Foreign markets fall overnight, but U.S. indices trade near the flat line in midday action. The fact is that traders are concerned that profit forecasts could be too high given the view the economy is slowing faster than initially expected. Stocks could continue to struggle until support is found, possible at a 50 percent retracement, and/or economic reports show a stronger economy.
One major issue hurting stocks is the problems sub-prime lenders are in. New Century Financial (NEW) shares are plummeting Monday, off more than 60 percent. The company announced that it is in default with several lenders and is under investigation by the government. In fact, it seems that the company could be at risk of going out of business and this has left the shares below $6 Monday. NEW shares were trading near $50 less than a year ago and at $30 in early February.
New Century got the whole issue of bad loans going in a month ago, but they aren't the only company having problems with the issue. HSBC Holdings (HSB) stated today that they booked $10.6 billion in losses due to bad loans in 2006 and Countrywide Financial (CFC) was off nearly 3 percent today on concerns it also will breach financial contracts with backers for its sub-prime loans.
Shares of Palm (PALM) are down more than 7 percent today. However, last Friday, the stock gained more than 11 percent on rumors Nokia (NOK) was looking at buying the company. Today, the Wall Street Journal reports that PALM is working with Morgan Stanley to evaluate its strategic options.
In economic news, the ISM services index fell in February to 54.3 from 59.0 in January. This was below estimates for a reading of 57.5, but leaves the index in expansion territory above 50. The new orders index fell slightly to 54.8 from 55.4 and the prices paid component fell to 53.8 from 55.2. Though worse than expected, the report doesn't show that the economy is in trouble. In fact, the employment index edged higher in the month, easing some concerns about this sector of the economy.
It will be interesting to see how the major market indices perform the rest of the session. Each attempt by the Dow ($INDU) to rally has been met with selling. Though there are concerns about unwinding in the carry trade and the sub-prime lending market, the Fed seems convinced that the economy will see moderate growth this year and that inflation will fall. However, we are likely to hear more about these problems this week when Fed Chairman Bernanke and other officials speak.
Senior Staff Writer & Options Strategist
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