Tuesday, October 16, 2007

U.S. Stocks Drop on Bernanke Comments; Banks, D.R. Horton Fall

By Michael Patterson

Oct. 16 (Bloomberg) -- U.S. stocks dropped for a second day after Wells Fargo & Co. and KeyCorp reported earnings that fell short of analysts' estimates and Federal Reserve Chairman Ben Bernanke said the housing slump may drag on through next year.

Wells Fargo, the biggest lender on the U.S. West Coast, and KeyCorp, Ohio's third-largest bank, both retreated the most in two months. D.R. Horton Inc. helped drag down homebuilders for a third day after saying orders plunged to the lowest in almost six years last quarter.

The Standard & Poor's 500 Index slid 10.18, or 0.7 percent, to 1,538.53. The benchmark posted its steepest two-day loss since Sept. 10 as record oil prices also weighed on stocks.

The Dow Jones Industrial Average fell 71.86, or 0.5 percent, to 13,912.94. The Nasdaq Composite Index lost 16.14, or 0.6 percent, to 2,763.91, dragged down by a 4.2 percent drop in Yahoo! Inc.

Bernanke said in a speech last night in New York that it's too early to gauge how much the housing recession will affect spending by consumers and businesses. Concern that rising mortgage defaults will curb corporate profits prompted analysts to predict the first earnings decline in five years for S&P 500 companies, according to third-quarter estimates compiled by Bloomberg.

``The housing situation is going to continue to plague the U.S. economy,'' said Kevin Rendino, who runs the $8.1 billion BlackRock Basic Value Fund from Plainsboro, New Jersey. ``It's going to be a lot harder for companies to hit earnings.''

Global Retreat

The drop in U.S. stocks followed declines in Europe and Asia. Europe's Dow Jones Stoxx 600 Index lost 0.8 percent after Ericsson AB's profit fell short of its own forecast. The Morgan Stanley Capital International Asia-Pacific Index slid 1.3 percent. Treasuries rose, pushing yields on two-year notes to the biggest drop in five weeks. Bond yields move inversely to prices.

Wells Fargo lost $1.40, or 3.9 percent, to $34.55. Per-share profit rose to 68 cents from 64 cents, a penny less than the average estimate of analysts surveyed by Bloomberg. The bank reported net credit losses of $892 million, up 35 percent from a year earlier. About half of the increase stemmed from home equity loans, where lower home prices caused steeper-than-expected losses, the company said.

KeyCorp declined $1.91, or 5.9 percent, to $30.44. Profit fell 33 percent, a bigger decline than analysts expected, on losses from loan sales and writedowns the company attributed to ``extraordinary volatility'' in the credit markets.

Regions Financial Corp., the biggest bank based in Alabama, declined 60 cents to $28.53. Profit excluding acquisition-related costs was 64 cents a share, the company said. That missed the 69- cent average of 17 analyst estimates compiled by Bloomberg.

`Multi-year Problem'

Financial companies including banks and brokerages, which make up 20 percent of the S&P 500's value, may report an average 14.4 percent drop in third-quarter profits, the biggest decline since 2001 and the largest decrease among 10 industry groups, according to Bloomberg data. Profits for the entire S&P 500 probably fell by an average of 0.6 percent.

The S&P 500 Financials Index declined 1.9 percent today and contributed the most to the overall index's decline as 84 of its 92 members retreated.

``I'm pretty cautious on financials for the obvious reasons that I don't think credit problems are over in just one quarter, as many in the market seem to believe,'' said Peter Boockvar, an equity strategist at Miller Tabak & Co. in New York. ``This will be a multi-year problem that needs to unwind.''

D.R. Horton, Countrywide

D.R. Horton, the biggest U.S. homebuilder by market value, dropped 72 cents to $12.86. Orders for the period ended Sept. 30 decreased to 6,374 from 10,430 a year earlier, the company said. The value of houses ordered declined 48 percent to $1.3 billion and the cancellation rate was 48 percent. A gauge of homebuilders in S&P indexes lost 3.5 percent.

Countrywide Financial Corp. retreated 25 cents to $18.09. Goldman, Sachs & Co. cut its 2007 and 2008 profit estimates for the largest U.S. mortgage company and said the home-loan market will continue to deteriorate.

Confidence among U.S. homebuilders fell to a record low in October. The National Association of Home Builders/Wells Fargo index of builder sentiment dropped to 18, more than economists had forecast, from 20 in September. Levels lower than 50 mean most respondents view conditions as poor.

Forest Laboratories Inc. and Boston Scientific Corp. helped drag down a gauge of health-care companies in the S&P 500 by 0.7 percent.

Forest Laboratories declined $1.81 to $38.57 after the maker of the antidepressant Lexapro posted fiscal second-quarter revenue that missed analysts' estimates.

Boston Scientific, Yahoo

Boston Scientific, the third-largest U.S. maker of electronic cardiac devices, dropped 73 cents to $14.30 after Johnson & Johnson reported a 44 percent decrease in use of drug- coated heart stents. Johnson & Johnson, the world's largest health-care products maker, slipped 58 cents to $65.07 after reporting third-quarter net income slumped 7.7 percent.

Yahoo! Inc. fell $1.17 to $26.69. After the close of U.S. exchanges, the owner of the most-visited U.S. Web site reported third-quarter profit that beat analysts' estimates, signaling that acquisitions and new advertising software may be spurring growth. The shares rose $3, or 11 percent, to $29.29 in after- hours trading.

Ericsson's U.S.-traded shares dropped $9.60, or 23 percent, to $31.33 for the largest decline since March 2001. The world's biggest maker of wireless networks said net income fell 36 percent to 4 billion kronor ($620 million) from 6.2 billion kronor a year earlier. Revenue rose 6 percent to 43.5 billion kronor. Analysts had predicted profit of 6.14 billion kronor, the average of nine estimates in a Bloomberg survey.

Economy Watch

In economic reports, industrial production in the U.S. rose 0.1 percent in September, restrained by a slump at automakers, the Fed said. The increase in output at factories, mines and utilities matched expectations and followed no change in August. Capacity utilization, which measures the proportion of plants in use, held at 82.1 for a second month.

International investors sold a record amount of U.S. financial assets in August as tightening access to credit spurred an exodus from American equities. Total holdings of equities, notes and bonds fell a net $69.3 billion after an increase of $19.2 billion in July, the Treasury Department said.

Paulson Comments

Treasury Secretary Henry Paulson said today in Washington that the Bush administration will review accounting rules for the off-balance sheet units that large U.S. banks set up to invest in assets including mortgage-backed securities.

The announcement comes after Paulson facilitated a plan led by Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co. to set up a fund to buy assets from the so-called structured investment vehicles. SIVs were forced to sell $75 billion of securities in the past three months after investors balked at buying the debt used to finance the investments.

Bank of America fell $1.22 to $50.20 and JPMorgan slumped $1.16 to $45.11. The second- and third-largest U.S. banks may post their first quarterly profit declines since 2005 this week, according to analysts' estimates compiled by Bloomberg.

Energy shares climbed after oil rose above $88 a barrel for the first time in New York on concern Turkey may attack Kurdish militants in Iraq and disrupt oil shipments.

Chevron Corp., the second-biggest U.S. oil company, gained $1.12 to $93.45. ConocoPhillips, the third-largest, increased $1.44 to $87.80. A gauge of energy stocks in the S&P 500 advanced to a record and extended its 2007 rise to 32 percent, the top gain among 10 industry groups.

State Street, Bear Stearns

State Street Corp. jumped $5.75, or 8.3 percent, to $74.68 for the steepest rise since April 2005. The money manager raised its 2007 earnings-growth forecast to more than 15 percent, easing concern that results would be hurt by the credit-market freeze.

Bear Stearns Cos. increased $2.36 to $123.05 after China Citic Group, the overseas investment arm of the Chinese cabinet, disclosed its interest in buying a stake in the U.S. investment bank.

Microsoft Corp. climbed 28 cents to $30.32. The world's largest software maker, stepping up competition with Cisco Systems Inc. and IBM, began selling corporate communications software with built-in Internet-calling features.

Cisco, the world's biggest maker of computer-networking gear, dropped 50 cents to $32.29. IBM gained $1.57 to $119.60.

The Russell 2000 Index, a benchmark for companies with a median market value of $652 million, dropped 0.7 percent to 823.35. The Dow Jones Wilshire 5000 Index, the broadest measure of U.S. shares, declined 0.7 percent to 15,544.94. Based on its retreat, the value of stocks decreased by $129 billion.

Bank of America Corp. (BAC US)
Bear Stearns Cos. (BSC US)
Boston Scientific Corp. (BSX US)
Chevron Corp. (CVX US)
ConocoPhillips (COP US)
Countrywide Financial Corp. (CFC US)
D.R. Horton Inc. (DHI US)
Ericsson AB (ERIC US)
Forest Laboratories Inc. (FRX US)
International Business Machines Corp. (IBM US)
Johnson & Johnson (JNJ US)
JPMorgan Chase & Co. (JPM US)
KeyCorp (KEY US)
Microsoft Corp. (MSFT US)
Regions Financial Corp. (RF US)
State Street Corp. (STT US)
Wells Fargo & Co. (WFC US)
Yahoo! Inc. (YHOO US)

Last Updated: October 16, 2007 18:04 EDT

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