U.S. Stocks Retreat as Earnings Concern Overshadows Stimulus
By Lynn Thomasson
Nov. 10 (Bloomberg) — U.S. stocks dropped as a worsening outlook for companies from Goldman Sachs Group Inc. to Google Inc. overshadowed China’s $586 billion stimulus plan and pledges by the world’s biggest nations to bolster economic growth.
Goldman fell 8.5 percent after Barclays PLC said the stock- market rout may drag the firm to its first quarterly loss since going public. General Motors Corp., which last week said it may run out of cash, lost almost a quarter of its value after Deutsche Bank AG said the automaker’s shares may go to zero. Google Inc., the biggest seller of online ads, sank to a three- year low on concern fourth-quarter revenue growth will stall.
“The market doesn’t really have a handle on the depth of the recession’s duration,” said John Wilson, co-director of equity strategy at Memphis, Tennessee-based Morgan Keegan, which manages $120 billion. “There’s still a lot of fear out there.”
The Standard & Poor’s 500 Index retreated 1.3 percent to 919.21, extending last week’s 3.9 percent slide. The Dow Jones Industrial Average lost 73.27 points, or 0.8 percent, to 8,870.54. The Nasdaq Composite Index slipped 1.9 percent to 1,616.74. Almost three stocks dropped for each that advanced on the New York Stock Exchange.
The decline in U.S. equities halted a global rally that sent the MSCI World Index up as much as 2.6 percent after China announced its stimulus package and the Group of 20 nations said it will act “urgently” to bolster growth while calling on governments to cut interest rates. The MSCI gauge of 23 developed nations ended the day little changed.
China’s stimulus “will support growth in the medium-term but we still expect a slowing in the near-term,” RBC Capital Markets strategist Nick Chamie wrote in a note to clients today.
President-elect Barack Obama may inherit the worst U.S. recession since 1982, according to economists’ estimates, putting pressure on the Democrat to assemble a response and name his economic team. The S&P 500 has lost 38 percent this year.
Goldman, once Wall Street’s most profitable securities firm, slumped $6.57 to $71.21 and reached as low as $68.51. The company may post a fourth-quarter loss of $2.50 a share, Barclays said. Analysts at Merrill Lynch & Co., UBS AG, JPMorgan Chase & Co. and Morgan Stanley also forecast a deficit for the New York-based firm.
Goldman identified six equity analysts fired by the firm today, including William Tanona, who covered companies such as JPMorgan Chase & Co., and Deane Dray, who followed General Electric Co. The company, now a commercial bank, cut 3,200 jobs last week.
Financials Lead Retreat
Financial shares fell the most among S&P 500 industries with a 4.4 percent loss. HSBC Holdings Plc, Europe’s biggest bank, predicted climbing loan defaults and set aside a more- than-estimated $4.3 billion to cover bad loans in the U.S.
American Capital Strategies Ltd. had the steepest drop in the benchmark stock index, plunging 43 percent to $7.87. The asset manager that invests in management buyouts suspended its dividend for 2008, posted a loss for the third quarter and said it would buy European Capital Ltd., a fund it spun off in October 2005.
Financials, which began the year as the biggest part of the S&P 500, slid behind health-care companies to become the third- largest industry in the benchmark index for U.S. equities.
The 53 percent decline in the S&P 500 group of banks, brokerages, insurers and other financial firms this year shrank the industry’s market value to less than 14 percent of the total index. A measure of health-care stocks make up 14.3 percent of the S&P 500 and are the second-best performing group with a 25 percent loss this year. Technology companies have the biggest weighting in the S&P 500 at 15.3 percent.
Google slumped $12.36 to $318.78, its lowest price since October 2005. Barclays analysts cut fourth-quarter revenue estimates for the company, saying the search-engine business has deteriorated.
Third-quarter earnings shrank 19 percent for S&P 500 companies that reported results so far, according to Bloomberg data. Profits for 2008 will decrease an average 8.5 percent and rise 12 percent next year, based on a survey of analysts’ estimates.
“Expectations for 2009 are still too optimistic,” said Michael Mullaney, a Boston-based money manager at Fiduciary Trust Co., which oversees $10 billion. “We don’t think we’ve turned the corner yet.”
General Motors Corp. tumbled $1.00 to $3.36. Deutsche Bank’s Rod Lache lowered his recommendation on the automaker, which tumbled 25 percent last week, to “sell” from “hold.”
“Even if GM succeeds in averting a bankruptcy, we believe that the company’s future path is likely to be bankruptcy- like,” the analyst wrote in a research report.
The Chicago Board Options Exchange Volatility Index added 6.9 percent to 59.98. The VIX measures the cost of using options as insurance against declines in the S&P 500.
Utilities slumped 2.9 percent for the second-steepest decline among S&P 500 industries. NRG Energy Inc. rejected an unsolicited $6.1 billion takeover offer from Exelon Corp., the largest U.S. utility, because of a recent downgrade of Exelon’s credit rating.
NRG Energy, the second-largest power producer in Texas, lost 5.5 percent to $22.56. Exelon fell 6.2 percent to $50.49.
Circuit City Bankruptcy
Circuit City Stores Inc. was halted after the company filed for bankruptcy protection, becoming the biggest retail casualty of the economic slowdown and credit crisis. The 59-year-old retailer, with 721 stores in the U.S., plunged 98 percent this year to less than $1 a share.
Developers Diversified Realty Corp., the landlord for the most Circuit City stores of any real estate investment trust, sank 25 percent to $7.25. Kimco Realty Corp., the largest U.S. owner of community shopping centers, slid 10 percent to $19.
American International Group Inc. rallied 8.1 percent to $2.28 after the government almost doubled the size of its bailout of the insurer to $150 billion. The U.S. will reduce the original $85 billion loan that saved AIG in September to $60 billion, buy $40 billion of preferred shares, and purchase $52.5 billion of mortgage securities owned or backed by the company, according to the Federal Reserve.
“This action was necessary to maintain the stability of our financial system,” Neel Kashkari, head of the Treasury’s bank rescue program, said at a conference in New York today. “Although progress has been made in the last month, our capital markets remain fragile and confidence remains shaky.”
AIG lost $24.5 billion, or $9.05 a share, in the period ended Sept. 30, compared with profit of $3.09 billion, or $1.19, a year earlier, AIG said.
McDonald’s Corp., the world’s largest restaurant company, added 1.8 percent to $56.48. Global sales at restaurants open at least 13 months climbed 8.2 percent, paced by Europe’s gain of 9.8 percent compared with a year earlier. U.S. same-store sales increased 5.3 percent, the company said, as consumers pinched by rising food bills and unemployment bought double cheeseburgers and other $1 items.
Even after cutting estimates at the fastest rate ever, Wall Street strategists still need the biggest year-end rally in the history of the Standard & Poor’s 500 Index for their forecasts to come true.
The average Wall Street estimate calls for the S&P 500 to break out of a bear market and surge almost 22 percent to 1,118 by Dec. 31 — more than twice as much as the biggest-ever advance to close out a year, according to data compiled by Bloomberg.
Strategists were also calling for a record gain at this time last year, after the first quarterly decline in corporate profits dragged the S&P 500 down from its high of 1,565.15 on Oct. 9. It never materialized and stocks have dropped 41 percent since.