (CMG).

However, not all company news was positive. RadioShack (RSH), Avon (AVP), Clorox (CLX), and Nortel Networks (NT) were among the week's losers.

Overall, Utilities, Telecom, and Consumer Staples - all more defensive-oriented areas - fared the best during the week. Energy stocks posted the largest declines, followed by Financials and Consumer Discretionary.

As the second quarter earnings season winds down, credit risks and problems facing the housing market will continue to take center stage, overshadowing corporate earnings news.

--Richard Jahnke, Briefing.com