News Article
BusinessWeek.com
August 23, 2006
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Stocks Drop on Weak Housing Data

July existing home sales declined more sharply than expected. Meanwhile, U.S. officials said Iran's response in the nuclear standoff "falls short"

Stocks finished lower for a third straight day Wednesday, as an unexpectedly sharp drop in July existing home sales offset buzzing tech deal news. The damp housing-market data raised concerns that the economy could be headed for a hard landing, says Standard & Poor's Equity Research. Losses deepened slightly after the U.S. State Department said Iran's response to calls that the country abandon its nuclear program "falls short."

The Dow Jones industrial average fell 41.94 points, or 0.37%, to 11,297.9. The broader Standard & Poor's 500 dropped 5.82 points, or 0.45%, to 1,293. The tech-heavy Nasdaq composite slid 15.36 points, or 0.71%, to 2,134.66.

NYSE breadth was decidedly negative, with 23 issues declining for every 10 advancing. Nasdaq breadth was 20-10 negative.

Investors were digesting weak housing-market figures Wednesday. Existing home sales fell 4.1% in July to a growth rate of 6.33 million units, a much sharper decline than economists expected. A report on July new home sales was due Thursday, along with data on monthly durable goods orders and weekly jobless claims.

The housing numbers prompted worries that the economy may not be slowing as gently as the Federal Reserve expects. "The question is, again, are we headed for a soft or hard landing in the housing market?" says Peter Cardillo, chief market analyst at S.W. Bach. "That's the reason why the market is selling off."

However, the decline in home sales could also have implications for interest rates, a day after Fed officials indicated the central bank would hike rates again if necessary to fight inflation. "These housing data should help keep the Fed on hold in September as it attempts to evaluate how much economic growth has moderated by," says John Ryding, chief U.S. economist at Bear Stearns.

The supply of homes on the market rose to 7.3 months worth of sales, the highest level in more than a decade, analysts note. "While declines in mortgage rates may help to cushion the extent of the downturn, the key data on the housing market consistently suggest that the deterioration will continue for some time," says Goldman Sachs. 

M&A activity was in focus on the corporate side. Information-technology giant IBM (IBM ) agreed to buy Internet Security Systems (ISSX ), an outfit that helps companies protect themselves against Internet attacks, for $1.3 billion in cash, or $28 a share.

Computer maker Gateway (GTW ) was sharply higher after receiving an unsolicited offer from eMachines founder Lap Shun Hui to acquire the company's retail operations for $450 million. Hui sold PC maker eMachines to Gateway in 2004 for roughly $290 million in cash and stock.

Chipmaker National Semiconductor (NSM) was higher despite cutting its revenue forecast, citing disappointing sales to mobile phone customers. Analysts attributed the slowdown to seasonal factors.

Shares of Borders (BGP ) fell after the bookseller swung to a second-quarter loss.

In other earnings news, Medtronic (MDT) was modestly lower after the cardiac-device maker posted an 87% surge in fiscal first-quarter profit but reduced its forecasts for fiscal 2007 and 2008.

Among other stocks to watch, Rambus (RMBS) was up sharply as the memory-chip licensing company said a court stayed the final stage of its patent dispute with Hynix Semiconductor.

In the energy markets, October West Texas Intermediate crude oil futures closed down $1.34 at $71.76 a barrel after a weekly inventory report showed an unexpectedly modest supply decline.

European markets finished lower. In London, the Financial Times-Stock Exchange 100 index lost 42.6 points, or 0.72%, to 5,860. Germany's DAX index fell 42.87 points, or 0.74%, to 5,775.54. In Paris, the CAC 40 index was down 45.6 points, or 0.89%, to 5,082.73.

Asian markets ended in the red. Japan's Nikkei 225 index edged down 18.14 points, or 0.11%, to 16,163.03. In Hong Kong, the Hang Seng index dropped 61.63 points, or 0.36%, to 17,088.39. Korea's Kospi index declined 10.01 points, or 0.75%, to 1,324.95.

Treasury Market

Treasuries ticked lower after the unexpectedly steep decline in existing home sales. The 10-year note edged down in price to 100-16/32 for a yield of 4.81%, while the 30-year bond crept lower to 93-03/32 for a yield of 4.95%.