By Michael Patterson
Dec. 4 (Bloomberg) -- U.S. stocks fell for a second day after JPMorgan Chase & Co. said deteriorating credit markets will reduce profits at the four biggest securities firms, while lower oil prices dimmed the earnings outlook for energy companies.
Goldman Sachs Group Inc., Morgan Stanley, Merrill Lynch & Co. and Lehman Brothers Holdings Inc. declined after JPMorgan analysts said the brokerages may write down more assets infected by subprime losses. Exxon Mobil Corp. and Chevron Corp. led energy companies to their first drop in five days after crude prices fell to a six-week low.
The Standard & Poor's 500 Index lost 9.63, or 0.7 percent, to 1,462.79. The Dow Jones Industrial Average decreased 65.84, or 0.5 percent, to 13,248.73. The Nasdaq Composite Index slid 17.3, or 0.7 percent, to 2,619.83. More than two stocks fell for every one that rose on the New York Stock Exchange. Benchmark indexes in Europe and Asia also slumped.
``We haven't found all the skeletons yet,'' said Rick Campagna, who helps manage $3 billion at Provident Investment Counsel in Pasadena, California. ``Until credit loosens up, you can't get a solid footing in the market.''
Financial companies, which account for about one-fifth of the S&P 500's value, have tumbled 19 percent as a group this year as securities firms and banks announced more than $60 billion of writedowns linked to subprime mortgage losses. The 93-member S&P 500 Financials Index still has gained 6.8 percent from its two- year low on Nov. 26 as traders increased bets the Federal Reserve will cut interest rates to keep the economy from contracting.
Treasuries fell today as yields near the lowest since 2004 discouraged buyers. The dollar weakened against the euro.
Morgan Stanley lost $2.27 to $50.01. Merrill declined $1.93 to $57.13. Lehman decreased $1.77 to $59.61. Goldman, the world's largest securities firm by market value, dropped $11.67 to $215.22.
Slumping credit markets will reduce the securities firms' earnings from debt underwriting and advising on mergers and acquisitions, JPMorgan analysts led by Kenneth Worthington wrote in a research note. The declining value of some debt securities held by the brokerages may force them to report further writedowns in the fourth quarter, Worthington wrote.
Financial companies also dropped after Punk Ziegel & Co. analyst Richard Bove reduced his rating on shares of Bear Stearns Cos., Goldman and Lehman to ``sell'' from ``market perform.''
Bear Stearns, the fifth-biggest U.S. securities firm, lost $4.79 to $93.61.
Citigroup Inc., the biggest U.S. bank, retreated 51 cents to $32.55. UBS AG analyst Glenn Schorr reduced his 2007 and 2008 profit estimates, citing slower economic growth and the potential for more writedowns. Separately, Sedna Finance Corp., a structured investment vehicle run by Citigroup, had $867 million of junior-ranking debt downgraded 12 levels to CCC by Fitch Ratings after declines in the fund's assets.
Citigroup has dropped 42 percent this year, the biggest decline in the Dow average.
``What we've had really is a hysterical exit from the financial stocks,'' said Michael Metz, the New York-based chief investment strategist at Oppenheimer Holdings Inc., which manages about $60 billion. ``I think they still go lower.''
Operating earnings at diversified financial companies in the S&P 500 may fall 45 percent in the fourth quarter, the biggest decline among two dozen industry groups, according to the average of analysts' estimates compiled by Bloomberg. Profits for the group may slip 9.3 percent in next year's first quarter, based on analysts' projections.
Crude oil fell after an OPEC delegate said the group would discuss a production increase at its meeting tomorrow. The contract for January delivery slid 99 cents to $88.32 a barrel in New York, the lowest since Oct. 24.
Exxon, the biggest U.S. energy company, dropped 73 cents to $88.12. Chevron, the second biggest, retreated 68 cents to $87.16. The S&P 500 Energy Index declined 0.9 percent.
Goldman strategists today reduced their 2007 and 2008 operating earnings estimates for S&P 500 members to account for profit shortfalls in the financial industry.
Michael Moran, Abby Joseph Cohen and Michelle Kim, who are part of Goldman's New York-based research team, reduced their prediction for per-share operating profit growth this year to 0.7 percent, down from 4 percent previously. Earnings in 2008 will increase 5.6 percent for companies in the benchmark, down from an earlier estimate 7.5 percent growth, according to the report.
Still, Cohen forecast the S&P 500 will end 2008 at 1,675, an increase of 14 percent from yesterday's close. The weak dollar, a ``vigilant'' Fed, strong U.S. labor productivity and healthy corporate balance sheets will help stocks offset lower earnings from financial companies, the strategist wrote.
Fed funds futures for the first time today priced in greater odds of a 0.5 percentage point rate cut than a 0.25 percentage point reduction at the central bank's Dec. 11 policy meeting.
The odds of a half-point cut in the Fed's target for the overnight lending rate between banks are 52 percent, up from 2 percent last week, futures contracts show. Futures are pricing in a 48 percent chance of a quarter-percentage point cut to 4.25 percent.
The increased bets on a half-point cut came as the three- month London interbank offered rate for dollars extended its advance begun Nov. 14, rising to 5.15 percent. The rate is 65 basis points over the Fed's target, the widest gap since Sept. 18, when policy makers lowered their benchmark rate for the first time in more than four years. Libor has climbed for 15 straight days, the longest stretch of gains since June 2006.
Joseph Veranth, chief investment officer at Dana Investment Advisors, said he expects the Fed to reduce rates by only 0.25 percentage point at the December meeting because high commodity prices and a weak dollar will keep policy makers focused on inflation.
``There are more and more market analysts thinking that there's a 50 basis-point cut coming,'' said Veranth, who helps manage about $2.8 billion in Brookfield, Wisconsin. ``I don't see that yet.''
AutoZone Inc. posted the biggest gain in the S&P 500, advancing $20.93, or 19 percent, to $128.80. The largest U.S. retailer of automobile parts reported first-quarter profit that rose more than analysts estimated on the biggest sales increase in six quarters.
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. This week's decline has left the benchmark more than 100 points below its all-time closing high of 1,565.15 on Oct. 9.
The Russell 2000 Index, a benchmark for companies with a median market value of $587.5 million, today dropped 1 percent to 752.06. The Dow Jones Wilshire 5000 Index, the broadest measure of U.S. shares, slipped 0.7 percent to 14,752.19. Based on its decline, the value of stocks decreased by $120.7 billion.
AutoZone Inc. (AZO US)
Bear Stearns Cos. (BSC US)
Chevron Corp. (CVX US)
Citigroup Inc. (C US)
Exxon Mobil Corp. (XOM US)
Goldman Sachs Group Inc. (GS US)
Lehman Brothers Holdings Inc. (LEH US)
Merrill Lynch & Co. (MER US)
Morgan Stanley (MS US)