Tuesday, February 5, 2008

U.S. Stocks Fall After Service Industries Unexpectedly Shrink

By Michael Patterson

Feb. 5 (Bloomberg) -- U.S. stocks tumbled the most in 11 months after service industries contracted at the fastest pace since 2001, reinforcing concern the economy is in a recession.

Exxon Mobil Corp. and General Electric Co. led declines in New York trading and all 10 industry groups in the S&P 500 retreated after the Institute for Supply Management's index, which reflects almost 90 percent of the economy, fell more than forecast. Citigroup Inc. led 91 of 92 financial shares in the S&P 500 lower after Fitch Ratings said it may downgrade the AAA insurance rating on MBIA Inc., the largest bond guarantor.

The S&P 500 lost 44.18, or 3.2 percent, to 1,336.64. The Dow Jones Industrial Average decreased 370.03, or 2.9 percent, to 12,265.13. The Nasdaq Composite Index slipped 73.28, or 3.1 percent, to 2,309.57. Shares also retreated in Asia and Europe. Almost 11 stocks fell for every one that rose on the New York Stock Exchange.

``As the recession unfolds, then profits will disappoint,'' Stuart Schweitzer, who helps oversee $420 billion as the global markets strategist at JPMorgan Private Bank, said in a Bloomberg Television interview from New York. ``It's already under way.''

Fourth-quarter profits at the 311 companies in the S&P 500 that reported results so far declined 23 percent on average, according to data compiled today by Bloomberg. Still, 64 percent of the companies posted earnings that topped analysts' estimates, compared with 60 percent a year ago.

The S&P 500 has lost 9 percent so far in 2008 for the worst- ever start to a year in the benchmark's eight-decade history, according to S&P analyst Howard Silverblatt. The Dow is down 7.5 percent this year and the Nasdaq has lost 13 percent. The S&P 500 has fallen 4.2 percent this week, the steepest two-day retreat since January 2003.

Global Impact

Shares also declined on signs the U.S. slowdown is spreading to Europe and Asia. Europe's service industries grew at the slowest pace in more than four years and retail sales dropped the most since 1995, reports showed today. Asian equities fell as Yamaha Motor Corp. said operating profit will slide for the first time in eight years amid falling U.S. demand.

Commodities producers fell after the contraction in the services industry prompted crude for March delivery to fall 1.8 percent to $88.41 a barrel. Gold and copper prices also dropped.

Exxon Mobil, the biggest U.S. oil company, lost $3.33 to $82.11. Chevron Corp., the second-largest, declined $2.28 to $79.74. Freeport-McMoRan Copper & Gold Inc. retreated $5.27 to $85.91. Newmont Mining Corp. fell $1.43 to $49.48.

GE, the second-largest U.S. company by market value, lost $1.16 to $34.21.

ISM Shrinks

The ISM's non-manufacturing index, which assesses banks, retailers and construction companies, slumped to 41.9 from 54.4 the prior month. A reading of 50 is the dividing line between growth and contraction.

Citigroup, the biggest U.S. lender by assets, lost $2.17 to $27.05. Merrill Lynch & Co., the nation's third-largest securities firm, slid $3.23 to $54.50. MBIA slipped 49 cents to $14.90. Ambac Financial Group Inc., the second-largest bond insurer, was unchanged at $11.39.

The S&P 500 Financials Index retreated 4.6 percent today and has lost 7 percent this week, the biggest two-day drop since October 2002. The gauge is still 8 percent above its four-year low on Jan. 18.

Banks and brokerages fell to their lows of the day after MBIA's bond insurance ranking was put back under review for a downgrade by Fitch Ratings less than a month after affirming the grade with a stable outlook. Fitch is updating its assumptions for higher losses on U.S. subprime-mortgage securities, the ratings company said. The results may show MBIA doesn't have enough capital to support its guarantees on such debt, Fitch said.

Ratings Watch

Separately, S&P said downgrades of bond insurers such as MBIA and Ambac may lead to cuts in credit ratings at banks.

Speculation about whether the guarantors will maintain the AAA credit ratings they rely on to insure $2.4 trillion in securities has contributed to larger-than-average price swings in the U.S. stock market. Intraday moves in the Dow industrials averaged 264 points last week, three times the average of a year ago.

Goldman Sachs Group Inc. dropped $10.94, or 5.5 percent, to $189.86, the largest decline since Dec. 11. The biggest U.S. securities firm was cut to ``perform'' from ``outperform'' by Oppenheimer & Co. analyst Meredith Whitney. She lowered her 2008 earnings-per-share estimate by 18 percent to $20.90 and reduced her 2009 prediction by 14 percent to $25.50, according to a Feb. 4 note to clients.

'Continue to Slow'

The S&P 500 has fallen 15 percent from its all-time high in October as evidence increased that declining home values, higher unemployment and tighter credit would push the world's biggest economy into a recession for the first time since 2001. The benchmark for U.S. equities has rebounded 2 percent from its 2008 low on Jan. 22 after two interest-rate cuts from the Federal Reserve boosted shares of financial companies.

``The economy is going to continue to slow,'' said Matthew Kaufler, who helps manage about $2.6 billion at Clover Capital Management in Rochester, New York. ``The market will still remain very contained for the foreseeable future.''

Principal Financial Group Inc. and Lincoln National Corp. led insurers in the S&P 500 lower after saying earnings declined on investment losses.

Principal Financial, an Iowa-based life insurer and marketer of 401(k) plans, fell $6.71 to $53.10 after fourth-quarter profit dropped 85 percent. Lincoln National, the fourth-largest U.S. life insurer by assets, retreated $3.89 to $51.41 on a 70 percent decline in quarterly earnings.

Chipmakers Slump

Semiconductor companies in the S&P 500 fell 4.6 percent as a group after National Semiconductor Corp. cut a sales forecast because of lower-than-projected shipments to handset makers.

The maker of chips for devices such as Apple Inc.'s iPhone said revenue this quarter will be as much as $455 million. That's below the $484 million average estimate of analysts in a Bloomberg survey.

National Semiconductor shares lost $1.43 to $17.59. Texas Instruments Inc., the biggest maker of mobile-phone chips, dropped $1.42 to $29.74. Intel Corp., the world's largest chipmaker, lost 95 cents to $20.12. The declines pushed the S&P 500 Information Technology Index, a gauge of 71 computer-related companies, to the lowest since March 13.

General Motors Corp. slipped $1.10 to $26.47. GMAC LLC, the lending company that General Motors sold to a hedge fund manager, lost $724 million in the fourth quarter because home buyers didn't keep up with their mortgage payments. A group led by Cerberus Capital Management bought a 51 percent stake in GMAC in 2006.

NYSE Euronext Tumbles

NYSE Euronext dropped $11.70, or 14 percent, to $71.03 for the biggest decline since its initial public offering in March 2006. The owner of securities exchanges on both sides of the Atlantic delayed some of its planned expense reductions and posted fourth-quarter profit that trailed the most optimistic analyst estimates.

Martin Marietta Materials Inc. fell $12.10 to $106.02. The second-largest U.S. supplier of construction sand and gravel posted fourth-quarter earnings that trailed analysts' estimates on fuel costs and bad weather. Vulcan Materials Co., a Birmingham, Alabama-based producer of highway construction materials, declined $5.92 to $69.52.

Casinos Gain

Las Vegas Sands Corp. climbed $7.45 to $88.90. The world's largest casino company by market value was raised to ``overweight'' from ``equal weight'' by Morgan Stanley, which said the fundamentals of its casino in Macau were ``robust.'' Wynn Resorts Ltd., which was also upgraded to ``overweight,'' rallied $7.89 to $119.36.

Whirlpool Corp. added $8.41 to $90. The world's largest appliance maker posted fourth-quarter profit that topped analysts' estimates on an increase in overseas sales and reduced costs following its acquisition of Maytag Corp.

Traders boosted bets on Fed interest-rate cuts after the ISM report. Fed funds futures indicate a 76 percent chance the central bank will lower the target for overnight loans between banks by 0.5 percentage point to 2.5 percent by a March 18 policy meeting. That compares with 68 percent odds yesterday. The odds of a 0.75 percentage-point cut are 24 percent, up from no chance yesterday.

Fed Bank of Richmond President Jeffrey Lacker said today he sees ``the possibility of a mild recession'' and further reductions in interest rates ``may be warranted.''

David Rosenberg, Merrill's North American economist, wrote in a research note today that the U.S. economy may face a ``much deeper downturn'' than in 2001 and that there is a ``strong chance'' the Fed will cut interest rates before its scheduled policy meeting next month.

Some 1.7 billion shares changed hands on the NYSE, 3.1 percent more than the three-month daily average.

The Chicago Board Options Exchange Volatility Index, known as the market's ``fear gauge'' because it tends to rise as stocks fall, increased 8.7 percent to 28.24. Higher readings on the so- called VIX, derived from prices paid for S&P 500 options, indicate traders expect bigger share-price swings.

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