Wednesday, May 21, 2008

U.S. Stocks Extend Drop on Fed Minutes; Financials Lead Retreat

By Eric Martin

May 21 (Bloomberg) -- U.S. stocks tumbled, sending the Standard & Poor's 500 Index to its biggest two-day drop since March, as the Federal Reserve signaled it is done cutting interest rates and record oil prices threatened to reduce profits at consumer companies.

Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co. sent financial shares to their lowest since April 15. Target Corp. led retailers to their worst decline in a month and an index of airlines slid to an all-time low as crude climbed above $133 a barrel. Moody's Corp. slumped the most since 1999 after the credit ratings company said it is investigating whether it mistakenly assigned Aaa ratings to debt securities that later fell in value.

The S&P 500 lost 22.69 points, or 1.6 percent, to 1,390.71. The Dow Jones Industrial Average slid 227.49, or 1.8 percent, to 12,601.19. The Nasdaq Composite Index fell 43.99, or 1.8 percent, to 2,448.27. Four stocks retreated for every one that rose on the New York Stock Exchange.

``The American market is a bottomless pit right now,'' said Peter Schiff, president of Darien, Connecticut-based brokerage Euro Pacific Capital, which has more than $1 billion in customer accounts. ``The Fed can't cut rates any more. Oil is $132 a barrel and rising. Any company that collects revenues from American consumers is going to have terrible earnings, and share prices are going to fall.''

`Close Call'

All 10 industries in the S&P 500 slid after the minutes from the Fed's April meeting suggested record energy costs and rising public expectations for inflation threatened their ability to continue cutting rates. Policymakers also reduced their projections for economic growth this year by almost a full percentage point and raised their forecasts for inflation amid curtailed bank lending and a record rise in the prices for oil

``Most members viewed the decision to reduce interest rates at this meeting as a close call,'' the minutes said. ``Several members noted that it was unlikely to be appropriate to ease policy in response to information suggesting that the economy was slowing further or even contracting slightly in the near term.''

The S&P 500's 2.5 percent drop over the past two days was the benchmark's biggest decline since the Federal Reserve brokered JPMorgan Chase & Co.'s buyout of Bear Stearns Cos. in March.

Citigroup slid 4.8 percent to $21.06, while Bank of America lost 2.2 percent to $34.63 and JPMorgan fell 2.9 percent to $42.42.

Financials Tumble

The S&P 500 Financials Index slumped for a fourth day, losing 2.3 percent. The index has tumbled 34 percent over the past year, allowing technology companies to surpass the group as the biggest industry in the S&P 500, after global banks and securities firms racked up $379 billion in asset writedowns and credit losses related to the collapse of the subprime mortgage market.

Moody's plunged 16 percent to $36.91. Some senior staff at Moody's were aware in early 2007 that constant proportion debt obligations, funds that used borrowed money to bet on credit- default swaps, should have been ranked four levels lower, the Financial Times said, citing internal Moody's documents. Moody's altered some assumptions to avoid having to assign lower grades after it corrected the error, the paper said.

McGraw-Hill Cos., the owner of Moody's rival Standard & Poor's, tumbled 5.5 percent to $41.18.

Lehman Brothers Holdings Inc. lost 5.8 percent to $39.56 after Merrill Lynch & Co. reduced earnings forecasts. Lehman will probably earn 6 cents a share in the quarter that ends May 30, down from Merrill's earlier estimate of 82 cents. Merrill analyst Guy Moszkowski lowered his full-year estimate to $2.80 per share from $3.88.

Crude's Rally

Target, the second-largest U.S. discount chain, tumbled 2.6 percent to $52.87, leading retailers in the S&P 500 to a 2.5 percent drop as a group.

Crude for July delivery climbed $4.19, or 3.3 percent, $133.17 a barrel after U.S. stockpiles unexpectedly dropped, spurring concern that rising fuel bills will leave consumers with less money to spend elsewhere.

At least five banks raised price forecasts for crude in the past week and options contracts betting that oil will exceed $200 a barrel in December have risen 46 percent this week, as futures for delivery in 2016 topped $141.

Homebuilders fell the most since March 26 and accounted for five of the top 10 declines in the S&P 500 on concern that higher borrowing costs will reduce demand. D.R. Horton Inc., the largest U.S. builder by market value, slumped 6.2 percent to $13.43. Smaller rival Lennar Corp. tumbled 7.4 percent to $17.43.

`Another Hurdle'

``Those who expected the Fed would continue to be able to reduce rates and thus provide a safety net to the economy and consumers who are in trouble are going to have to question that,'' said Michael Barron, chief executive officer of Knott Capital Management in Exton, Pennsylvania, which manages $1 billion. ``It's another hurdle the financial sector has in front of it.''

The AMEX Airline Index slumped 12 percent to an all-time low after Soleil Securities downgraded the industry to ``neutral'' from ``outperform'' and AMR Corp.'s American Airlines said it will slash U.S. capacity as much as 12 percent, retire as many as 85 jets and cut jobs to blunt surging fuel prices and slowing demand.

UAL Corp., parent of United Airlines, lost 30 percent to $8.15. Continental Airlines Inc. slid 13 percent to $14.20. AMR lost 24 percent to $6.22. Boeing Co., the world's second-biggest commercial airplane maker, fell 4.6 percent to $81.19.

Bankruptcy Speculation

``We now expect AMR to have trouble avoiding bankruptcy by sometime in 2009,'' Soleil analyst James M. Higgins wrote in a note to clients.

United spokeswoman Robin Urbanski didn't immediately return calls for comment. AMR spokesman Andy Backover said ``We've done a lot of work in recent years to avoid bankruptcy and to put ourselves in a better position to weather today's uncertainty.''

Medtronic Inc. climbed 3 percent to $50.43. Goldman Sachs Group Inc. upgraded the shares to ``buy'' from ``neutral'' after the company's fiscal fourth-quarter profit beat analysts' estimates yesterday as defibrillator sales recovered from a recall and the heart stent Endeavor began selling in the U.S.

Micron Technology Inc. climbed 1.8 percent to $8.36. The largest U.S. maker of computer-memory chips was upgraded to ``buy'' from ``hold'' at Deutsche Bank AG, which said it expects further price increases for dynamic random access memory.

Intuit Inc. gained the most in a month, rising 93 cents, or 3.4 percent, to $28.14. The world's largest maker of tax- preparation software said third-quarter profit rose 21 percent after more customers used its TurboTax software to file U.S. tax returns. Sales advanced 15 percent, topping analysts' estimates.

The Russell 2000 Index, a benchmark for companies with a median market value 95 percent smaller than the S&P 500's, fell 1.2 percent to 727.11. The Dow Jones Wilshire 5000 Index, the broadest measure of U.S. shares, dropped 1.6 percent to 14,084.22. Based on its retreat, the value of stocks decreased by $282 billion.

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