Sunday, August 26, 2007

Weekly Wrap

Here is the Weekly Recap by

It's a stretch to say things were back to normal this week, but there was no denying that the market tone was much improved as the major indices logged sizable percentage gains on the week.

Negative headlines on the subprime exposure - and there were plenty of them - came and went without unraveling the market. Meanwhile, T-bill rates pushed higher again, providing a tacit signal that fears about a liquidity crisis have eased in the wake of the Fed cuttting its discount rate and its accommodative repurchase agreements.

Notwithstanding the Fed's reassuring efforts, a number of mortgage lenders and banks still face difficulties. On Monday, Thornburg Mortgage (TMA) said it sold $20.5 billion of its AAA-rated mortgage securities portfolio in an effort to boost liquidity amid a rapidly deteriorating mortgage market. Capital One Financial (COF) also announced that it will close its wholesale mortgage business, GreenPoint Mortgage, due to challenging conditions in the secondary mortgage market.

Meanwhile, On Wednesday, Lehman Brothers (LEH) said it will close it BNC mortgage unit and cut roughly 1,200 jobs. London-based HSBC Holdings (HBC) and Accredited Home Lenders (LEND) also announced job cuts related to the difficult credit conditions.

However, Wall Street took some comfort in Bank of America's (BAC) announcement that it plans to invest $2 billion in beleaguered mortgage lender Countrywide Financial (CFC) to help it weather the difficulties in the mortgage market. The cash infusion was seen as a vote of confidence in Countrywide's long-term prospects and its important role in the mortgage business.

A spate of deal-related news also lent some support to the market. The Wall Street Journal reported on Wednesday that TD Ameritrade (AMTD) and E*Trade Financial (ETFC) are in merger discussions, and that Dubai World, a holding company for the Dubai government, planned to acquire a 9.5% stake in MGM Mirage (MGM) and 50% ownership of its CityCenter project in Las Vegas.

Overall, it was a light week for economic data. The durable orders report and July new homes sales were the only major releases for the period.

On Friday, the Commerce Department reported orders for durable goods surged 5.9% last month after an upward revision to 1.9% in June. That easily beat market expectations and is encouraging news for business investment and coming manufacturing production. Meanwhile, July new home sales unexpectedly rose 2.8% to 870k after an upward revision to June. While the housing outlook has not improved, the latest figures were moderately better than expected and contributed to the market's climb.

Earnings continued to trickle in during the week, as second quarter earnings season winds down. Home improvement retailer Lowe's Companies (LOW) reported a higher than expected profit on Monday despite weakness in the housing market and a challenging sales environment.

Lowe's report followed last week's disappointing report from rival Home Depot (HD), which is now facing headwinds related to the sale of its supply business, which was expected to close on Thursday. According to The Wall Street Journal, three major banks, who are reluctant to finance the $10.3 billion all-cash deal amid current credit conditions and weakness in the housing market, are currently renegotiating terms of the transaction, which was announced in June.

Target Corp. (TGT) also reported strong results, despite increased consumer pressures, while luxury homebuilder Toll Brothers (TOL) posted grim results due to lower demand and write-downs, but managed to beat analysts' expectations.

A host of other notbale retailers also reported their results, including Gap (GPS), Limited Brands (LTD), Abercrombie & Fitch (ANF), American Eagle Outfitters (AEO), AnnTaylor Stores (ANN), Saks (SKS) and GameStop (GME).

Until the market gets a clearer picture on the current problems in the credit markets and the impact on consumers and the economy, stocks are likely to continue to trade in choppy fashion until the Fed meets in September. This week, though, belonged to the bulls


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