Market Meltdown

The market started out on a positive note today with much better than expected earnings from General Motors (GM). GM earned $2.48 a share ex-items vs. $2.03 a share ex-items in the 2nd quarter of last year. GM had revenues of $46.8B vs $53.9B last year. The decrease in revenues vs. the same period last year was expected due to the majority sale of GMAC to Cerebus last year. In fact analysts on average were expecting sales of $44.45B this quarter. GM opened up 6% this morning before falling along with most of the market this afternoon.

News did move the market lower today. American Home Mortgage Investment Corp. shares plunged 90 percent after the lender said it doesn't have cash to fund new loans, stranding thousands of home buyers and putting the company on the brink of failure. Investment banks cut off credit lines, leaving American Home without money for $300 million of mortgages it had already promised. American Home anticipates that $450 million to $500 million of loans probably won't get funded, and the lender may have to sell off its assets. American Home caters to borrowers whose credit scores fall just short of standards for top-rated mortgages. The announcement provides fresh evidence that defaults may be spreading from subprime borrowers with the worst credit scores to homeowners with more reliable payment records. The biggest U.S. mortgage lender, Countrywide Financial Corp., said last week late payments rose among some of its most creditworthy clients.

According to Bloomberg late Tuesday afternoon Bear Stearns, manager of two hedge funds that collapsed last month, halted redemptions from a third fund after a slump in credit markets prompted investors to overwhelm the fund with redemption requests. The Bear Stearns Asset-Backed Securities Fund had about $900 million invested in asset-backed securities, including mortgage bonds. The fund's stumble is a setback for New York-based Bear Stearns and illustrates how the crisis in the subprime mortgage market has spread. The fund had less than 0.5 percent of its assets in securities linked to loans to subprime borrowers. The two funds that collapsed invested almost fully in subprime bonds. Losses have spread to banks, insurers and hedge funds in France and Australia, including one run by Macquarie Bank Ltd.

The news that mortgage troubles are spreading beyond the subprime market may prove devastating to the market in the short run. At this writing the Dow Industrial Futures are down 112 points. I would imagine that the financials will be hit particularly hard.

The long term investor may want to ride out the storm and at some point open or add to positions in the financials that will survive this rough point. I am holding Citigroup, JP Morgan Chase, and AIG in my portfolio. I am very exposed (many will think overexposed) to the financials. Short term this will be rough. Long term I am convinced that these companies will turn out to be good investments.