Friday, September 28, 2007

In the Ripple Effect of the Housing Slump, Here Comes Another Ripple – Lower Corporate Profits

The effects of the housing market are slow to unwind, but they are unwinding none the less. Everyone knew that the housing slump would eventually bite into corporate profits. Well according to Bloomberg it looks like that ripple is on its way.

I seldom make statements about investing because this purpose of this blog is to discuss macroeconomic issues. But, the third quarter profit reporting season might be a good time to be standing on the sidelines with your hands in your pockets (unless of course you really know what you are doing). No wonder many in the investment business are clamoring from a rate cut in October. But let me repeat myself from a previous blog. When the Fed cuts the Fed Funds rate by 50 bps one month and may cut it again 6 weeks later, this is not a good thing. It means that the economy has growth issues.

Profit in the U.S. may grow at the slowest rate in more than five years this quarter as the housing slump hurts results at companies from IndyMac Bancorp Inc. to Target Corp.

Earnings of Standard & Poor's 500 Index members may rise an average of 3.2 percent from a year earlier, breaking a 20- quarter streak of gains exceeding 10 percent, according to data compiled by Bloomberg.

Since Aug. 20, at least 52 financial and consumer discretionary companies in the Standard & Poor's 500 Index have issued third- quarter forecasts that met or fell short of analysts' estimates, compared with 10 that said earnings would be higher than forecast.

``The consumer is feeling the impact of lower housing prices,'' said Timothy Ghriskey, who manages $1 billion as chief investment officer at Solaris Asset Management in Bedford Hills, New York. ``Any consumer discretionary industry is affected, whether it's restaurants, cruise ships, automobile sales.''

Consumer confidence dropped to the lowest level in almost two years in September after home sales weakened in August, the Conference Board said on Sept. 25. The housing slump is the biggest in the U.S. in at least 16 years.

U.S. companies that cited housing as they trimmed forecasts in recent weeks include Pool Corp., the biggest U.S. distributor of swimming-pool equipment; Masco Corp., the maker of Behr paint and Delta faucets; Knight Transportation, a short- haul trucking company; FedEx Corp., the second-largest U.S. package delivery company; and CarMax Inc., the biggest U.S. car dealer.

Pasadena, California-based IndyMac Bancorp, the second- biggest U.S. mortgage company, said on Sept. 7 it may post a loss for the first time in at least eight years. Loan origination probably will fall 20 percent in the third quarter from the second, the company said.

Target, the second-largest U.S. discount chain, slashed its projection for this month's sales on Sept. 24. Wal-Mart Stores Inc., the world's largest retailer, last month reported profit below analysts' estimates and cut its third-quarter forecast.

The International Council of Shopping Centers Inc. lowered its estimate for U.S. retail sales growth in September after sales fell 1 percent last week.

Lowe's, the second-biggest home-improvement retailer after Home Depot Inc., said on Sept. 25 that profit this year may be at the low end or slightly below an Aug. 20 forecast.

Merrill Lynch & Co., the third biggest U.S. securities firm, may post losses of as much as $4 billion on writedowns of mortgages, corporate loans and collateralized debt obligations, resulting in the lowest quarterly earnings in almost six years, Goldman Sachs Group Inc. analyst William Tanona said on Sept. 26. He cut his full-year profit estimate by 25 percent

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