Friday, June 27, 2008

U.S. Stocks Slump, Pushing Dow Average to Brink of Bear Market

By Michael Patterson

June 27 (Bloomberg) -- U.S. stocks fell a second day, pushing the Dow Jones Industrial Average to the brink of a bear market, on concern subprime-related writedowns at banks will worsen and record oil and a slowing economy will prolong the worst profit decline since 2002.

The Dow extended its retreat from an all-time high in October to almost 20 percent, the threshold for a so-called bear market. American International Group Inc. and Merrill Lynch & Co. sent the Standard & Poor's 500 Financials Index to a five-year low on speculation of mounting losses. Hasbro Inc. and KB Home helped lead consumer stocks in the S&P 500 to the lowest level since 2003 as oil topped $142 a barrel.

The Dow average lost 106.91 points, or 0.9 percent, to 11,346.51, leaving it within 0.1 percent of a bear market. The 30-stock measure fell 10 percent this month for the worst June since 1930. The S&P 500 slid 4.77, or 0.4 percent, to 1,278.38 today. The Nasdaq Composite Index slipped 5.74, or 0.3 percent, to 2,315.63. Eight stocks declined for every five that rose on the New York Stock Exchange.

``The news on earnings is that the second quarter is probably going to be worse than we thought,'' said Ron Sweet, vice president of equity investments at USAA Investment Management Co., which oversees $100 billion in San Antonio. ``The old news keeps sticking around: it's energy prices, it's writeoffs at banks, it's the slow economy.''

The S&P 500 slumped 3 percent this week, the Dow slid 4.2 percent and the Nasdaq tumbled 3.8 percent. The S&P 500's 8.7 percent decline in June is the worst monthly performance since the 11 percent plunge in September 2002.

Earnings Slump

Analysts forecast earnings for companies in the S&P 500 will slump 11 percent on average, according to a Bloomberg survey today, compared with a projected decline of 8.9 percent a week ago. Goldman Sachs Group Inc. strategist David Kostin said in a report today that expectations for 2008 and 2009 profits are ``too optimistic'' and are likely to be reduced.

AIG decreased 34 cents to an 11-year low of $27.75. The world's biggest insurer plans to absorb losses for a dozen insurance units after their securities-lending accounts suffered $13 billion of writedowns tied to the subprime-mortgage collapse.

Merrill fell 35 cents to $32.70, the lowest price since March 2003. Lehman Brothers Holdings Inc. analyst Roger Freeman increased his second-quarter loss estimate on expectations subprime-related writedowns will be more than twice as big as previously projected.

`Tenuous Situation'

MBIA Inc. lost 22 cents to a 20-year low of $4.17. The world's largest bond insurer faces a ``tenuous situation'' as it seeks to cover payments and collateral calls on $7.4 billion of securities triggered by a credit-rating downgrade, Fitch Ratings analyst Thomas Abruzzo said.

MBIA may need to tap assets pledged to back other commitments as it comes up with the money, potentially opening the company up for further downgrades, said Abruzzo, who yesterday withdrew his rating on MBIA and Ambac Financial Group Inc. after the companies refused to give him information.

Ambac slid 19 cents to $1.61, a record low.

The S&P 500 Consumer Discretionary Index lost 0.7 percent, falling to the lowest since October 2003, after crude oil gained as much as 2.4 percent to $142.99 a barrel. Hasbro, the world's second-largest toymaker, lost $1.60 to $35.14.

KB Home, the homebuilder founded by Eli Broad, slumped 41 cents to $17.72. The company reported its fifth straight quarterly loss as rising mortgage rates and falling prices reduced demand for homes.

Worst Ahead?

Homebuilders in S&P indexes lost 1 percent as a group. Lennar Corp. fell 72 cents to $12.62, the lowest price since September 2000. The second-largest builder said yesterday that the housing market has yet to see the worst of the slump.

Micron Technology Inc. retreated the most since October 2006, falling 89 cents, or 13 percent, to $6.10. The largest U.S. producer of memory chips reported a wider third-quarter loss on weaker pricing for semiconductors used to store pictures and music in portable devices.

``June has been difficult,'' Matthieu Bordeaux-Groult, who helps oversee about $6.2 billion as fund manager at Richelieu Finance in Paris, said in a Bloomberg Television interview. ``There are a lot of negative elements in the market such as high raw materials prices, but valuations are low and offer buying opportunities.''

The S&P 500 gained as much as 0.5 percent earlier after U.S. consumer spending rose 0.8 percent in May, exceeding forecasts. Tax rebates drove the biggest gain in incomes in almost three years, enabling households to at least temporarily overcome soaring fuel bills.

Bristol-Myers Squibb Co. climbed the most since May 1, rising 63 cents, or 3.2 percent, to $20.30. The drugmaker selling a unit for $4.1 billion to finance acquisitions may itself be a takeover target, Sanford C. Bernstein & Co. analyst Timothy Anderson said.

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