Credit crunch creams stocks; American Home Mortgage bankruptcy seen 'imminent'

By Paul A. Harris

St. Louis, Aug. 3 - The deteriorating situation in the credit markets was clearly to blame for a sell off in stocks Friday, a trader told Prospect News, noting the Dow Jones Industrial Average was down more than 2% on the day, and the Nasdaq and the S&P 500 were each down more than 2.5%.

The Dow ended Friday nearly 284 points lower to close 13,179, off 2.11% on the day.

The Nasdaq was down 64.73 points to close at 2,511.25, down 2.51%.

The S&P 500 ended slightly less than 39.34 points off to close at 1,433 down 2.67%.

The market began the day confronting the late-Thursday news from American Home Mortgage Investment Corp. (NYSE: AHM) that it had discontinued most of its operations and truncated its workforce.

The trader said that a bankruptcy filing is imminent.

Elsewhere it was mixed news on the LBO and merger front, as Nexstar Broadcasting Group, Inc. announced that the difficult conditions in the credit markets prompted it to suspend talks with its buyers.

However Luxottica Group SpA announced that it has $2 billion of financing in place to fund its acquisition of eyeware, apparel and accessories company Oakley, Inc.

Blame 'credit'

The home building and mortgage financing tail is now wagging the U.S. equities dog, a distressed equities analyst said late Friday morning.

At that point the Dow Jones Industrial Average was more than 0.50% lower relative to the Thursday close, and the S&P 500 was off nearly 0.75%.

The U.S. market awoke to news that the Bureau of Labor Statistics of the U.S. Department of Labor had reported that unemployment in July was essentially unchanged at 4.6%, with non-farm payrolls having grown in July by 92,000, the most anemic monthly rate of growth since February.

The jobless rate has ranged from 4.4% to 4.6% since September 2006, according to the Dept. of Labor.

But those unemployment numbers trailed more dire news from the mortgage lending sector.

American Home Mortgage stated in a press release issued Thursday night that, "in light of the liquidity issues resulting from extraordinary disruptions occurring in the secondary mortgage market," it would significantly reduce its operating structure as it seeks the most appropriate course of resolution to preserve the value of its remaining assets.

The Melville, N.Y. company went on to state that it has ceased taking mortgage applications and laid off all of its production employees, slashing what had been a 7,000-strong workforce to approximately 750.

The company added that it is currently maintaining its thrift and loan servicing businesses.

American Home Mortgage's share price at Friday's close was $0.69, a drop of more than 52% versus the Thursday close.

A trader said that he believed a bankruptcy filing from the company was imminent.

Homebuilding troubles

The distressed equities analyst went on to say that Beazer Homes USA, Inc. (NYSE: BZH) was among a myriad of stocks which are "acting distressed right now."

Beazer, the source said, was not really a distressed name until recently, when bonds across the Atlanta-based home builder's capital structure fell to the high 70s and low 80s.

However, the analyst continued, Beazer is vehemently denying that bankruptcy is a near-term possibility.

"Fitch and the sell-side analysts came out and supported them," the analyst noted.

"But if you look at the estimates, Beazer is leveraged at 2.8 times trailing EBITDA. But the Wall Street forecast is for EBITDA to contract to $99 million in 2008.

"Unless some of its debt is paid off through land sales Beazer could be leveraged as high as 16 times EBITDA going forward.

"That's not a supportable leverage ratio."

The source noted that on Thursday Beazer stock saw a big rebound on news that Citadel Investment Group LLC had increased its stake in the company to 5.7%.

However late Friday morning Beazer shares were down $0.80, at just under $12.25 per share, the source said.

Later in the day, however, a trader asserted that "Beazer is not going bankrupt, at least not now.

"The banks did a new credit facility last week," the trader said.

"The banks are not going to lend if these guys are going under."

Beazer shares continued to decline throughout the Friday session, closing $1.74 lower at $11.30.

Among other home building names, the shares of Centex Corp. (NYSE: CTX) fell $2.49 (nearly 6.6%) on Friday to close at $35.31 per share.

Lennar Corp. (NYSE: LEN) shares fell $0.37 per share, or 1.16%, to close at $31.40.

KB Home (NYSE: KBH) shares ended the session down $1.78, or 5.44%, to close at $30.94.

Among mortgage lenders Countrywide Financial Corp. (NYSE:CFC) fell by $1.77 per share (slightly more than 6.6%) to end at $25.00.

Meanwhile Annaly Capital Management, Inc. (NYSE: NLY), which manages mortgage securities and related derivatives, ended the Friday session flat at $14.98 per share.

Nexstar not happening

Shares of Nexstar Broadcasting (Nasdaq: NXST) plummeted Friday afternoon when the company disclosed that in light of the difficult conditions in the financing markets its board, in consultation with financial advisor Goldman Sachs, decided to suspend discussions with prospective acquirers.

Prior to the announcement the Irving, Tex.-based broadcast company's shares had been trading above $13.00, but dropped sharply afterwards to as low as $8.66 at mid-afternoon, before catching a bounce to close at $9.17, down $1.74 (nearly 11.75%) on the session.

That kind of problem has been cropping up everywhere, a trader asserted, adding that for all practical purposes the credit markets are closed, and deals in the leveraged loan and junk bond markets are not getting done.

"No one is buying anything over there," the trader asserted, "there is simply no bid to be seen."

Having said so, however, the trader did note that Milan, Italy-based high-end eyeware maker, Luxottica Group (NYSE:LUX) had secured $2 billion of financing for its acquisition of Oakley (NYSE:OO), a Foothill Ranch, Calif., eyeware, apparel and accessories company.

"It's a case-by-case situation," the trader said, but added that "clearly a lot of lenders have closed shop, and are unwilling to do anything at this point."

Luxottica shares dropped $0.37, or 1.03%, on Friday, to close at $35.43 per share.

Oakley's shares were down $0.23 on the session, 0.80% lower, closing at $28.39 per share.

More taxing still

Rick Nelson, head of equity research at J. Giordano Securities Group, said that the credit squeeze, initiated by the complications in subprime mortgages, has been complicated by talk emanating from Washington, D.C., about doubling taxes for managers of private-equity firms and hedge funds.

"People are wondering what the Democrats might actually do if they gain the White House a couple of years hence," Nelson said, adding that the tax noise is doing nothing to improve the pensive moods of Wall Street players.

Nelson said that one way out of the current crunch in the credit markets would be for the Federal Reserve's Federal Open Market Committee to lower the short term interest rate which has been perched at 5.25% for more than a year.

However, he added, such a move could further weaken the dollar.

"No matter which way you turn there are no easy decisions," Nelson conceded.

He also said that the halcyon days of mergers and acquisitions, which lent a lot of vitality to the stock market, may now be history.

"The bloom has come off the rose in a lot of those cases," said Nelson, adding that there is a credit transformation underway, with rates for weaker borrowers having jumped 100 to 200 basis points over the past month.

"That turns the financial modeling for some of these transactions upside down," he said.

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