By Eric Martin
April 8 (Bloomberg) -- U.S. stocks fell the most in seven days after the first signs of quarterly earnings disappointed investors, Washington Mutual Inc. slashed its dividend and some Federal Reserve officials warned of a prolonged recession.
Washington Mutual led financial shares to their biggest drop this month after the largest savings and loan cut its payout by 93 percent following a $1.1 billion loss. Lennar Corp. led declines in all 15 homebuilders in Standard & Poor's indexes after pending home sales fell more than forecast. Advanced Micro Devices Inc. retreated the most in three weeks on a 22 percent slump in first-quarter sales.
The S&P 500 lost 7 points, or 0.5 percent, to 1,365.54. The Dow Jones Industrial Average slipped 35.99, or 0.3 percent, to 12,576.44. The Nasdaq Composite Index declined 16.07, or 0.7 percent, to 2,348.76. Seven stocks dropped for every five that rose on the New York Stock Exchange.
``We'll be lucky to see earnings be flat for the year and we'll probably see earnings decline,'' Steven Bleiberg, who helps manage about $6 billion as head of global investment strategy at Legg Mason Asset Management in New York, said in an interview with Bloomberg Television. ``Ultimately you've got to have earnings growth, that's the driver, and I just don't see it happening. There are so many negative signs out there.''
Alcoa Inc., the world's third-largest aluminum company, kicked off the first-quarter earnings season last with a worse- than-forecast 54 percent drop in profits. Earnings that trailed estimates at Novellus Systems Inc. this morning added to concern that profits are shrinking.
'Prolonged and Severe'
First-quarter earnings at S&P 500 companies probably fell by an average 11.3 percent from a year earlier, according to analyst estimates compiled by Bloomberg. The decline would mark the third straight quarterly drop in profits, the longest stretch in six years.
Many Fed officials thought an economic contraction was likely and some were concerned about ``a prolonged and severe economic downturn,'' minutes released today from the Federal Open Market Committee's March 18 meeting showed. In the first 11 weeks of this year, the central bank cut the benchmark lending rate 2 percentage points, the fastest drop in two decades.
Today's retreat was limited as Peabody Energy Corp. led energy companies to a seventh straight advance and raw-material producers rose for the fifth time in six days.
About 1.2 billion shares changed hands on the New York Stock Exchange, the least of any day this year and 30 percent fewer than the three-month daily average.
Washington Mutual had the steepest decline in the S&P 500, dropping $1.34, or 10 percent, to $11.81. The lender slashed its quarterly dividend to 1 cent from 15 cents, preserving $490 million of capital annually, and announced 3,000 job cuts. The company also got $7 billion from a group of investors led by David Bonderman's TPG Inc. after losses on subprime loans ate up capital and erased 74 percent of its market value.
The Seattle-based company sold 176 million shares at $8.75 a piece, 33 percent below yesterday's closing price, and $5.5 billion in convertible preferred shares. TPG will buy $2 billion of the shares.
Advanced Micro Devices slid 31 cents, or 4.9 percent, to $6.03 after the company said first-quarter revenue fell to about $1.5 billion and announced plans to cut 10 percent of its staff. The revenue decline may indicate Advanced Micro is losing market share to Intel Corp., said analyst Cody Acree at Stifel Nicolaus & Co. Advanced Micro posted losses in five straight quarters as it fell behind larger rival Intel in introducing products and racked up costs for its acquisition of ATI Technologies Inc.
Homebuilders had their steepest decline in almost two weeks, falling 4.3 percent as a group. Lennar, the third-largest U.S. homebuilder, lost $1.81, or 8.3 percent, to $20. Pulte Homes Inc., the second-biggest, decreased 92 cents to $14.94.
The number of Americans signing contracts to buy previously owned homes declined more than forecast in February, the National Association of Realtors reported, indicating no sign of a bottom in the U.S. real-estate recession that is entering its third year. The group's index of signed purchase agreements decreased 1.9 percent to 84.6, the lowest reading since records began in 2001. Economists in a Bloomberg survey had forecast a drop of 1 percent.
Former Federal Reserve Chairman Alan Greenspan said today the drop in U.S. home prices will probably end ``well before'' early next year as the number of houses on the market diminishes, aiding an economic rebound. Greenspan added that the extent of damage stemming from the collapse of the subprime- mortgage market won't be known for months and described the credit contraction as the worst in 50 years. He spoke at a conference in Tokyo.
Alcoa slipped 26 cents to $37.18. The company said yesterday that first-quarter profit tumbled on surging energy costs, a weaker U.S. dollar and lower metal prices. Excluding some items, profit was 44 cents a share, less than the 50-cent average estimate of 14 analysts in a Bloomberg survey.
Intel Corp. lost 67 cents, or 3.1 percent, to $21.08. The world's largest computer-chip maker had its share-price forecast and 2008 profit estimates cut at Jefferies & Co., which cited ``softer'' first-quarter sales.
Novellus Systems Inc., the maker of equipment that helps turn silicon wafers into computer chips, slid $1.93 to $21.88. Novellus said earnings in the three months ended March 29 will be lower than predicted by the company in February. Net income will be 15 cents to 17 cents a share, compared with a forecast of 21 cents to 24 cents given by the company on Feb. 28, Novellus said. Analysts on average had forecast 20 cents.
Fannie Mae, the largest U.S. mortgage-finance company, slipped 85 cents to $29 and Freddie Mac, the second biggest, lost $1.14 to $25.46. Analysts at Lehman Brothers Holdings Inc.'s estimated that the stocks will soar to $45 or more, while their colleagues at Goldman Sachs Group Inc. forecast that the shares will tumble to $16 or less.
The companies ``have reached an important inflection point,'' Lehman analyst Bruce Harting said, boosting the shares to ``overweight.'' Harting was the top-ranked consumer finance analyst in Institutional Investor's annual survey for 2007.
Goldman Sachs analysts led by James Fotheringham reiterated their ``sell'' recommendation, predicting credit losses at the companies will ``increase rapidly.''
Fannie Mae will have $15.2 billion in credit losses through 2010, on top of $4.1 billion already reported, Goldman said, and Freddie Mac will have $10.6 billion on top of $3.7 billion.
`A Difficult Year'
Financial shares also fell after John Mack, chief executive officer of Morgan Stanley, the world's second-biggest securities firm by market value, said the credit crisis will last ``a couple of quarters'' longer as it spreads to commercial real estate, European lenders with subprime holdings and U.S. midsized banks.
``It's going to be a difficult year for the Street,'' Mack said to reporters before the company's annual meeting today. Mack told shareholders the markets are facing the most difficult conditions he's seen in 40 years.
The International Monetary Fund said losses stemming from the U.S. mortgage crisis may approach $1 trillion, citing a ``collective failure'' to predict the breadth of the crisis.
'Still Too High'
``Our view is that earnings estimates are still too high,'' Damon Barglow, who helps oversee $1.7 billion as the Boston- based managing director at Eastern Investment Advisors, said in an interview with Bloomberg Television. ``We still think there's going to be some negative news here and we would not be surprised to see a pullback before we move higher.''
Peabody Energy, the largest coal producer, added $2.93 to $59.92, leading energy shares in the S&P 500 to a 0.8 percent advance. Coal producers gained on optimism that a shortage of coal in China may bolster prices.
Citrix Systems Inc. climbed the most in the S&P 500, gaining $2.30, or 7.5 percent, to $33.14. Jefferies & Co. said the maker of computer-networking software may see ``substantial'' growth this year in the so-called virtualization market.
Some health insurers gained after the government boosted the base payments on private health plans for the elderly under Medicare's Advantage program by 4.2 percent next year. Humana Inc., the second-biggest provider of U.S.-funded health benefits, advanced 4.7 percent to $45.20. Coventry Health Care Inc. added 2.2 percent to $41.99. WellPoint Inc. increased 1.7 percent to $46.57. UnitedHealth Group Inc. rose 3.9 percent to $38.08.
The Russell 2000 Index, a benchmark for companies with a median market value 95 percent smaller than the S&P 500, fell 0.1 percent to 711.92. The Dow Jones Wilshire 5000 Index, the broadest measure of U.S. shares, dropped 0.4 percent to 13,789.88. Based on its retreat, the value of stocks decreased by $69.4 billion.