NEW YORK (AP):
Wall Street retreated Monday, losing momentum from last week's gains after news that sales of existing homes slipped in July for a fifth straight month stirred concerns about the strength of the economy.
Sales of existing homes slowed to their most sluggish pace in nearly five years, while home prices fell for a record 12th straight month. The National Association of Realtors reported that existing home sales slipped by0.2 per cent in July to a seasonally adjusted annual rate of 5.75 million units. Inventories rose 5.1 per cent to a record 4.59 million units.
The pullback wasn't unexpected given last week's rally and that Wall Street is still trying to sort out concerns about failing mortgages and tighter access to credit for both individuals and corporations. A fresh round of buyout news perhaps limited the stock market's losses Monday.
"I think there is still a little bit of nervousness about the credit market but that seems to be abating slowly," said Brian Gendreau, an investment strategist for ING Investment Management. "We had a very strong week last week and I wouldn't attribute this downmarket to any return to panic," he said, referring to concerns about bad loans and a drying up of liquidity that upset markets in recent weeks. "I think it's just a normal down day."
In midday trading, the Dow fell 46.82, or 0.35 per cent, to 13,332.05.
Broader stock indicators also declined. The Standard & Poor's 500 index fell 9.65 or 0.65 per cent to 1,948.31, and the Nasdaq composite index fell 15.84, or 0.61 per cent to 2,560.85.
Bonds rose, with the yield on the benchmark 10-year Treasury note falling to 4.60 per cent from 4.62 per cent late Friday. Bond prices move opposite their yields.
Last week was a strong one for the markets following volatility owing to worries that credit is shrinking to the point where it pinches economic and corporate growth. The Dow finished up 2.29 per cent for the week, the S&P 500 advanced 2.31 per cent, and the Nasdaq jumped 2.86 per cent.
Possible setback
Gendreau contends investors last week gained a sense that the subprime and credit market problems weren't necessarily going to sink the economy bad news on that front could still deal investors a setback. Unease has grown that subprime mortgages - those given to borrowers with weak credit - will continue to falter as housing markets cool and as payments on adjustable-rate mortgages balloon.
"People realised, however, severe the problems seemed to be in the credit area, that unless there's some big macro impact from this, large multinationals with strong overseas revenue should be able to weather these conditions fairly well," Gendreau said.
That realisation, however, makes the likelihood of an interest rate cut at the Federal Reserve's next meeting less certain than it might have appeared two weeks ago, he said. Gendreau noted the Fed has "gone out of its way" to add liquidity, doing so again Monday with a US$9.5 billion (€6.96 billion) short-term injection into the banking system.
"The big question is whether the market will accept that as an adequate Fed response. What if the market doesn't get a rate cut? I think that won't be the end of the world."
Investors faced such questions Monday amid fresh signals that there still seems to be an appetite for corporate dealmaking. On Monday, U.S. Steel Corp. said it will buy Canada's Stelco Inc. for about US$1.1 billion (euro810 million); Swiss electrical engineer ABB Ltd. said it will sell its oil and gas production plant to Chicago Bridge & Iron NV for US$950 million (€695.5 million); and Taiwanese computer vendor Acer Inc. said it will acquire U.S. computer maker Gateway Inc. for US$710 million (€520 million).
But it's possible the huge buyout sums seen earlier in the year, which drove the Dow to record highs last month, might slip as debt becomes more difficult to take on. The Home Depot Inc. has tentatively agreed to sell its wholesale distribution business to private equity firms for US$8.5 billion (€6.22 billion), a person with direct knowledge of the situation said Sunday, which is US$1.8 billion (€1.32 billion) less than originally planned. The deal includes Home Depot guaranteeing US$1 billion (€730 million) of the debt the buyers will take on to complete the transaction.
Home Depot shares rose 58 cents US$35.26 (€25.82) on the tentative deal with a buyer group that includes Bain Capital Partners, Carlyle Group and Clayton, Dubilier & Rice.
Gateway surged 60 cents, or 49 per cent, to US$1.80 (€1.32) after news it was being acquired by Acer.
In other takeover news, global mining company Rio Tinto Ltd. said it won U.S. antitrust approval for its US$38.1 billion (€27.9 billion) buy of Canadian aluminum producer Alcan Inc. Rio Tinto fell 90 cents to US$273.12 (€199.97), while Alcan rose 18 cents to US$97.60 (€71.46).
News of tie-ups among big companies seemed to offer little help to smaller stocks Monday; the Russell 2000 index of smaller companies fell 9.00 or 1.13 per cent, to 789.91.
Wall Street often regards bigger companies as better able to withstand economic slowdowns, given that they can generally operate on slimmer profit margins. Gendreau noted that about half the revenue of the 30 companies that make up the Dow industrials is drawn from overseas, where economic growth is generally stronger.
