Monday, March 10, 2008

U.S. Stocks Retreat, Led by Financials; Bear Stearns Tumbles

By Eric Martin

March 10 (Bloomberg) -- U.S. stocks fell for a third day to the lowest level since 2006, led by a plunge in financial shares, on speculation earnings estimates will prove to be too high as the economy slows and credit losses spread.

The decline in banks steepened as Bear Stearns Cos. tumbled the most since 1987 on concern the brokerage was facing financial difficulties, even after former Chief Executive Officer Alan ``Ace'' Greenberg said the speculation was ``ridiculous.'' Fannie Mae and Freddie Mac, the largest U.S. mortgage finance providers, both lost more than 11 percent on expectations they face increasing losses as the housing slump deepens.

The Standard & Poor's 500 Index declined 20 points, or 1.6 percent, to 1,273.37 and is down almost 19 percent from its Oct. 9 record. The Dow Jones Industrial Average lost 153.54, or 1.3 percent, to 11,740.15. The Nasdaq Composite Index decreased 43.15, or 2 percent, to 2,169.34. Five stocks fell for every one that rose on the New York Stock Exchange.

``It's a painful time for investors,'' said Sam Rahman, the Boston-based head of U.S. equities at Baring Asset Management Inc., which manages $36 billion. ``Not only are the concerns of economic weakness more palpable, but you're getting continued concerns about the impact of the credit crisis.''

All 10 industry groups in the S&P 500 dropped today on growing concern that the economy will slip into a recession after banks posted $188 billion in subprime-related losses and analysts forecast earnings for members of the index will decline this quarter and next. The benchmark for U.S. equities is approaching a so-called bear market, which is marked by a decline of at least 20 percent from a peak.

Banks Slump

Financial shares in the S&P 500 slumped 3.1 percent as a group today to the lowest level since May 2003 and contributed the most to the broader index's retreat. Producers of raw materials slumped 3.3 percent and industrial companies dropped 1.8 percent as a group.

Bear Stearns, the second-biggest underwriter of mortgage- backed bonds, tumbled $7.78, or 11 percent, to $62.30, its steepest drop since October 1987.

``There's an insolvency rumor and concerns on liquidity, that they just have no cash,'' said Michael Mainwald, head of equity trading at Lek Securities Corp. in New York.

There is no truth to the rumors, Russell Sherman, a spokesman for New York-based Bear Stearns, said in an interview. Greenberg, the former Bear Stearns chief executive officer and current board member, told CNBC that liquidity rumors are ``totally ridiculous.''

Moody's Investors Service downgraded 163 portions of 15 mortgage bonds issued by Bear Stearns Alt-A Trust.

Fannie, Freddie Mac

Fannie Mae fell $2.96, or 13 percent, to $19.81 after Barron's said solvency may be tested at the largest source of financing for U.S. home loans.

Freddie Mac slid $2.26, or almost 12 percent, to $17.39. The company ``could generate a writedown'' of as much as $5 billion should McLean, Virginia-based Freddie Mac be required to mark to market half of its holdings of subprime mortgages and mortgage bonds, Credit Suisse Group analyst Moshe Orenbuch said today in a report to clients.

Financial companies in the S&P 500 have dropped 20 percent this year, dragged down by the collapse of the subprime-mortgage market.

Citigroup, Bank of America

Citigroup Inc. slipped $1.22 to $19.69. Bank of America Corp. declined $1.43 to $35.31. Citigroup and other U.S. banks had their combined earnings estimate cut by $8.8 billion at Morgan Stanley, which cited slower equity capital markets and a ``severe'' deterioration in credit conditions this year.

Citigroup's estimated earnings in 2008 were trimmed to $2.09 a share from $2.60 at Morgan Stanley, analysts led by Betsy Graseck said in a note to clients. Citigroup's shares may fall to $20, down from the earlier estimate of $22, Graseck said.

Countrywide Financial Corp. dropped 71 cents, or 14 percent, to $4.36. The mortgage lender is under investigation by the Federal Bureau of Investigation for possible securities fraud, according to a person familiar with the probe.

FBI spokesman Richard Kolko declined to comment yesterday. Jumana Bauwens, a spokeswoman for Calabasas, California-based Countrywide, said the company is unaware of any FBI probe. Bank of America, which is in the process of buying Countrywide, declined to comment, spokesman Scott Silvestri said.

Merrill Lynch & Co. and Bear Stearns also helped lead financial shares lower after analysts at Bernstein Research advised investors against buying the stocks until the credit market stabilizes. Merrill fell $2.35, or 5.2 percent, to $42.84.

Metal Producers Fall

Freeport-McMoRan Copper & Gold Inc., the world's second- largest producer of copper, lost $5.91 to $93.97. Copper fell on speculation a U.S. slowdown will exacerbate slowing demand from China, the world's largest user of the metal. Aluminum, zinc and tin also declined.

U.S. Steel Corp., the biggest U.S.-based steelmaker, dropped $5.67, or 5.2 percent, to $103.60. Nucor Corp., the second-largest U.S. steelmaker by sales, fell $3.34, or 5 percent, to $63.30.

Concern that the U.S. has tipped into a recession grew last week after the Labor Department reported a drop of 63,000 jobs last month, the most since 2003, and home foreclosures climbed to a record.

Record Oil

Stocks also fell after crude oil rose above $108 a barrel in New York to a record as investors purchased futures because the returns have outpaced those of financial markets. Crude oil for April delivery climbed $2.75, or 2.6 percent, to $107.90 a barrel in New York. Futures surged to $108.21 a barrel today, the highest since trading began in 1983.

Ambac Financial Group Inc. dropped the most in the S&P 500, falling $2.21, or 23 percent, to $7.29. The world's second- largest bond insurer erased an advance spurred by two block trades totaling at least 8.8 million shares in the final moments of trading on March 7. The company raised about $1.5 billion in a sale of shares and convertible units last week, more than doubling its stock outstanding, to salvage its AAA credit rating.

Micron Technology Inc. dropped the most in a month, falling 47 cents, or 6.8 percent, to $6.41. The U.S. chipmaker hit by slumping memory prices may have the rating on its debt lowered, Standard & Poor's said. The BB- rating was put on review with ``negative implications,'' S&P said. The credit score is three levels below investment grade.

McDonald's, Medco

McDonald's Corp. climbed the most in the Dow average, gaining $1.53, or 2.9 percent, to $53.80. The world's largest restaurant company said Europe and Asia spurred a sales increase last month. U.S. same-store sales rose 8.3 percent, exceeding the 7.3 percent median analyst estimate in a Bloomberg survey.

Medco Health Solutions Inc. gained $1.15, or 2.8 percent, to $42.99. The biggest U.S. manager of drug benefits was upgraded to ``buy'' from ``neutral'' by Goldman Sachs Group Inc. analyst Randall Stanicky, who said the company is ``attractively valued.''

Blackstone Group LP, manager of the largest buyout fund, gained 42 cents, or 2.9 percent, to $15. Citigroup analysts reiterated their ``buy'' rating on the manager of the world's largest buyout fund, citing an expected 8 percent dividend yield. The report overshadowed an 89 percent decrease in fourth- quarter profit spurred by lower takeover fees and the writedown of its holdings in bond insurer Financial Guaranty Insurance Co.

European stocks fell for a third day and Asia's regional benchmark slid to a seven-week low.

The Russell 2000 Index, a benchmark for companies with a median market value 96 percent less than the S&P 500's, dropped 2.5 percent to 643.97. The Dow Jones Wilshire 5000 Index, the broadest measure of U.S. shares, fell 1.8 percent to 12,822.54. Based on its decline, the value of stocks decreased by $287 billion.

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