By Michael Patterson
Dec. 3 (Bloomberg) -- U.S. stocks dropped for the first time in five days, led by financial companies, after Deutsche Bank AG analyst Mike Mayo said bond losses will hurt profits at brokerages and concern increased that economic growth will slow.
Morgan Stanley and Merrill Lynch & Co., the second- and third-biggest U.S. securities firms, slumped after Deutsche Bank said declining fixed-income markets will reduce fourth-quarter earnings. MetLife Inc. spurred declines in insurers after forecasting 2008 profit below analysts' projections. General Electric Co. fell after Citigroup Inc. analysts cut their profit estimate for the second-biggest U.S. company by market value.
The Standard & Poor's 500 Index lost 8.72, or 0.6 percent, to 1,472.42. The Dow Jones Industrial Average decreased 57.15, or 0.4 percent, to 13,314.57. The Nasdaq Composite Index decreased 23.83, or 0.9 percent, to 2,637.13. About two stocks fell for every one that rose on the New York Stock Exchange.
``People are contending with several different issues right now, and trying to get your arms around all of it is very difficult,'' said Jason Cooper, who helps manage $2.5 billion at 1st Source Investment Advisors in South Bend, Indiana. ``I'm more cautious than bullish.''
Financial shares lost 1.2 percent, halting their steepest weekly advance in five years. The market pared its losses after U.S. Treasury Secretary Henry Paulson set a timeline for a plan to minimize home foreclosures, then fell to fresh lows after analysts at Barclays Plc and UBS AG said the program may do little to boost mortgage bonds.
Morgan Stanley slipped 44 cents to $52.28. Merrill declined 88 cents to $59.06. Lehman Brothers Holdings Inc., the fourth- biggest U.S. securities firm, dropped $1.25 to $61.38. Lower revenue from fixed-income markets and possible losses from bond holdings reduced fourth-quarter profit at securities firms and may crimp next year's revenue as well, Deutsche Bank's Mayo wrote.
The 93-member S&P 500 Financials Index has tumbled 17 percent this year as securities firms and banks announced more than $50 billion of writedowns for their subprime assets.
MetLife, the biggest U.S. life insurer, slipped 81 cents to $64.78. Operating profit next year will be between $5.90 and $6.20 a share, the company said. That's less than the $6.31 average estimate of 16 analysts surveyed by Bloomberg.
Other insurers declined after MetLife's forecast. American International Group Inc., the world's largest insurer, fell $1.23 to $56.90. Prudential Financial Inc., the second-largest U.S. life insurer, slipped 87 cents to $93.27.
Traders increased wagers that the Federal Reserve will reduce interest rates to revive the U.S. economy after San Francisco Fed President Janet Yellen said financial conditions and consumer spending deteriorated more than she expected, and Boston Fed President Eric Rosengren said growth will slow ``well below'' its long-term pace for two quarters.
A report today showing manufacturing expanded in November at the slowest pace in 10 months also added to evidence that the central bank may need to reduce borrowing costs to keep the world's largest economy from falling into a recession.
The odds of a quarter-percentage point rate cut to 4.25 percent at the central bank's Dec. 11 policy meeting are 60 percent, Fed funds futures contracts show. Futures are also pricing in a 40 percent chance of a 0.5 percentage point cut.
The Institute for Supply Management's manufacturing index dropped to 50.8, matching economists' forecasts, from 50.9 the prior month, the Tempe, Arizona-based group said today. Fifty is the dividing line between contraction and expansion.
``The market's grappling with whether or not we're in a recession,'' said Keith Wirtz, who helps oversee $23 billion as chief investment officer at Fifth Third Asset Management in Cincinnati. ``We're getting mixed news and the market is reacting by moving south.''
The Chicago Board Options Exchange Volatility Index, known as the market's ``fear gauge'' because it tends to rise as stocks fall, increased 3.5 percent to 23.66. Higher readings in the so- called VIX, derived from prices paid for S&P 500 options, indicate traders expect bigger share-price swings in the next 30 days.
Treasuries rose, pushing two-year note yields to within 3 basis points of the lowest level since 2004.
General Motors Corp. led declines in auto-related companies, falling $1.22 to $28.61. The largest U.S. automaker trimmed its first-quarter North American production plan 11 percent after November U.S. sales fell the same amount.
Ford Motor Co., the second-biggest U.S. automaker, declined 26 cents to $7.25. U.S. sales rose 0.4 percent last month, ending 12 straight months of declines, Ford said. The automaker plans to cut first-quarter North American production 7.4 percent from year-earlier levels. Johnson Controls Inc., the largest maker of automotive batteries, lost 69 cents to $37.93.
E*Trade Financial Corp. posted the biggest decline in the S&P 500, dropping 49 cents, or 11 percent, to $4.11. The online bank and brokerage was downgraded to ``sell'' from ``neutral'' at Banc of America Securities, which cited the ``dwindling'' value of its retail brokerage business and mortgage-related losses at its bank.
D.R. Horton Inc. and Lennar Corp. led homebuilders to their biggest two-day advance since August after Paulson said a deal to fix some subprime mortgage rates before they reset higher may be reached this week. The Treasury chief today proposed letting state and local governments ``temporarily'' exempt taxes on bonds issued to help refinance subprime borrowers.
A gauge of homebuilders in S&P indexes gained 1.5 percent, bringing its two-day advance to 10 percent. D.R. Horton, the second-biggest U.S. homebuilder by sales, climbed 37 cents to $12.34.
Lennar increased 90 cents to $16.74. The largest U.S. builder and Morgan Stanley formed a land investment venture that purchased 11,000 properties from Lennar for $525 million. The properties had a net book value of about $1.3 billion on Sept. 30, Lennar said. Merrill Lynch & Co. analysts reiterated their ``buy'' rating on Lennar, saying the land sales will boost the company's liquidity.
Some analysts said Paulson's plan may do little to ease mortgage-related losses. Barclays said few homeowners may qualify for the proposed aid and many are likely to default even before rates reset higher. UBS said most borrowers who would be helped by the plan would have their loans reworked without a coordinated effort.
Subprime loans, given to people with poor or limited credit histories or high debt, typically offer a low introductory rate for the first two or three years. The rate then resets for the duration of the mortgage, usually 30 years.
The S&P 500 last week posted its biggest weekly gain since March, rebounding from its first so-called correction in four years, after Fed officials signaled more interest rate cuts may be on the way. The S&P 500 still needs to rise 6.3 percent to reach its all-time closing high of 1565.15 on Oct. 9.
The Russell 2000 Index, a benchmark for companies with a median market value of $593.8 million, today dropped 1 percent to 759.97. The Dow Jones Wilshire 5000 Index, the broadest measure of U.S. shares, slipped 0.6 percent to 14,848.71. Based on its decline, the value of stocks decreased by $105 billion.
American International Group Inc. (AIG US)
D.R. Horton Inc. (DHI US)
E*Trade Financial Corp. (ETFC US)
Ford Motor Co. (F US)
General Electric Co. (GE US)
General Motors Corp. (GM US)
Lehman Brothers Holdings Inc. (LEH US)
Lennar Corp. (LEN US)
Merrill Lynch & Co. (MER US)
MetLife Inc. (MET US)
Morgan Stanley (MS US)
Prudential Financial Inc. (PRU US)