Wall Street has a dead cat bounce one day, but returned to reality the next as more write-downs are revealed by banks and a big US state fund becomes embroiled in the subprime disaster.

US wholesale inflation is benign, as are retail sales, making a mockery of the rebound by giant Wal-Mart on Tuesday which the silly US investors took to mean that the economy wasn’t slowing. What they neglected to focus on were reports that Wal-Mart had started “discounting” early to boost sales, which could mean this year’s big holiday sales season is a dud.

Wal-Mart has dragged forward sales from November and December by cutting prices on 15,000 holiday items, 20% more than last year, and started discounting toys in the beginning of October, more than two weeks earlier than last year. That’s why the profit figures were misleading.

Furniture sales fell sharply in October, and sales of whitegoods were not strong either, due to the housing slump. The subprime mortgage mess is infecting the rest of the US economy, slowly but steadily, and everyone in a policy making area now knows that.

US retail sales rose 0.2% in October, down from a revised upwards 0.7% in September while wholesale prices rose 0.1% compared to a 1.1% rise the previous month. With US consumer price figures out tonight, there’s a case for the Fed to cut rates again on 11 December, even without the returning subprime crisis slowly eroding balance sheets and investment portfolios across the US.

US economists say that stripping out petrol sales (up strongly because of higher prices at the pump) US retail sales were just 0.1% higher. Hardly worth getting out of bed for.

The big US hardware group, Home Depot seemed to speak for more and more companies yesterday when it said that it now expected the housing slump will linger well into 2008. It reported lower third-quarter profit and cut its full-year earnings forecast. CEO Frank Blake said in a statement: “We are facing a tough environment as housing indicators continue to deteriorate.”

But investors liked the inflation figures (the retail sales were ignored) and the news that investment bank, Bear Stearns, had announced a $US1.2 billion write-down for the current quarter due to the credit crisis.

Shares rose as that was portrayed as smaller than expected as the investment bank indicated it had slashed its holdings of subprime related debt and securities, which isn’t a bad thing considering it had helped stuff two of its hedge funds full of the junk.

It was their collapse in June that made markets realise the growing enormity of the problem. Bear Stearns is now being investigated by the State Government in Massachusetts over claims of illegal trading between the firm and the busted funds.

Meanwhile, HSBC said, in reporting strong quarterly revenue, that it will take a write-down of $S3.4 billion, due to its exposure to the US mortgage market.

In a trading update the bank said those losses were “more than offset by revenue growth in the group” as a whole and that third-quarter operating income was up compared with a year ago. But it did warn that “There is the probability of further deterioration if the current housing market distress continues and further impacts the broader economy.”

HSBC should know, it was one of the first big banks to reveal losses: it sold the mortgages or funded them. It set aside over $US10.5 billion for losses in March mainly in its household finance arm that sells credit to subprime and lower income people.

And Bloomberg reports that $US2 billion of the $US50 billion of state investment funds controlled by the State of Florida are held in subprime mortgage-related securities and other investments now classed as junk status by ratings agencies. The disclosure came in a report presented to the Florida administration.

It’s the biggest amount so far identified among state holdings (some other big state sponsored retirement funds have larger holdings) which represent money deposited in a central management fund by schools, counties and other local government bodies. They’re like cash management funds operated by private fund managers and the same “break the buck” fears apply.

Any hint of net asset backing falling to less than the amount invested could see these funds depleted as the depositors take their money and go elsewhere. The Florida fund may have to be topped up with state funds, just as Bank of America may have top its cash funds up by $600 million or more to maintain the $1 asset backing line.

HSBC’s warning about the housing crisis worsening should be taken seriously after foreclosure figures were updated overnight.

According to the latest quarterly update from RealtyTrac, which follows busted mortgages, most of the US saw a rise in failures, while California, Florida and Ohio, continue to dominate new foreclosure filings.

It said that nationally, foreclosure filings, which include all three main stages of foreclosure, default or late payments, auction and real estate owned (properties reacquired by lenders and now being resold), were up 30% compared with the previous three months:

A total of 635,159 foreclosure filings — default notices, auction sale notices and bank repossessions — were reported on 446,726 properties nationwide during the third quarter, a 30% increase from the previous quarter and an increase of nearly 100% from the third quarter of 2006. The report also shows a foreclosure rate of one foreclosure filing for every 196 US households for the quarter.

It said that during the period ended September 30, 77 out of the nation’s 100 largest metropolitan areas reported rises in delinquencies compared with the previous three months.

According to figures from the Center for Responsible Lending, 7.2 million American households have subprime mortgages, and more than 14% of those are in default. It projects that one of every five of those loans issued in 2005 and 2006 will end in foreclosure, with 2.2 million families losing their homes. It also says that will slash the tax base of thousands of US communities and most US states for years to come.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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