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What a Week: August Ugliness

The retreat continues amid rising concerns about housing, energy prices and consumer spending.
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While hardly shocking anymore, oil reaching new highs yet again was cited as the catalyst for the continuation of a steady August decline in stock prices this week. But there was more cause for concern: Signs of cracks are appearing in the still-booming housing market.

Still, once in a while, it's good to rub one's eyes and take a second look at the latest price quote for crude oil. It finished the week at $67.40 per barrel, just shy of the record high of $67.49 it closed at on Thursday. Crude traded above $68 several times this week on Nymex.

As opposed to last month, when stocks were rallying alongside oil prices, there have been increasing signs that oil's bite presents a growing threat to the economic and profit outlook.

On Friday, news that consumer confidence dropped in July, for the first time since May, confirmed something fairly obvious, though it had been ignored by the market for a while: soaring gasoline prices are hurting consumers.

On Friday, the

Dow Jones Industrial Average

fell 53.34 points, or 0.5%, to 10,397.29. The

S&P 500

dipped 7.29 points, or 0.6%, to 1205.1. Technical traders noted that the broad index now has fallen below a key support level of 1220, its 50-day moving average. The

Nasdaq Composite

fell 13.60 points, or 0.6%, to 2120.77.

For the week, the Dow dropped 1.5%. The S&P 500 fell 1.1% while the Nasdaq lost 0.7%.

The market already had received tangible evidence of oil's impact last week, when


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warned that consumers were feeling the pinch. There was more evidence of that this week from the likes of

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Beyond retailers, the stocks of homebuilders were again among the biggest losers for the week. That may sound surreal given news that new-home sales continued to soar to new highs in July.

Indeed, news that existing home-sales had dropped in July spooked the market on Tuesday. But while the market rallied on the new-home-sales data the next day, it was in this report that the cracks really appeared. While sales soared to a new record high, the median sales price of new homes fell to its lowest level since December 2003 and prices were down 4% year on year.

"That means

homebuilders are building too many homes and they're having trouble selling them at current prices," says Asha Bangalore, an economist at Northern Trust who's been bearish on the economy for a while.

Other experts believe that a lot of the speculation in housing has shifted from new-home sales to existing-home sales, as homebuilders have put clauses in contracts for new homes to restrict the growing speculative practice of flipping. Contrary to the declining price of new homes, the median price of existing homes is up 14% year on year.

Whatever the reason, it doesn't bode well for the housing market. "I'm expecting a big correction, although when that will take place is hard to predict," Bangalore says.

Investors aren't waiting. When

Toll Brothers

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reported blowout earnings on Thursday, its stock fell 3.8%. It fell another 3% on Friday. The Philadelphia Stock Exchange Housing Sector index fell 2.3% this week and has lost more than 11% since reaching an all-time high on July 28.

It didn't help on Friday, when

Federal Reserve

Chairman Alan Greenspan

rang the alarm bells on housing a bit louder than he had previously. Referring to the housing "boom" as an "economic imbalance," Greenspan warned that investors were too confident that gains in asset prices, which have been fueled by low risk-premiums and interest rates, would be long-lasting.

But if investors turn more cautious and risk premiums start rising, the snowball effect of falling asset prices and higher interest rates should be expected. "This is the reason that history has not dealt kindly with the aftermath of protracted periods of low risk premiums," Greenspan warned.

With the double threats of surging oil prices and of declining home prices weighing on consumption, it's hard to make a bullish case for the economy, profits and stocks going forward.

That may explain why the bond market has continued to rally. The yield of the benchmark 10-year Treasury note, which moves inversely to its price, continued its monthlong decline this week. It stood at 4.18% on Friday vs. 4.21% last week and 4.39% in late July.

The lower bond yield, used to benchmark mortgages, may encourage more demand for homes. But some homebuyers may be better off waiting for a while.

To view Gregg Greenberg's video take on today's market, click here


In keeping with TSC's editorial policy, Godt doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He appreciates your feedback;

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