This is what you call "contagion."
With revelations throughout the past week that the housing recession is intensifying and infecting stock and bond investments, as well as lending practices, investors have focused on what could go wrong.
"Recession chatter is surfacing," said Merrill Lynch economist David Rosenberg.
With homeowners still facing mortgage adjustments of an extra 5 or 6 percentage points on their mortgage interest rate, consumers could face more foreclosures and struggle so much with monthly payments that they will cut back sharply on purchases.
There was evidence of that in last week's consumer spending data. On an annualized basis, spending was up just 1.3 percent - the lowest number recorded in a year. Meanwhile, analysts worry that businesses could cut back, too, if they have fewer avid customers and have to spend more to borrow money - an outgrowth of today's nervous lenders.
Even as market indexes rose Wednesday, for example, investors were selling the stocks on the New York Stock Exchange by 3-to- 1. That is called bad market breadth - a lot more selling than buying, and an indication that investors are leery of most stocks.
Financial stocks were on the decline, as American Home Mortgage Investment Corp. said it might have to liquidate its assets, and more hedge funds revealed subprime-related messes. Analysts also estimated that American International Group Inc. had lost $1 billion to $2.3 billion on subprime-related securities.
Financial stocks are down more than 8 percent for the year and are declining worldwide as institutions as far away as an Australian hedge fund choke on U.S. mortgage investment problems.
Meanwhile, the Case-Shiller index of home prices for May was released during the week, and showed housing prices down 2.8 percent over the past year nationally. The stocks of homebuilders and mortgage companies have dropped about 60 percent from their highs. On Wednesday, investors knocked the stock of Beazer Homes USA Inc. down as much as 42 percent when a rumor surfaced that the company was going to file for bankruptcy. The company denied it, and the stock ended the day down 18 percent.
Rumors were flowing throughout the week as investment bankers and traders headed to Internet sites such as dealbreaker.com and wallstfolly.com for insight.
The good news last week was that Citadel Investment Group, a giant hedge fund, said it would buy most of the assets of the injured Sowood Capital hedge fund. The bad news, which wasn't lost in Internet chatter, was that Sowood has been considered an outgrowth of the Harvard hedging brainpower that has been lauded and copied by pension funds and wealthy individuals during the last few years.
Also causing a buzz was the revelation that the bonds of some of the nation's premier investment banking firms have been trading like junk. The banks, such as JPMorgan Chase, got stuck in a downturn of confidence, agreeing to loan billions of dollars to private equity firms doing deals, and then not being able to unload the obligation to bond investors.
Also troubling, said Peter Anderson, chief investment officer for RBC, a part of Allianz SE, a German insurance company, was increasing evidence that the lax lending which caused a mess in mortgage loans also has been happening in commercial loans, too.
Merrill Lynch strategist Richard Bernstein said he warned stock investors not to ignore the message bond markets are sending about risk. Investors buying high-yield bonds are now seeking yields about 1.5 percentage points above the levels they accepted just a couple of weeks ago.
"There is no more argument about contagion," Rosenberg said.
Gail MarksJarvis writes for Tribune Media Services.