With the housing market in a tailspin, some economists ratcheting up recession forecasts, and major banks reporting big losses, the stock market is on a roll, rising to record highs. How can that be?The simple answer: Investors care less about what’s happening today than about what they expect to happen tomorrow. And, as bad as today’s headlines look, they’re not as bad as Wall Street’s worst fears at the height of the turmoil that rocked the global financial markets in August.
For weeks, Wall Street has been watching the collapse of the housing market, along with the meltdown of the mortgage market, and waiting to see just how badly banks and other financial institutions had been weakened. As more and more loans went bad, a number of smaller lenders, especially those that specialized in subprime loans, closed their doors or got snapped up by larger firms. What wasn’t clear was just how badly the biggest lenders were hit by the credit meltdown.
On Monday, a big piece of uncertainty was resolved when Citigroup warned that third-quarter earnings will probably drop by 60 percent, as the nation's biggest financial institution takes more than $3 billion in writedowns for securities backed by bad mortgages and troubled loans for corporate buyouts. Swiss bank UBS also said Monday it will post a loss of up to $690 million in the third quarter, partly due to losses linked to U.S. subprime mortgages.
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