U.S. Stocks Fall on Credit Concern; Citigroup, Fannie Retreat

By Elizabeth Stanton


Nov. 26 (Bloomberg) -- U.S. stocks fell, pushing the decline from this year's record highs to more than 10 percent, on concern that mounting mortgage losses will lead banks to reduce lending.

Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co., the three biggest U.S. banks, retreated after Goldman Sachs Group Inc. said HSBC Holdings Plc faces $12 billion in additional writedowns. Fannie Mae and Freddie Mac, the largest U.S. mortgage-finance companies, tumbled after UBS AG said higher credit costs will cause earnings growth to slow. Target Corp. and Macy's Inc. led retailers lower on concern consumers will spend less on holiday gifts.

The Standard & Poor's 500 Index dropped 33.48, or 2.3 percent, to 1,407.22, leaving the benchmark down 0.8 percent in 2007. The Dow Jones Industrial Average tumbled 237.44, or 1.8 percent, to 12,743.44, paring its gain for the year to 2.3 percent. The Nasdaq Composite Index lost 55.61, or 2.1 percent, to 2,540.99 and is up 5.2 percent in 2007. Almost six stocks fell for every one that rose on the New York Stock Exchange.

``There's still a lot of fear out there because of the fact that this credit contagion is starting to widen out,'' said Larry Adam, chief investment strategist at Deutsche Bank Alex. Brown in Baltimore, which manages $58 billion. ``You're seeing increasing amounts of write-offs by banks, with some of them saying that they're going to be larger for the fourth quarter than the third.''

The S&P 500 extended its worst monthly drop in five years as all 10 of its main industry groups fell. Financial shares dropped to the lowest since April 2005 after the Federal Reserve said ``heightened pressures in money markets'' prompted it to take steps to increase the cash available to banks for loans.

10 Percent Drop

Treasuries rallied, pushing 10-year yields to the lowest level since March 2004, as investors sought the safety of U.S. government debt.

Both the S&P 500 and Dow average have fallen 10.1 percent from their Oct. 9 records, marking a so-called correction in the U.S. stock market. The S&P 500 last fell at least 10 percent from a high in the period ended March 11, 2003, or 1,721 calendar days ago. Today's decline ended the longest streak without a correction in the S&P 500 since the 2,573-day stretch ended October 27, 1997, according to data compiled by Birinyi Associates Inc. and Bloomberg News.

Bank of America dropped $1.27 to $41.88. JPMorgan fell $1.49 to $40.46. Lehman Brothers Holdings Inc., the largest U.S. underwriter of mortgage bonds, retreated $3.40 to $57.46. Merrill Lynch & Co., the biggest U.S. brokerage, decreased $2.31 to $51.23.

`Rudderless Ship'

Citigroup, whose Chief Executive Officer Charles O. ``Chuck'' Prince stepped down Nov. 4, posted the steepest decline in the 30-member Dow average after CNBC said it may cut as many as 45,000 jobs. The biggest U.S. bank by assets said ``reports on specific numbers are not factual.'' Its shares slipped $1.95, or 6.2 percent, to a five-year low of $29.75.

``Without a CEO it's kind of like a rudderless ship,'' said Peter Kovalski, who helps manage $12 billion at Alpine Woods Capital Investors in Purchase, New York. ``Since they don't have a spokesman who can go out and talk to the investment community, they're defenseless against the rumors that keep swirling around, whether its write-offs or layoffs.''

Banks and brokerages declined after HSBC, Europe's largest bank, said it will bail out two structured investment vehicles by taking on $45 billion of assets to avoid a fire sale of bond holdings. Banks are trying to prevent SIVs, companies that borrow short-term to invest in higher-yielding securities, from collapsing and forcing fund managers to sell their $320 billion of assets.

Bank of America, Citigroup and JPMorgan are trying to persuade competitors to help finance an $80 billion ``SuperSIV'' fund to bail out the companies.

Fannie, Freddie

Fannie Mae and Freddie Mac were cut to ``neutral'' from ``buy'' by analysts at UBS AG, who lowered the price estimate on Fannie Mae to $31 from $88 and Freddie Mac to $28 from $87.

Fannie Mae dropped $3.28 to $28.92. Freddie Mac fell $1.97 to $24.50.

Countrywide Financial Corp. fell $1.01, or 10 percent, to $8.64 after Senator Charles Schumer urged the regulator of the Federal Home Loan Bank system to examine the risks posed by cash advances to the largest U.S. mortgage lender. The system's Atlanta bank had made $51.1 billion in advances to Countrywide as of Sept. 30, representing 37 percent of the bank's total outstanding advances, Schumer wrote to Federal Housing Finance Board Chairman Ronald Rosenfeld, citing U.S. Securities and Exchange Commission filings.

Financial shares in the S&P 500 dropped 4.1 percent as a group and contributed the most to the overall index's decline.

Target, Macy's

Target, the second-largest discount chain, fell $1.95 to $55.22. Macy's lost $1.73 to $28.30.

Circuit City Stores Inc., the second-largest U.S. consumer electronic chain, fell 52 cents to $5.99. Its 19 percent gain on Nov. 23, the first day of holiday shopping season, was the biggest in at least 27 years.

The National Retail Federation said 147 million customers visited stores on the day after Thanksgiving, up 4.8 percent from a year earlier, while shoppers spent 3.5 percent less per person.

``In general it's a pretty pessimistic market,'' said Bartley Barnett, head of listed trading at Memphis-based Morgan Keegan Inc., which has $120 billion in client assets. ``It seems like there are two sides to every story and everyone's leaning to the negative side right now.''

Fed Adds Cash

The Federal Reserve today announced it would add cash reserves to the banking system for long-term periods spanning the end of the year, a step aimed at keeping the overnight lending rate between banks in line with the central bank's 4.5 percent target. The rate exceeded the target seven of the past eight days, a sign banks are reluctant to lend.

The Fed lowered its target for the federal funds rate at its past two meetings, and is forecast by traders of interest-rate futures to reduce it at each of its next three meetings.

The S&P 500 has fallen 9.2 percent in November, its biggest monthly decline since sliding 11 percent in September 2002. Financial companies declined the most in the month, dropping more than 16 percent.

A poll of 50 economists released last week by the National Association for Business Economics found that nine put the odds of a recession in the next 12 months at 50 percent or higher. In September, five of 46 economists held that view.

Slowing Growth

The biggest slump in residential real estate since 1991, resulting turmoil in financial markets and higher energy prices will slow the U.S. economy's growth rate to 1.5 percent during the fourth quarter, the economists said.

A gauge of homebuilders, including Centex Corp. and D.R. Horton Inc., fell 6.4 percent to a four-year low after Citigroup's investment research arm said real-estate prices may continue to fall. Shares of Centex slipped $1.58 to $18.38 while D.R. Horton lost 80 cents to $10.58.

Apple Inc., maker of the iPod, iPhone and Macintosh computers, added $1 to $172.54. Goldman Sachs recommended investors buy shares of the company after a ``strong start'' to the so-called Black Friday weekend. ``Apple will have multiple winners once again this holiday season, with Macs a particular standout,'' wrote analysts David Bailey and Laura Conigliaro.

Cisco Systems Inc., the world's largest maker of networking equipment, fell $1.19 to $27.49 after an analyst said investors overlooked slowing sales in developing countries when it reported earnings. Investors instead focused on a decline in U.S. orders, said John Marchetti, an analyst with Morgan Stanley in New York who recommends buying the shares.

Boeing, Deere

Boeing Co. rose 39 cents to $89.93 for the second-biggest gain in the Dow average after Wachovia Capital Markets LLC advised investors to buy shares of the world's second-largest maker of commercial planes because of rising global demand. Analyst Gary Liebowitz said Boeing has become less reliant on U.S. airlines and will benefit from global economic growth of 4 percent next year and 4.1 percent in 2009, based on Wachovia's forecasts.

Deere & Co. added $1.82 to $158.46 after Banc of America raised its recommendation on the world's largest maker of tractors and harvesters to ``buy'' from ``neutral,'' increasing its price estimate 43 percent to $186 per share. ``Global agriculture fundamentals -- rising farm income, relatively high crop prices, low crop inventories, and bio-fuel-related demand -- all suggest another strong year of farm equipment sales in 2008,'' analysts including Seth Weber in New York wrote in a note published today.

The Russell 2000 Index, a benchmark for companies with a median market value of $573.5 million, fell 2.6 percent to 735.07. The Dow Jones Wilshire 5000 Index, the broadest measure of U.S. shares, lost 2.1 percent to 14,208.95. Based on its drop, the value of stocks decreased by $386.6 billion.