Reply #42: the final word on this nastiness

[ozymandius]

Dow 13,211.99 Down 146.32 (1.10%)
Nasdaq 2,546.27 Down 37.01 (1.43%)
S&P 500 1,455.27 Down 18.64 (1.26%)
10-Yr Bond 4.771% Down 0.033
NYSE Volume 152,047,000
Nasdaq Volume 2,789,550,000

4:20 pm : Monday's bounce was short lived as renewed fears of potential subprime spillover and surging oil prices overshadowed some solid earnings reports, upbeat analyst commentary, and more proof that inflation remains contained.

With pricing pressure still the predominant concern among policy makers, the Fed's favored inflation gauge (i.e. core PCE) rising just 0.1% for the fourth straight month initially helped pave the way for another day of broad-based buying. That left the year-over-year rate at 1.9% and within the Fed's 1.0% to 2.0% "comfort zone," offering further evidence that core prices are falling faster than expected and leaving investors believing the Fed now has more breathing room to justify a rate cut at some point.

Throw in General Motors (GM 32.52 -0.09) swinging to a much larger than expected Q2 profit and an analyst upgrade on fellow Dow component Verizon Communications (VZ 42.75 +1.24) and stocks were on their way to post another strong performance. The Dow was up as much as 140 points while the S&P 500 and Nasdaq, at their best levels early on, were also up more than 1.0% on average and trading above last Thursday's close, effectively wiping out Friday's drubbing.

Nonetheless, the temptation among investors to sell into the market's latest rally became evident less than an hour after the opening bell sounded. At 9:45 ERT, the Chicago PMI checked in with its lowest reading (58.5) since April.

Then, a 1% rise in oil prices to their highest level in a year ($77.60/bbl), in anticipation that tomorrow's EIA report will show a drawdown in weekly crude supplies, a reversal in Health Care, and speculation Apple (AAPL 131.76 -9.67) may cut iPhone production began to take some steam out of early follow-through momentum.

Even though the subprime mortgage problem continues to linger, UBS upgrading bank stocks to Overweight from Equal Weight helped investors initially shrug off MGIC Investment (MTG 38.66 -6.78) disclosing that its investment in residential mortgage issuer C-BASS has been "materially impaired" due to an "unprecedented" amount of margin calls.

The resurfacing of more subprime concerns at around 1:15 ET, however, took the wind out of the market's sails and set the stage for another bloodletting that eventually more than wiped out Monday's reflex rally.

American Home Mortgage Investment Corp (AHM 1.09 -9.38) said that it is unable to borrow on its credit facilities and is struggling to raise money, including "the orderly liquidation of its assets." After being halted for a day and a half, AHM shares finally opened but at a more than 85% discount to where they closed on Friday. The troubled mortgage lender, which was unable to fund lending obligations of about $300 mln yesterday and did not anticipate funding roughly $450-500 mln today, tumbled 89% and took nearly the entire Financial sector down with it.

All 10 economic sectors lost ground, paced by a 1.8% sell-off in Financials that saw a more than 3% swing from its morning highs. Technology was a close second while Industrials and Discretionary also fell more than 1.0%. Not even the Energy sector (-0.95%), despite crude futures surging 1.8% to a new record close ($78.21/bbl), was able to maintain any upward momentum. DJ30 -146.32 NASDAQ -37.01 SP500 -18.64 NASDAQ Dec/Adv/Vol 1812/1237/2.15 bln NYSE Dec/Adv/Vol 1908/1406/1.97 bln