By Michael Patterson
Nov. 15 (Bloomberg) -- U.S. stocks fell for a second day after Wells Fargo & Co. said the housing market is the worst since the Great Depression and investors speculated Fannie Mae masked credit-market losses in its latest earnings report.
Wells Fargo, the second-largest U.S. mortgage lender, dropped after saying home-equity losses will remain ``elevated'' through 2008. Fannie Mae tumbled to a two-year low after Fortune said the biggest source of money for U.S. mortgages changed the way it accounts for bad loans. J.C. Penney Co. declined to the lowest since 2005 after the third-biggest department-store chain reported a smaller profit and cut its earnings forecast.
The Dow Jones Industrial Average decreased 120.96, or 0.9 percent, to 13,110.05, weighed down by a 4.1 percent slide in Citigroup after the biggest U.S. bank sold $4 billion of 10-year notes at the highest yield relative to benchmarks in its history. The S&P 500 Index lost 19.43, or 1.3 percent, to 1,451.15. The Nasdaq Composite Index slipped 25.81, or 1 percent, to 2,618.51. More than three stocks dropped for every one that rose on the New York Stock Exchange.
``We had fooled ourselves a little bit thinking that the third-quarter was going to be the proverbial `kitchen sink' quarter where you got all the loan losses,'' said Benjamin Pace, who helps oversee about $25 billion as chief investment officer at Deutsche Bank Private Wealth Management in New York. ``I don't think we really had our arms around what they were.''
Treasuries climbed to the highest since 2005 as investors sought the safety of government debt.
Subprime Fallout
The fallout from subprime mortgage defaults has pushed financial shares down 17 percent this year and limited the S&P 500's advance to 2.3 percent. J.C. Penney's results added to concern consumer spending is slowing ahead of the holiday shopping season. Macy's Inc. slashed its sales forecast yesterday and a Commerce Department report showed a 0.5 percent decrease in October department-store sales.
Wells Fargo slipped $1.28 to $31.97. Chief Executive Officer John Stumpf said home-equity losses are likely to increase in the fourth quarter and remain elevated through next year. He spoke in New York at a conference sponsored by Merrill Lynch & Co. Wells Fargo also said it had net credit losses on 0.77 percent of its $83 billion in home equity loans in the third quarter.
'Killed the Market'
Fannie Mae retreated $4.78, or 10 percent, to $43.04. The change in the way the government-chartered company measures the impact of mortgage foreclosures caused it to report a credit-loss ratio of 4 basis points for the first nine months of 2007 instead of 7.5 basis points, Fortune reported in a story citing a Nov. 9 filing with the U.S. Securities and Exchange Commission.
Fannie Mae believes ``our credit losses will be'' between 4 basis points and 6 basis points during 2007, spokesman Brian Faith said today in a statement. A basis point is 0.01 percentage point.
``The story about Fannie Mae just killed the market,'' said Michael Nasto, senior trader at U.S. Global Investors Inc., which manages $5 billion in San Antonio. ``There's a lot of pain today. It doesn't seem like anyone can get their arms around just how big the subprime mess is.''
Countrywide Financial Corp., the biggest U.S. home-loan company, dropped $1.16 to a five-year low of $12.21. Freddie Mac lost $2.33, or 5.3 percent, to $41.86.
Banks Plunge
The S&P 500 Financials Index of 93 companies also dropped after Deutsche Bank AG, Germany's biggest bank, lost an effort to foreclose on 14 properties because a federal judge in Cleveland found the bank hadn't proved that investors in the underlying mortgages actually owned them. The ruling, if adopted by other federal courts, may complicate efforts by investors in mortgage securities to foreclose on non-paying loans.
Citigroup Inc. declined $1.46 to $34.58. The bank also declined after the Wall Street Journal said it might have to increase its estimate of fourth-quarter writedowns in the next few months if the performance of mortgage securities worsens. Citigroup has predicted a writedown of $8 billion to $11 billion.
J.C. Penney lost $2.40 to $44.33, the lowest since February 2005. The company reported its first profit decline in three quarters after sales fell. Net income in the third quarter through Nov. 3 shrank to $1.17 a share from $1.26 a year earlier, the company said. J.C. Penney expects fourth-quarter profit of $1.65 to $1.80 a share, down from a previous forecast of $2.41.
Dillard's Inc., the U.S. department-store chain that operates mostly in southern states, lost 75 cents to $18.28. Nordstrom Inc., a Seattle-based upscale department-store chain, dropped $1.01 to $33.50.
`Great Deal of Uncertainty'
NovaStar Financial Inc. plunged $2.51, or 55 percent, to $2.08. The former subprime lender posted a wider quarterly loss and said it doesn't plan to reenter mortgage banking until the market improves.
``There is still a great deal of uncertainty about the outlook for the financial sector,'' said Darren Winder, London- based head of macro and equity research at JPMorgan Cazenove Ltd. ``It remains to be seen what the full scale of the fallout from the deterioration of credit conditions is likely to be, what impact it is going to have on the broader economy.''
Industrials, Commodities Slump
The S&P 500 Industrials Index fell 1.3 percent, led by declines in General Electric Co. and Tyco International Ltd.
GE, the world's third-biggest company by market value, dropped for a second day after a short-term bond fund run by GE Asset Management returned money to investors at 96 cents on the dollar. The fund lost about $200 million, mostly on mortgage- backed securities. The shares slipped 70 cents to $38.31.
Tyco, the world's biggest provider of security systems through its ADT unit, fell $1.43 to $37.88 after fourth-quarter profit fell 36 percent on costs from June's split into three public companies and to pay for job cuts.
Commodities producers slumped after oil and metals prices fell.
Exxon Mobil Corp., the biggest U.S. energy company, decreased $1.82 to $84.49, the lowest since August. Chevron Corp., the No. 2, lost $1.99 to $84.16. Crude oil for December delivery fell 66 cents, or 0.7 percent, to $93.43 a barrel in New York after an Energy Department report showed that U.S. oil and gasoline inventories unexpectedly rose.
'Crack Spread'
The S&P 500 Energy Index dropped 2.3 percent today. The gauge of 34 companies has declined 9.7 percent from an all-time high on Oct. 16 as oil prices retreated from a record. Energy producers also fell after the profit margin, or crack spread, for turning three barrels of crude oil into two barrels of gasoline and one of heating oil fell 5.5 percent to $7.8502 a barrel.
Raw-materials producers in the S&P 500 fell 2.2 percent as a group after prices for gold and copper plunged. Gold fell 3.4 percent on speculation the euro's rally against the dollar may end, reducing the appeal of the precious metal as an alternative investment. Copper dropped 6.4 percent as mines in Chile, the world's biggest producer of the metal, opened after an earthquake yesterday disrupted power supplies.
Freeport-McMoRan Copper & Gold Inc., the world's largest publicly traded copper producer, lost $4.23 to $99.77. Newmont Mining Corp., the second-biggest gold producer, declined $2.40 to $48.80.
Consumer prices in the U.S. rose 0.3 percent in October, led by higher fuel costs, the Labor Department said today. The rise in the cost of living in October was the same pace as the prior month and matched economists' forecasts. So-called core consumer prices, which exclude fuel and food costs, gained 0.2 percent for a fifth month.
Economy Watch
The number of Americans filing first-time claims for unemployment benefits increased more than forecast last week. Initial jobless claims rose by 20,000 to 339,000 in the week ended Nov. 10, from a revised 319,000 the prior week, the Labor Department said.
The New York Federal Reserve Bank's general economic index this month fell less than expected to 27.4 from 28.8 in October, the New York Fed said today. Readings higher than zero signal expansion. A gauge of expectations for business in the next six months fell to the lowest since the month of the Sept. 11 terrorist attacks.
Manufacturing growth in the Philadelphia region unexpectedly accelerated this month as orders strengthened, the Philadelphia Fed's general economic index showed. Executives' outlook for the next six months turned more pessimistic.
Commercial Paper
The amount of U.S. asset-backed commercial paper was little changed in the latest week. Debt maturing in 270 days or less and backed by mortgages, credit-card loans and other assets fell $574 million to a seasonally adjusted $853.3 billion for the week ended yesterday, the Fed said today.
The S&P 500 has tumbled 7.3 percent from an all time high of 1,565.15 on Oct. 9 after shares of banks and brokerages retreated on concern about mounting losses from mortgage-related securities.
The Russell 2000 Index, a benchmark for companies with a median market value of $608.2 million, dropped 1.4 percent to 771.60. The Dow Jones Wilshire 5000 Index, the broadest measure of U.S. shares, declined 1.3 percent to 14,663.91. Based on its retreat, the value of stocks decreased by $234.2 billion.
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