U.S. Markets Wrap: Stocks, Commodities Slide as Dollar Rebounds

By Rita Nazareth


Oct. 26 (Bloomberg) -- U.S. stocks slid, erasing an early rally, on concern lawmakers will phase out a tax credit for homebuyers and Bank of America Corp. will have to sell shares to pay back its government bailout. The dollar rebounded from a 14- month low against the euro and oil wiped out an early advance.

All 12 shares in a gauge of homebuilders dropped as senators discussed reducing an $8,000 tax credit for first-time buyers. Bank of America sank 5.1 percent on speculation the government will force the bank to raise more capital, while Fifth Third Bancorp, SunTrust Banks Inc. and U.S. Bancorp lost at least 3.2 percent on downgrades from analyst Dick Bove. Treasuries fell, with 10-year yields touching a two-month high.

The Standard & Poor’s 500 Index tumbled 1.2 percent to 1,066.95 at 4:04 p.m. in New York. The Dow Jones Industrial Average retreated 104.22 points, or 1.1 percent, to 9,867.96. Almost five stocks dropped for each that rose on the New York Stock Exchange.

“Plenty of news for traders to sell on,” said James Paulsen, who helps oversee $375 billion as chief investment strategist at Wells Capital Management in Minneapolis. “We’ve still got a rise in loan losses. Some banks will probably have to raise further capital. And on the tax-credit front, we already know we won’t have that forever. But after a nice stock market run, a lot of players wanted to have a pause.”

Equities rallied earlier, sending the S&P 500 up as much as 1.1 percent, as investors grew more confident that better-than- estimated profits will fuel further equity gains. About 80 percent of companies in the S&P 500 that reported third-quarter results have topped analysts’ earnings projections, exceeding the record pace of 72.3 percent for the period ended in June.

Builders Slump

A gauge of 12 homebuilders in S&P indexes slumped 3.4 percent, led by declines of at least 3.8 percent in Pulte Homes Inc. and D.R. Horton Inc. Senate leaders are negotiating to extend and gradually reduce the housing tax credit through 2010, Senator Bill Nelson said. The credit was set to expire at the end of November.

“The phase out is worse than a straight extension and probably worse for housing than the consensus,” ISI Group Inc. analysts said in a note

Banks fell 3.3 percent collectively, the steepest decline in the S&P 500 among 24 industries, after Bove downgraded Fifth Third Bancorp, SunTrust and U.S. Bancorp on concern loan losses will remain high.

Fifth Third, Ohio’s largest lender, retreated 7.9 percent to $9.52. SunTrust, the seventh-largest U.S. bank, lost 5.4 percent to $19.85, while Minneapolis-based U.S. Bancorp dropped 3.2 percent to $24.15. Bank of America, the largest U.S. lender by assets, sank 5.1 percent to $15.40.

‘Meaningfully Harm’

“The government apparently wants the bank to raise $45 billion in the market from a new capital offering before it will let the bank redeem the TARP preferreds,” Bove wrote in a note dated Oct. 23, referring to the preferred stock purchased by the government as part of the Troubled Asset Relief Program. “Selling more stock would meaningfully harm Bank of America’s shareholders. If the bank did what the government wants it would have to sell 3 billion shares or increase its share base by 35 percent.”

Bank of America pared an earlier slide of as much as 7.1 percent after Citigroup Inc. added the stock to its “top picks” list, saying it is “very attractive” after the sell- off.

‘Serious Challenges’

Federal Deposit Insurance Corp. Chairman Sheila Bair said that banks continue to face “serious challenges.” Bair also said tapping a Treasury Department credit line to replenish funds depleted by a surge of bank failures would harm her agency and the banking industry. She made the comments today during a speech at an American Bankers Association convention in Chicago.

Monsanto Co. fell 6 percent to $70.69, its biggest drop since May. Goldman Sachs Group Inc. lowered its earnings estimates for the world’s largest seed producer, citing company discounts on corn-seed prices.

Producers of raw materials and energy dropped 2.5 percent and 1.5 percent, respectively, after the dollar rose, curbing demand from investors who buy commodities as a hedge against inflation. Copper prices retreated from the highest level in almost 13 months, while crude oil dropped 2.3 percent, the most in a month, to below $79 a barrel. Gold fell after gaining for four straight weeks.

Commodity Producers Slump

Newmont Mining Corp., the largest U.S. gold producer, dropped 3.5 percent to $43.34. Freeport-McMoRan Copper & Gold Inc., the world’s largest publicly traded copper producer, declined 2.3 percent to $79.48. ConocoPhillips, the second- largest U.S. refiner, lost 2.4 percent to $50.74.

The U.S. Dollar Index, a measure of the currency against those of six major trading partners, rose 0.7 percent, erasing an earlier loss.

Newspaper shares slumped after the Audit Bureau of Circulations said that four of the top five U.S. newspapers, including the New York Times, the Washington Post and Gannett Co.’s USA Today, posted average weekday circulation declines. The Wall Street Journal’s circulation rose.

New York Times Co. slumped 6.2 percent to $10.08, while Gannett dropped 7.1 percent to $12.28.

The S&P 500’s rebound of as much as 62 percent since March 9 propelled the index to a one-year high on Oct. 19 and pushed its valuation to more than 20 times the reported operating income of its companies, the most expensive level since 2004.

Robert Doll, chief investment officer of equities at BlackRock Inc., said in an interview with CNBC that he expects some “digestion” in the market after recent gains. He also suggested health-care stocks may be a “defensive” strategy for investors, particularly those in oil services.

‘Wait-and-See’

“We’ve already had a good move,” said Richard Sichel, chief investment of officer at Philadelphia Trust Co. in Philadelphia, which manages $1.3 billion. “Some investors are taking a wait-and-see attitude. Certain companies have been richly rewarded as corporate earnings beat expectations.”

The S&P 500 is about 40 percent overvalued and headed for a decline as central banks pull back on securities purchases that pushed up asset prices, according to economist Andrew Smithers. Asset purchases have doubled the size of the Federal Reserve’s balance sheet to $2.1 trillion since the start of the current financial crisis.

In his March 2000 book “Valuing Wall Street,” co-authored with economist Stephen Wright, Smithers argued that U.S. equities were overvalued and should be sold. The S&P 500 then plunged 49 percent over 2 1/2 years.

Technical Watch

The S&P 500 may decline as measures based on the ratio of rising stocks to falling shares are “not confirming” the rally, according to technical analysts at Bank of America’s Merrill Lynch Global Research who base forecasts on price and volume charts.

The Bloomberg Cumulative Advance-Decline Line for New York Stock Exchange shares, which is calculated by subtracting the number of falling stocks from the number of rising stocks, fell 6.7 percent to 18,838 on Oct. 23, the lowest level since Oct. 7.

“The advance-decline diffusion index shows a strong bearish divergence off the August, September and October highs,” Mary Ann Bartels and Stephen Suttmeier wrote in a report today. “This is a sign that the strong uptrends for the advance-decline lines have become overextended and that breadth may begin to narrow.”

Better-than-estimated earnings at companies from Verizon Communications Inc. to Corning Inc. also helped fuel earlier gains in stocks today. Verizon, the second-largest U.S. phone company, erased a gain of as much as 0.8 percent and fell 0.7 percent to $28.64 as the overall market turned lower. Corning, the world’s biggest maker of glass for flat-panel televisions, declined 0.9 percent to $15.51 after earlier rising 2.1 percent.

‘Seen the Bottom’

“We’ve seen the bottom in terms of prices with respect to stocks,” Brian G. Belski, chief investment strategist at Oppenheimer & Co. Inc, told Bloomberg Television. “We’ve seen it in earnings and now the economy will turn as a result.”

Microsoft Corp. had the biggest gain in the Dow, climbing 2.4 percent to $28.68. JPMorgan Chase & Co. raised its share price estimate by 50 percent to $30 after boosting its earnings estimates for the December quarter and fiscal years 2010 and 2011, citing strong performance.

American Express Co. had the second-steepest gain in the Dow, rising 0.9 percent to $34.88. The biggest U.S. credit-card issuer by purchases was raised to “buy” from “hold” at Stifel Nicolaus & Co., which also boosted earnings estimates and said the company is best positioned for “new normal.”

Treasuries fell as the U.S. began to sell a record $123 billion of notes to fund its stimulus program and record deficits. The yield on the 10-year note increased eight basis points, or 0.08 percentage point, to 3.57 percent. The yield touched 3.58 percent, the highest level since Aug. 24.