Thursday, January 17, 2008

U.S. Stocks Tumble on Recession Concern, Merrill Lynch Loss

By Eric Martin

Jan. 17 (Bloomberg) -- Growing conviction that the U.S. is in a recession sent stocks plunging in their worst three-day decline since 2002.

Exxon Mobil Corp., General Electric Co. and Bank of America Corp. led the drop after the Federal Reserve said manufacturing in the Philadelphia region slid to a six-year low and Merrill Lynch & Co. posted a loss double analysts' estimates. Ambac Financial Group Inc. and MBIA Inc., the two biggest U.S. bond insurers, retreated on concern their AAA credit ratings will be revoked. All 10 industry groups in the Standard & Poor's 500 Index, and 452 of its members, decreased.

The S&P 500 lost 39.95, or 2.9 percent, to 1,333.25 and is down 9.2 percent this year after tumbling 5.9 percent the past three days. The Dow Jones Industrial Average decreased 306.95, or 2.5 percent, to 12,159.21. The Nasdaq Composite Index slid 47.69, or 2 percent, to 2,346.9. More than seven stocks fell for every one that rose on the New York Stock Exchange.

``The problems seem to be intensifying,'' said John Carey, who helps oversee about $13 billion at Pioneer Investment Management in Boston. ``We're in for some rough months.''

Benchmark indexes are approaching so-called bear markets, or declines of at least 20 percent. The S&P 500, which is off to its worst-ever start for a year, and Dow average have both lost more than 14 percent from their Oct. 9 records, while the Nasdaq composite has tumbled 18 percent from an almost seven-year high on Oct. 31. The Russell 2000 Index, a benchmark for companies with a median market valuation of $510 million, is down 20 percent since its July 13 peak.

Exxon, GE Slump

Exxon Mobil, the biggest U.S. oil company, slid $2.62 to $83.91. GE, the world's third-largest company by market valuation, lost $1.35 to $33.21. Bank of America, the biggest U.S. bank by valuation, fell $1.78 to $36.91.

Merrill retreated $5.64, or 10 percent, to $49.45 in its biggest drop since September 2001. Merrill's fourth-quarter net loss of $9.83 billion, or $12.01 a share, compared with a $4.82- a-share deficit forecast by analysts in a Bloomberg survey. The decline resulted in Merrill's first full-year loss since 1989.

Ambac, battered by losses from the collapse of the subprime mortgage market, dropped as much as 65 percent and Armonk, New York-based MBIA fell as much as 43 percent. Moody's and S&P said late yesterday they are reviewing the ratings the companies' depend on to sell bond insurance.

MGIC Investment Corp., the largest U.S. mortgage insurer, declined $2.28, or 14 percent, to $13.49.

Goldman Sachs Group Inc. dropped $6.52 to $190.98. Bear Stearns Cos. decreased $4.61 to $74.44. Financial companies in the S&P 500, which fell 4.7 percent today, have lost 11 percent as a group this year after tumbling 21 percent in 2007.

Tennessee Bank

First Horizon National Corp., Tennessee's biggest bank, plunged $2.43, or 13 percent, to $16.48. First Horizon led regional banks stocks lower after posting a fourth-quarter loss and cutting its dividend.

Concern that the economy has entered a recession was spurred after the Fed said manufacturing in the Philadelphia region contracted more than forecast in January, adding to evidence factories are cutting production as the economy slows. The Philadelphia Fed's general economic index declined to minus 20.9, the lowest reading since October 2001, from minus 1.6 in December.

The Commerce Department said builders broke ground on the fewest houses since 1991 in December, making last year's decline in homebuilding the worst in almost three decades.

Lennar Corp., the biggest U.S. homebuilder, fell 34 cents, or 2.4 percent, to $13.91. Hovnanian Enterprises Inc., New Jersey's biggest homebuilder, dropped 8 cents, or 1.2 percent, to $6.55.

Fed Watch

Fed Chairman Ben S. Bernanke told Congress the outlook for economic growth has worsened. Still, he said the central bank is not forecasting a recession for this year. Bernanke said a ``temporary'' fiscal stimulus would help the central bank to buttress economic growth, while warning against worsening the longer-term outlook for budget deficits.

Traders increased bets for a bigger interest-rate cut at the Fed's meeting at the end of January. Fed funds futures trading indicates a 44 percent chance for a 0.75 percentage point reduction, up from 40 percent odds yesterday. The rest of the bets are for a 0.5 percentage point cut. The benchmark rate stands at 4.25 percent.

Monsanto Co., the world's biggest seed maker, posted its steepest decline in almost five years, tumbling $13.09, or 12 percent, to $99.61. UBS AG initiated coverage of the shares with a ``short-term sell'' rating, saying the company could miss second-quarter earnings estimates as farmers plant more soybeans and less corn. Corn made up 33 percent of Monsanto's revenue versus 11 percent for soybeans in the fiscal year ended in August, according to Bloomberg data.

`Devil's Arcade'

``Right now, this market is the Devil's arcade,'' said Michael Nasto, the senior trader at U.S. Global Investors Inc., which manages about $6 billion in San Antonio. ``We're looking at a possible recession with housing being the drag.''

Raw-materials and energy producers declined on concerns a recession would curb demand for fuel and metals.

Crude oil for February delivery fell 71 cents, or 0.8 percent, to $90.13 a barrel on the New York Mercantile Exchange, the lowest in more than a month. A gauge of energy shares in the S&P 500 sank to the lowest level since August. Chevron Corp., the second biggest, dropped $3.50 to $82.75.

Gold fell to a one-week low as oil's decline eroded demand for the precious metal as a hedge against inflation. Newmont Mining Corp., the world's second-biggest gold producer, dropped $1.03 to $52.89. Freeport-McMoRan Copper & Gold Inc. slumped $7.14 to $81.49.


Harley-Davidson Inc., the biggest U.S. motorcycle maker, dropped $2.68 to $36.95. Analysts at Citigroup Inc. said slower U.S. sales growth may hurt earnings and downgraded the stock to ``sell'' from ``hold.''

The benchmark for U.S. stock-option prices climbed the most in 10 weeks. The Chicago Board Options Exchange Volatility Index, or VIX, rose 17 percent to 28.46. The index, which tends to increase when stocks fall, has more than doubled over the past year and closed today at the highest level since Nov. 26.

The Russell 2000 declined 2.8 percent to 680.57 as the benchmark for small companies entered its first bear market since October 2002. The Dow Jones Wilshire 5000 Index, the broadest measure of U.S. shares, fell 2.8 percent to 13,389.66. Based on its decline, the value of stocks decreased by $479 billion.

Treasuries rose, with the yield for the benchmark 10-year note dropping 13 basis points, or 0.13 percentage point, to 3.61 percent, the biggest decline since Dec. 11. It touched 3.60 percent, the lowest since July 2003.

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