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Wall Street Drifts Downward

Robert Holmes

Stocks in the U.S. opened the week with modest losses Monday as another report detailing the softness in the housing sector kept buyers from remaining interested.

The Dow Jones Industrial Average made a brief push into the green after midday, but it ultimately closed down 56.74 points, or 0.42%, at 13,322.13. The S&P 500 was off 12.58 points, or 0.85%, to 1466.79, and the Nasdaq Composite lost 15.44 points, or 0.6%, at 2561.25.

Shortly after the opening bell, the National Association of Realtors said existing-home sales dipped 0.2% to 5.75 million annualized units in July. The data came in higher than expectations but marked the lowest level of sales since November 2002.

Inventories of unsold homes, meanwhile, rose 5.1%, representing a 9.6-month supply.

"This [report] does not change the underlying trend, which is horrible," said Ian Shepherdson, chief economist with High Frequency Economics. "In particular, inventory continues to soar. In this environment, prices would be falling even if all was well in the mortgage market, so in today's troubled circumstances we have to expect steep declines for the foreseeable future."

Housing stocks Toll Brothers (TOL), Lennar (LEN), Centex (CTX) and Pulte Homes (PHM) all finished lower by 4.5% or more.

The report comes after separate data from Commerce Department on Friday showing that new-home sales unexpectedly rose 2.8% to 870,000 annualized units. Economists had expected that sales would decline 1% to 825,000 homes.

Those numbers helped boosted the major averages, which finished out another volatile week with gains.

The Dow rose 142.99 points, or 1.08%, to 13,378.87, aided by a strong upswing in the last hour of trading. The S&P 500 added 16.87 points, or 1.15%, to 1479.37, and the Nasdaq jumped 34.99 points, or 1.38%, to 2576.69.

Volume was sluggish to begin the new week. On the New York Stock Exchange, 2.39 billion shares changed hands Monday, as decliners topped advancers by a 2-to-1 margin. Volume on the Nasdaq reached 1.32 billion shares, with losers outpacing winners nearly 2 to 1.

Volume may continue to be light as the pre-holiday week progresses, though traders will have a torrent of economic data to digest. Minutes from the Federal Reserve's policy meeting on Aug. 7 are due Tuesday, and reports on second-quarter gross domestic product and personal income and spending, among others, are expected later in the week.

"The economic calendar is full this week and there's certainly a lot of data to focus on," said Robert Pavlik, chief investment officer with Oaktree Asset Management. "It's hard to tell, though, if there will be enough participants around this week to make anything exciting happen. This whole summer has been pretty surprising, in that there has been more activity than anyone expected."

Paul Nolte, director of investments with Hinsdale Associates, said that the unexpected increases in new home sales and durable goods orders to round out last week were "an indication that just maybe the economy remains on sounder footing than many believe and the fallout from subprime lending is relatively contained.

"What did disappear last week was the thought that the Federal Reserve was going to have to cut rates at their September meeting, although a rate cut still seems likely by year-end," Nolte added.

Though the turmoil in the credit markets has settled somewhat, former Treasury Secretary Lawrence Summers said over the weekend that the risks of a recession are at their highest since the terror attacks on Sept. 11, 2001.

Additionally, Summers said, efforts by Congress to restrict lenders Fannie Mae (FNM) and Freddie Mac (FRE) were badly timed, and that "we should be encouraging them to provide capital in the subprime space."

Among equities, Home Depot (HD) will accept $1.8 billion less than the original $10.3 billion planned from three private-equity companies in a deal for its wholesale distribution business.

According to The Wall Street Journal, the home-repair retailer guaranteed $1 billion of the debt the buyers will take on to complete the transaction. Home Depot climbed 57 cents, or 1.6%, to $35.25.

Other M&A activity was making headlines, as well. Computer maker Gateway (GTW) will be acquired by Taiwan's Acer in a $710 million deal. The bid values shares of Gateway at a 57% premium to its last closing price. Shares of Gateway soared 50.4% to close at $1.82.

Elsewhere, U.S. Steel (X) will purchase Canada's Stelco for $1.04 billion. U.S. Steel dipped 38 cents, or 0.4%, to $93.01.

Away from stocks, the front-month October crude contract rose 88 cents to close at $71.97 a barrel. Gasoline prices advanced 6 cents to $2.03 a gallon.

Treasury bonds crept higher. The 10-year note added 5/32 in price, yielding 4.59%. The 30-year bond ended up 11/32 in price, reducing the yield to 4.86%.

In Asia, Hong Kong's Hang Seng surged 2.9% overnight, and Japan's Nikkei 225 tacked on 0.3%. Many overseas indices in Europe were closed for a holiday.