Late rally lifts Russell
The Russell 2000 (NYSE: IWM) and the Dow Jones Industrial Average (INDU) gained on news of modestly upbeat economic data, despite more credit concerns. The small-cap index added 1.80 points, or 0.23%, to 777.92. The Dow moved up 150.38 points, or 1.14%, to 13,362.37.
The day got off to a negative start following news that Bear, Stearns & Co. Inc. (NYSE: BSC) will prevent investors from pulling their money out of a troubled hedge fund, which renewed concerns about loans and securities derived from home mortgages.
The New York-based financial services heavyweight is a repeat offender. Two similar hedge funds that had placed bets on securities backed by subprime loans imploded in late June, losing virtually all their value.
In a sign that the contagion has spread globally, Australia’s Macquarie Bank warned that two of its debt funds face losses of up to 25%. On Monday, Germany’s IKB Deutsche Industriebank AG reported that it will fall short of its 2007-2008 earnings forecast after one of its investment funds got burned.
The snowball first began rolling downhill when the U.S. housing sector started to weaken in the second half of 2006 and initially hit the subprime financial sector, which serves individuals with poor credit histories.
But it soon spread to mainstream lenders, such as Crystal River Capital Inc. (NYSE: CRZ), which today got downgraded to “hold” from “buy” due to the overall uncertainty in the mortgage industry.
Nevertheless, Treasury Secretary Henry Paulson said today that strong global economic growth has largely contained fallout from the subprime mortgage market. Paulson was speaking to reporters in China, where he is trying to convince the government to let the currency float freely and appreciate.
Economists and American manufacturers have long argued that the yuan is undervalued, making exports to the world’s most populous country more expensive.
Back in the United States, data released by the National Association of Realtors suggest that there might be light at the end of the tunnel for the U.S. housing sector.
The Washington, D.C.-based trade association’s monthly index of pending homes sales increased 5% in June, the largest such gain in more than three years. The index reached a seasonally adjusted 102.4 points, above May’s downwardly revised reading of 97.5.
The increase, which was spread across every region of the country, suggests that the major declines in home sales have already occurred.
That emboldened the bulls, and their battle with the bears lasted all day while stocks went on a rollercoaster ride. The major U.S. indices were lower on the day until minutes before the close.
Elsewhere, an index measuring mortgage loan application volume fell 0.3% for the week ended July 27, according to the Mortgage Bankers Association, an association representing the real estate finance industry.
The Institute for Supply Management’s factory index dropped to 53.8 in June from 56 in May. Investors took that as good news because economists were expecting a steeper drop. A reading above 50 is a sign of expansion.
