Friday, February 29, 2008

U.S. Stocks Decline on Economic Concern; AIG, Sprint Retreat

By Elizabeth Stanton

Feb. 29 (Bloomberg) -- U.S. stocks tumbled, capping the market's fourth-straight monthly drop, after a report showed business activity fell to the lowest level since 2001 and UBS AG said losses in credit markets may top $600 billion.

American International Group Inc., the world's largest insurer, declined the most in two weeks after posting the widest quarterly deficit in its 89-year history. Sprint Nextel Corp. slumped to an almost six-year low on concern more customers will defect from the third-biggest U.S. wireless carrier. All 10 industries in the Standard & Poor's 500 Index retreated, led by banks and phone companies.

The S&P 500 fell 37.05 points, or 2.7 percent, to 1,330.63, its biggest drop since Feb. 5. The Dow Jones Industrial Average slid 315.79, or 2.5 percent, to 12,266.39. The Nasdaq Composite Index lost 60.09, or 2.6 percent, to 2,271.48. Eleven stocks fell for every one that rose on the New York Stock Exchange.

``There is certainly no shortage of negative news out there,'' Michael Magiera, senior analyst at Manning & Napier Advisors, which manages $17 billion in Fairport, New York, said in an interview on Bloomberg Television.

The S&P 500 extended its February decline to 3.5 percent after the National Association of Purchasing Management-Chicago said its business barometer contracted as production and employment weakened, boosting concern the worst earnings slump in six years will continue. The four-month losing streaks for the S&P 500 and Dow are the longest since 2002.

Global Slump

Shares in Europe and Asia retreated on concern that the U.S. economy is tipping into recession. Europe's Dow Jones Stoxx 600 Index retreated 1.4 percent, while the MSCI Asia Pacific Index lost 1.2 percent. The MSCI EM Latin America Index dropped 4.5 percent, the most in almost six weeks.

Profits at S&P 500 companies fell 23 percent on average in the fourth quarter of 2007, and analysts surveyed by Bloomberg expect a 3 percent drop in the first quarter followed by profit growth of 13.7 percent for the year. Two months ago, the forecasts were for increases of 4.7 percent in the first quarter and 15.1 percent for the year.

AIG tumbled $3.29, or 6.6 percent, to $46.86 after posting a fourth-quarter net loss of $5.29 billion, or $2.08 a share, following an $11.1 billion writedown on investments linked in part to subprime mortgages. AIG said it expects more writedowns this year.

``Fridays are tough days'' because investors don't want to be long stocks in case more bad news is reported over the weekend, said David Goerz, chief investment officer of Highmark Capital Management, which oversees $22 billion in San Francisco. ``The news with AIG just put everybody in a foul mood.''

Citigroup Inc., the largest U.S. bank, slid $1.30 to $23.71. Goldman Sachs Group Inc., the biggest securities firm, fell $7.07 to $169.63.

`Cancer in the Market'

Credit-market losses will climb to at least $600 billion from about $160 billion written down so far as investments funded with borrowed money are unwound, UBS credit strategist Geraud Charpin wrote in a note to clients.

``Leveraged risk positions are a cancer in this market and the sooner it is treated the better,'' Charpin wrote. AIG's writedown ``is also the clearest indication that banks are not the only ones to suffer potential losses.''

Lehman Brothers Holdings Inc. and Bear Stearns Cos. fell after Deutsche Bank AG analyst Michael Mayo forecast further writedowns of subprime assets and lowered first-quarter profit estimates for the firms. At least five other analysts have cut their first-quarter analysts for banks and brokers in the last two weeks. Lehman fell $3.69 to $50.99. Bear Stearns lost $4.36 to $79.86.

September 2002

Financial shares in the S&P 500 fell 4 percent today and tumbled 11 percent in February, the steepest monthly loss since September 2002.

Ambac Financial Group Inc. fell 66 cents to $11.14 after CNBC reported that a deal to boost capital at the second-largest bond insurer hit a snag Feb. 27. The group of banks engaged in the bailout will come back with another proposal to keep Ambac together, the financial news network reported. CNBC cited people familiar with the situation.

MBIA Inc., Ambac's larger rival, decreased $1.09 to $12.97. The company is writing ``very little'' new bond insurance business as borrowers balk at buying a guarantee from a money- losing company without stable AAA credit ratings. MBIA said losses on mortgage-backed securities will probably increase this year and expand beyond subprime mortgages.

Subscriber Losses

Sprint slid 98 cents to $7.11. The company said it will likely lose 1.2 million subscribers in the first quarter. That was triple the number Stanford Group Co. analyst Michael Nelson in New York had forecast and represents 2.2 percent of Sprint's wireless customers.

Exxon Mobil Corp. and Chevron Corp. fell as crude oil retreated from a record and natural gas declined from a two-year high in New York. Exxon lost $2.37 to $87.01. Chevron tumbled $2.36 to $86.66.

Novell Inc. posted the biggest gain in the S&P 500, adding 91 cents, or 14 percent, to $7.45. The second-biggest seller of Linux operating-system software in the U.S. reported a fiscal first-quarter profit that beat analysts' estimates after cutting costs by eliminating jobs and changing sales tactics. The company raised its full-year sales forecast.

Gap Inc. rose 72 cents to $20.17. The largest U.S. clothing retailer said fourth-quarter profit advanced for the first time in three years and forecast further gains this year after it sold more full-priced sweaters and jeans during the holiday season.

3Com Buyout

3Com Corp. jumped 38 cents, or 13 percent, to $3.29. Bain Capital LLC and Huawei Technologies Co. plan to reapply within several weeks for U.S. approval to acquire the networking systems and services provider for $2.2 billion, the Wall Street Journal reported, citing people familiar with the matter.

Today was the most active trading day on the NYSE since Feb. 1, with 1.76 billion shares changing hands. Over the past three months, average daily volume has been 1.59 billion shares.

The National Association of Purchasing Management-Chicago said its business barometer dropped to 44.5 in February from 51.5 a month earlier. Figures less than 50 signal a contraction.

Consumer spending in the U.S. rose more than forecast in January, reflecting a jump in prices that is eroding buying power. The 0.4 percent rise in spending followed a revised 0.3 percent gain in December, the Commerce Department said. The Federal Reserve's preferred measure of inflation climbed 0.3 percent, the most in four months.

Treasury Yields Fall

Yields on Treasury securities slid, sending the two-year note under 1.7 percent for the first time since April 2004, as investors increased bets on interest-rate cuts by the Federal Reserve.

Interest-rate futures indicate traders for the first time assign a higher probability to a three-quarter-point cut than to a half-point cut at the Fed's next meeting on March 18. The odds of a three-quarter point cut implied by futures prices rose to 70 percent from 36 percent yesterday and 2 percent a week ago. The remaining bets are on a half-point cut.

The central bank has lowered its target for the overnight lending rate between banks five times since September, most recently to 3 percent on Jan. 30.

``The market has been of the belief that the Fed's aggressive easing action would relieve the pressures,'' said Henry Herrmann, president of Waddell & Reed Financial Inc., which manages $65 billion in Overland Park, Kansas. ``The complications are not diminishing, they're growing.''

Economic Slowdown

Stocks slid yesterday after slower-than-forecast economic growth, rising jobless claims and Federal Reserve Chairman Ben S. Bernanke's warning of possible failures among smaller banks deepened concern that the economy has tipped into a recession.

U.S. equities, as measured by the S&P 500, fared the worst among the world's 10 largest markets in February on concern that a recession is inevitable. Japan posted the second-biggest decline, with a drop of 1.6 percent in the Topix index.

Six of the 10 biggest markets have fallen more this year than the S&P 500, which is down 9.4 percent in 2008. Canada's Standard & Poor's/TSX Composite Index has lost 1.8 percent and Brazil's Bovespa fell 0.6 percent.

The S&P 500 trades at less than 14 times expected earnings, the lowest valuation since October 1990, reflecting investors' lack of confidence in profit estimates.

Financial companies and telephone stocks posted the biggest drops among 10 S&P 500 industries in February, declining 11 percent and 9.6 percent, respectively.

The Russell 2000 Index, a benchmark for companies with a median market value 22 times smaller than the S&P 500, dropped 2.8 percent today to 686.18. The Dow Jones Wilshire 5000 Index, the broadest measure of U.S. shares, fell 2.6 percent to 13,455.96. Based on its decline, the value of stocks decreased by $450.9 billion.

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