Fear factor rises as bad news keeps on coming
— -- The credit freeze's effects keep popping up in different places, icing Wall Street with a stream of negative headlines.
Despite the market's recovery Thursday, a flurry of other bad news is reinforcing worries about how difficult it has become for some borrowers to get money. Each day's developments heighten fears that problems emanating from subprime mortgages are spreading.
The flow of scary news is pumping up fears that have been hurting stocks in recent weeks.
"A couple of weeks ago, fear was not in line with reality," says Richard Sparks, senior equities analyst for Schaeffer's Investment Research. "Now the reality is catching up and feeding on itself and causing more fear."
Others say investors are overreacting to recent headlines.
"The fundamentals don't justify the bloodbath," says Jack Ablin of Harris Private Bank. "There's a psychological frenzy where investors are taking the current turmoil and drawing a trendline."
Worries over continuous signs of a tighter, but still open, credit market have overrun reason, says Chris Orndorff, money manager at Payden & Rygel.
"Television coverage of financial events creates panic," he says. Stocks "should not be where they are. We're near a point you're really seeing value," he says.
Nonetheless, everywhere investors turned Thursday there was more bad news:
Housing starts plunge to '97 levels
The pace of construction of new homes fell in July to the lowest in nearly 11 years. Housing starts reached an annual rate of 1.4 million units, down 6.1% from June and 21% below year-ago levels. It was the weakest reading for housing starts since January 1997.
Countrywide raids $11.5 billion credit line
Countrywide Financial, cfc the nation's top mortgage lender believed to be above the subprime fray, stunned investors by saying it would tap its entire $11.5 billion line of credit. That fanned fears that problems in the mortgage market are spreading beyond subprime and led to a downgrade of Countrywide's corporate debt. Countrywide's borrowing came one day after a Merrill Lynch analyst suggested the mortgage lender could face bankruptcy. Countrywide closed down $2.34, or 11%, to $18.95. Its shares have fallen 58% from their 52-week high.
CBOE 'fear gauge' shows pulses racing
Early in the day, the Chicago Board Options Exchange's volatility index, or "fear gauge," hit levels not seen since the October 2002 bear market. The barometer of investor confidence subsided when the stock market recovered. More than 3.7 billion shares traded hands on the Nasdaq on Thursday, setting a record for trading volume and showing just how antsy investors have become.
Mortgage company suspends operations
First Magnus, a privately held mortgage company, put a notice on its website saying it would no longer accept loan applications and is suspending operations. The Tucson-based company blamed the evaporation of demand for mortgage loans it sells to investors. It had operations in all 50 states.
Yen gains in big run against dollar
The Japanese yen rallied vs. the dollar by the biggest amount since 1998, according to Bloomberg News, as speculators unwound risky "carry trades." Low interest rates in Japan have allowed traders to borrow yen and use the money to buy riskier and higher-yielding assets in other countries. But fearing market turbulence, speculators undid their trades by buying yen and closing their positions. Part of the yen's rally, though, was undone after U.S. markets closed on a high note.
Contributing: Associated Press