U.S. Stocks Drop, Led by Financial Shares, AIG, Banks Retreat

By Elizabeth Stanton


Aug. 25 (Bloomberg) -- U.S. stocks fell the most in a month as a Kansas bank's failure and speculation American International Group Inc. will post a loss heightened concern that credit writedowns will keep rattling the financial system.

AIG tumbled to a 13-year low after Credit Suisse Group said the insurer may lose $2.41 billion this quarter on mortgage- related writedowns. Washington Mutual Inc. and Huntington Bancshares Inc. each dropped more than 6 percent after Columbian Bank & Trust Co. became the ninth U.S. bank to collapse this year. Alcoa Inc. and Freeport-McMoRan Copper & Gold Inc. led the Standard & Poor's 500 Materials Index to a 2.3 percent retreat as gold and aluminum prices decreased.

``The market's going to struggle until we get a clear indication that we know what the bottom is in the financials, and that may be a while,'' Peter Sorrentino, senior portfolio manager at Cincinnati-based Huntington Asset Advisors, which manages about $17 billion, told Bloomberg Television.

The S&P 500 dropped 25.36, or 2 percent, to 1,266.84, ending a three-day advance. The Dow Jones Industrial Average slid 241.81, or 2.1 percent, to 11,386.25, with all 30 of its companies lower. The Nasdaq Composite Index decreased 49.12 to 2,365.59. About 865 million shares changed hands on the New York Stock Exchange, the slowest trading day of the year. Volume last week was 35 percent less than the year-to-date average.

Broad Retreat

Almost 10 stocks retreated for each that rose on the NYSE. All 10 industry groups in the S&P 500 dropped as the index extended its first weekly decline since July. The benchmark for American equities slipped 0.5 percent last week as energy prices climbed and concern grew that the government may need to bail out Fannie Mae and Freddie Mac.

Stocks fell even after a report showed sales of previously owned homes in the U.S. rose in July from a 10-year low as declining prices helped stabilize demand, and investor appetite increased for Freddie Mac's weekly sale of short-term debt securities.

Morgan Stanley cut its year-end forecast for the S&P 500 on concern banks will report more credit-related writedowns and the global economic slowdown will curb profits at technology and industrial companies.

``Our biggest concern for 2009 earnings estimates is that a combination of global growth slowdown, declining operating leverage, a stronger U.S. dollar, less share count reduction and a long tail to dysfunctional credit markets will create powerful headwinds for what appear to be very optimistic consensus expectations,'' Abhijit Chakrabortti wrote in a note to clients dated yesterday.

AIG, Banks Retreat

AIG fell 5.5 percent to $18.78 for the biggest drop in the Dow average. Credit Suisse analyst Thomas Gallagher predicted AIG will lose 86 cents a share in the third quarter. Previously he forecast a 13-cent profit. ``Recent deterioration'' in debt holdings may cause losses in the firm's credit-default swaps, Gallagher wrote today in a research note. He rates New York-based AIG ``neutral.''

The KBW Bank Index tumbled 3.4 percent as all 24 of its companies decreased. Washington Mutual lost 23 cents to $3.60. Huntington Bancshares retreated 51 cents to $7. SunTrust Banks Inc., the largest bank based in Georgia, fell 6 percent to $40.15 after Citigroup Inc. began covering it with a ``sell'' rating.

Columbian Bank, with $752 million in assets and $622 million in total deposits, was shuttered by the Kansas state bank commissioner's office and the Federal Deposit Insurance Corp. on Aug. 22.

`Last Shoe'

The pace of bank closings is accelerating as global financial firms rack up more than $500 billion in writedowns and credit losses since 2007. The FDIC's ``problem'' bank list grew by 18 percent in the first quarter to 90 banks with combined assets of $26.3 billion. Prior to yesterday, the FDIC had closed 36 banks since October 2000, according to a list at fdic.gov. The U.S. shut 12 banks in 2002, the highest in the period, and 2005 and 2006 had no closures.

``Trying to guess when the last shoe has dropped is going to be a difficult way of making money,'' said Jeffrey Coons, co- director of research at Manning & Napier Advisors Inc., which manages $19 billion in Fairport, New York. Investors ``should focus on companies that aren't reliant on you picking a bottom in the financial crisis,'' he said.

Lehman Brothers Holdings Inc. slipped 6.6 percent to $13.45 on concern that a Korean bank will abandon a potential investment in the fourth-largest U.S. securities firm. The shares rose 5 percent in New York trading on Aug. 22 after Korea Development Bank said it's ``considering'' an investment in the company.

Lehman Talks

The Korean bank ended talks on a possible investment after Lehman demanded a price 50 percent higher than its book value, the Maeil Business newspaper said, citing an unnamed official in the banking industry. South Korea's financial regulator said today that state-controlled banks including Korea Development Bank should consider the risks of buying overseas rivals amid the global credit crisis.

New York-based Lehman has dropped 79 percent this year, the worst performance in the 11-company Amex Securities Broker/Dealer Index.

Fannie Mae rose 3.8 percent to $5.19, paring its drop over the past year to 92 percent. Freddie Mac climbed 17 percent to $3.29, still down 95 percent in the past year. Investors bid 3.95 times the amount of three-month securities on offer from Freddie today, compared with 2.19 times last week.

Financials Slump

Financial shares last week fell the most in six weeks for the biggest drop among 10 S&P 500 industries. The group has retreated 32 percent this year. One year into the financial crisis, central bankers and scholars at the Federal Reserve's annual retreat this weekend couldn't agree on how to prevent a repeat.

Fed Chairman Ben S. Bernanke, European Central Bank President Jean-Claude Trichet, former officials and economists meeting in Jackson Hole, Wyoming, split over whether policy makers should be made responsible for financial stability and how closely to heed the concerns of Wall Street.

The yearlong credit crisis has yet to run its course, with continued turmoil likely in housing and banking, Bank of Israel Governor Stanley Fischer said Aug. 23 at the Fed's symposium.

Alcoa, the world's third-largest aluminum producer, retreated 86 cents to $31.42. Freeport-McMoRan tumbled $2.79 to $87.81. Gold futures for December delivery fell $7.80, or 0.9 percent, to $825.70 an ounce in New York and November aluminum fell 1 percent in Shanghai. The London Metals Exchange was closed for a bank holiday.

Consumer Shares Decline

Shares of retailers, hotel operators and other S&P 500 companies that rely on consumers' disposable income dropped 2.4 percent as a group. Spreads on their bonds, the extra yield investors demand to own the industry's debt, rose to 2.5 percentage points over U.S. Treasuries last week. Every time spreads have widened that much this decade, the S&P 500 Consumer Discretionary Index slumped 16 percent on average.

Coach Inc., the largest U.S. maker of luxury handbags, fell $1.93 to $26.40. Darden Restaurants Inc., the owner of the Olive Garden and Red Lobster chains, retreated $1.31 to $32.26. Wyndham Worldwide Corp., the franchiser of Ramada and Super 8 hotels, lost 38 cents to $18.27.

The consumer index rose 7.6 percent in August through the end of last week, putting it on track for the biggest monthly rally in five years. The gain, helped by a 2.2 percent rally after earnings at Gap Inc. topped analyst forecast, was almost four times that of the S&P 500.

Ryder, AMR

Ryder System Inc. slid 6.4 percent to $64.72. Wachovia Corp. analyst Justin Yagerman lowered his rating on the trucking industry to ``market weight'' from ``overweight,'' citing ``lackluster'' freight volumes in August and the potential for continued weakness.

AMR Corp., parent of American Airlines, the world's largest carrier, lost 46 cents to $10.06. AMR may sell as much as $300 million worth of newly issued shares, diluting existing stockholders' stake, and use the proceeds to repay debt or help purchase aircraft, according to a regulatory filing.

Advanced Micro Devices Inc. climbed 2.1 percent to $5.93, the highest in two months. The world's second-largest maker of personal-computer processors agreed to sell a unit that produces semiconductors used in lower-priced digital TVs to Broadcom Corp. for $192.8 million. Broadcom declined 4.6 percent to $26.17.

Leggett & Platt Inc. gained 2 percent to $21.55. The maker of lumbar supports for car seats was raised to ``buy'' from ``hold'' by analysts at Stifel Nicolaus & Co., who said the company may get out of its less profitable businesses.

Dell Inc., Sears Holdings Corp. and Big Lots Inc. are among the companies scheduled to report earnings this week. Second- quarter profits for S&P 500 companies slumped 22 percent on average, based on Bloomberg data. Fewer than 50 companies in the U.S. stock benchmark have yet to release results.