Financials, Housing Rain Down On Market

It was an ugly day on Wall Street, as the major market averages pulled back early Wednesday after Merrill Lynch (MER) announced that severe credit-related losses would smack its bottom line.

In addition to the bad news in financials, the market also was rocked by a very sharp drop in existing home sales for September.

In what amounts to a one-two punch to the market, not only is the housing implosion dampening corporate profits, but it also actually is getting worse!

To give you an idea of how bad it was for Merrill Lynch, the company announced that it wrote down $7.9 billion in collateralized debt obligations due to defaulting subprime mortgages. The actual writedown was far more than the $5 billion the investment bank estimated earlier this month that it would have to report. The result for the investment-banking giant was a $2.3 billion net loss for the quarter. That hurts.

This worse-than-anticipated loss tells me that the financial sector may be in much worse shape than the optimists on Wall Street originally thought. I expect still more pain in financials, despite the recent strength in the overall market.

Once again, if you are still clinging to financial stocks here, get your house in order and get rid of them. There are plenty of other sectors, namely technology, health care and energy, that are performing far better and that don’t come with a subprime infection.

Oh, and speaking of housing, the falling housing market really could begin aggravating the financial sector’s troubles. The National Association of Realtors reported that existing home sales fell in September for the seventh straight month by a larger-than-expected 8%. That’s the largest decline on record since the association started keeping track back in 1999.

So, will the dark clouds of weakness in the financial and housing sectors continue to assault equities? Nobody knows for sure, but the only way to make certain you don’t become a victim of circumstance is to know when you are going to sell.