U.S. Stocks Drop; S&P 500, Dow Post Worst Retreats Since 1937

Ben S. Bernanke, chairman of the U.S. Federal Reserve, speaks on a television above a trader in the S&P pit at the Chicago Board of Trade in Chicago, on Tuesday Oct. 7, 2008. Photographer: Joshua Lott/Bloomberg News

Oct. 7 (Bloomberg) — U.S. stocks fell, sending the Standard & Poor’s 500 Index below 1,000 for the first time since 2003, on speculation banks and real-estate companies are running short of money as the credit crisis worsens.

Bank of America Corp. tumbled 26 percent after cutting its dividend in half and saying it plans to sell $10 billion in common stock to brace for a recession. Morgan Stanley, KeyCorp and JPMorgan Chase & Co. slid more than 10 percent as investors shrugged off signs the Federal Reserve will reduce interest rates. General Growth Properties Inc., a mall owner, plunged 42 percent on concern it won’t be able to repay debt.

The S&P 500 slid 60.66 points, or 5.7 percent, to 996.23, extending its 2008 tumble to 32 percent in the market’s worst yearly slump since 1937. The Dow Jones Industrial Average dropped 508.39, or 5.1 percent, to 9,447.11, giving it a 29 percent retreat in 2008 that would also be the worst in 71 years. The Nasdaq Composite Index lost 5.8 percent to 1,754.88.

“We’ve approached the edge of the cliff,” Leon Cooperman, 65, who manages $6 billion at hedge fund Omega Advisors Inc., said at the Value Investing Congress in New York. “Do we go over the cliff or begin to recede? History says we recede, but there’s no guarantee. This is the most difficult financial environment I’ve lived through.”

The S&P 500 Financials Index slumped 12 percent to below its lowest level since 1997 even after Fed Chairman Ben S. Bernanke signaled he is ready to cut interest rates. The S&P 500’s 15 percent retreat since Sept. 30 is the third-steepest five-day drop on record, according to Bespoke Investment Group LLC, a Harrison, New York-based research firm. The bigger slumps occurred in 1932.

Levkovich Cuts Forecast

The slump that pushed the S&P 500 to an almost five-year low yesterday prompted Tobias Levkovich, chief U.S. equity strategist at Citigroup Inc., to lower his year-end forecast for the index by 19 percent to 1,200. His previous target of 1,475 had been the most bullish of nine forecasts in a Bloomberg survey.

Bank of America plunged $8.45 to $23.77 after the lender slashed its dividend to 32 cents and announced plans to raise at least $10 billion in common stock as it braces for an extended recession. Chief Executive Officer Kenneth Lewis said the U.S. economy slowed in the past 45 days with little prospect for immediate improvement.

The bank also released its third-quarter earnings two weeks early. Profit declined 68 percent to $1.18 billion, or 15 cents a share. Analysts predicted earnings of 61 cents a share for the quarter, according to the average of 20 estimates compiled by Bloomberg.

`Credit Deterioration’

“The market is responding to the fact that there was credit deterioration in their businesses,” Erick Maronak, the New York- based chief investment officer at Victory Capital Management, said of Bank of America. Victory Capital oversees $66 billion.

Merrill Lynch & Co., which is being acquired by Bank of America, sank 26 percent to $18 for the steepest decline since October 1987. JPMorgan lost 11 percent to $39.32, and KeyCorp tumbled 10 percent to $10.61.

Morgan Stanley declined as much as 40 percent on concern its sale of a stake to Japan’s Mitsubishi UFJ Financial Group Inc. would fall through. The stock pared that drop, falling 25 percent to $17.65 at the close, after Morgan Stanley spokesman Mark Lane said the deal is still “on track.”

Goldman Sachs Group Inc.’s index of stocks with high hedge fund ownership dropped 7.1 percent to the lowest level since August 2003. All 49 companies in the measure declined, giving the index a 38 percent loss for 2008.

Disney Declines

Walt Disney Co. retreated 6 percent to $26.57, the lowest price since February 2006, after Merrill Lynch downgraded the world’s biggest theme-park operator to “underperform” from “neutral,” citing concern “about the risk to earnings estimates in the current economic climate.”

General Growth Properties Inc. led an index of real-estate investment trusts in the S&P 500 to a 8.9 percent drop, sending the group to a four-year low. The mall owner at risk of not being able to refinance debt coming due this year fell 42 percent to $4.50, extending its slide over the past year to 92 percent.

Apartment Investment & Management Co., a REIT specializing in apartments, fell 27 percent to $25.50.

Tomorrow is the last day of a Securities and Exchange Commission rule banning short sales in more than 980 financial companies. Since it was announced Sept. 18, companies covered by the rule are down an average of 16 percent, according to data compiled by Bloomberg. The S&P 500 lost 17 percent during the period, while commercial banks in the gauge are down 23 percent.

GM, Ford Slump

General Motors Corp. fell 11 percent to $7.56, the lowest price since the 1950s. The automaker’s European unit plans to reduce production by about 40,000 vehicles by the end of the year as credit-market turmoil causes a drop in car sales.

Ford Motor Co., the second-largest U.S. automaker after GM, tumbled 21 percent to $2.92, the lowest price since April 1983.

Advanced Micro Devices Inc., the chipmaker struggling to compete with Intel Corp., jumped 8.5 percent to $4.59 after saying Abu Dhabi will pay $700 million for a stake in a new company that will own two plants in Germany and build another in New York. The new company, which will assume $1.2 billion of AMD’s debt, will receive as much as $6 billion from Abu Dhabi to expand the factories and get $1.4 billion in operating capital. Abu Dhabi will also pay $314 million to double its stake in AMD to 19 percent.

Commercial Paper Fund

Stocks opened higher after the Federal Reserve invoked emergency powers to create a special fund to buy commercial paper, which is short-term debt issued by corporations to fund operations.

American Express Co., the largest U.S. credit-card company by purchases, dropped 6.1 percent to $28.25. It had surged as much as 8.1 percent after the Fed’s announcement. General Electric Co., whose businesses include jet engines, health care and television programming, added as much as 5.9 percent before closing down 5.1 percent at $20.30.

Both American Express and GE are among the biggest U.S. direct issuers of commercial paper. In the three weeks ended Oct. 1, finance-company commercial paper outstanding fell 16 percent to $683.4 billion, Fed data show.

“A connection is being made between the freeze-up in the credit markets and the drop-off in economic activity we’ve seen,” said Robert Stimpson, a money manager at Oak Associates Inc. in Akron, Ohio. “A step to loosen credit practices and allow companies to borrow again might forestall the economic weakness we’ve seen flow through” to employment.

Earnings Watch

Earnings at S&P 500 companies probably dropped on average of 5.6 percent in the third quarter, according to analysts’ estimates compiled by Bloomberg.

Financial companies are forecast to lead the drop in profits with a 64 percent decrease, followed by an 11 percent slide in earnings at retailers, hoteliers, restaurant chains and other so- called consumer discretionary companies.

The S&P 500 has tumbled 36 percent from its record a year ago. Based on estimated profit, the S&P 500’s price-to-earnings ratio is 11.9.

“On very conservative earnings expectations for the next 12 months this market at minimum is starting to look reasonably valued,” Leo Grohowski, chief investment officer for the wealth management unit of Bank of New York Mellon Corp., told Bloomberg Television. The unit manages $162 billion. “Times when it feels almost irresponsible to shore up equities, they tend to be good buying opportunities historically.”

To contact the reporters on this story: Elizabeth Stanton in New York at [email protected]; Eric Martin in New York at [email protected].

Last Updated: October 7, 2008 17:31 EDT
By Elizabeth Stanton and Eric Martin

Source: Bloomberg

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