Wall Street Turns South

Most U.S. Stocks Fall as Earnings Concern Overshadows Bank Plan

Oct. 14 (Bloomberg) — Most U.S. stocks fell a day after the market’s biggest rally since the 1930s as a worsening outlook for earnings forced investors to look beyond a $2 trillion global push to rescue banks.

PepsiCo lost as much as 14 percent, the most since October 1987, after lowering its profit forecast as customers cut back on snacks and soft drinks. Microsoft and Intel slid more than 5 percent as analysts said demand for computers is slowing. Morgan Stanley, Citigroup Inc. and Merrill Lynch & Co. added more than 19 percent, sending banking shares to a third straight advance.

“Notwithstanding the government and Treasury’s actions focusing on financials, the general economic environment has deteriorated quite a bit in the last five or six weeks,” said Jonathan Armitage, head of U.S. large-cap equities at the American unit of Schroders, the U.K. manager of $259 billion. “You’re just seeing different parts of the equity market reacting to that.”

Almost two stocks fell for each that rose on the New York Stock Exchange. The Standard & Poor’s 500 Index slipped 0.23 point to 1,003.12 at 3:48 p.m. in New York. The Dow Jones Industrial Average decreased 43.65, or 0.5 percent, to 9,343.96 after a 936-point rally yesterday. The Nasdaq Composite decreased 47.32, or 2.6 percent, to 1,796.93.

The S&P 500 pared its biggest one-day advance since 1939 and the Dow trimmed to its best rally since 1933. The S&P 500 is down 32 percent in 2008 as losses and writedowns from mortgage- related investments at financial firms worldwide top $635 billion. The S&P 500 was valued at 19 times the earnings of its companies at the start of trading today, 2.5 percent below its average over the past five years.

PepsiCo, Coca-Cola Slump

PepsiCo fell 12 percent to $54.36. The world’s largest snack maker said it will cut 3,300 jobs after posting profit that fell more than analysts estimated and lowering its forecast for the rest of the year.

Coca-Cola Co. tumbled 6.8 percent to $44.06 for the second- steepest drop in the Dow average. The biggest soft-drink company has fallen every day except twice in October.

The S&P 500 Consumer Staples Index slipped 2.5 percent. The measure of grocery stores, cigarettes makers and food companies is this year’s best performer with a 15 percent loss, half the drop in the broader S&P 500.

Once companies “start getting weakness in the revenue line, profitability will start to deteriorate,” said Mark Demos, a Minneapolis-based fund manager at Fifth Third Asset Management, which oversees $21 billion. “What people are fearing is how bad is it going to get.”

Microsoft, Intel

Microsoft declined 5.5 percent to $24.10. Credit Suisse Group AG reduced its earnings forecasts over the next two years. The company will earn $2.10 a share in fiscal 2009, analyst Philip Winslow said in a research note, down from his previous forecast of $2.13. Profit in the following year will be $2.44 a share, less than a prior estimate of $2.53.

Intel, which releases quarterly results after U.S. exchanges close today, slumped 6.5 percent to $15.89. Friedman Billings Ramsey Group Inc. said earnings estimates are likely too high for the world’s biggest chipmaker because of decreased desktop computer demand.

The S&P 500 Information Technology Index declined 3 percent.

Commodities Slump

Freeport-McMoRan Copper & Gold Inc. dropped 10 percent to $40.66. The world’s largest publicly traded copper producer may defer projects to conserve cash amid plunging metal prices and a freeze in credit markets, the company’s Chief Executive Officer Richard Adkerson said in an interview in London.

Alcoa Inc. fell 8.5 percent to $12.65. The largest U.S. aluminum company was downgraded to “equalweight” from “overweight” at Barclays Capital on concern profit margins will shrink as economic growth weakens and aluminum prices drop.

S&P 500 raw-material producers slumped 3.5 percent.

Crude oil for November delivery fell 2.9 percent to $78.87 a barrel in New York, sending energy stocks in the S&P 500 to a 3.1 percent decline. Exxon Mobil Corp., the world’s largest oil company, slipped 4.5 percent to $69.76. Marathon Oil Corp. tumbled 7.8 percent to $29.08.

More than 50 companies in the S&P 500 are slated to report third-quarter earnings this week. Wall Street analysts haven’t cut forecasts for record profits, even after the seizure in credit markets caused banks to stop lending to each other and prompted an unprecedented effort to cushion global economies.

For the fourth quarter, analysts say companies in the S&P 500 will earn about $241 billion, the most ever. The benchmark index for U.S. stocks plunged 18 percent last week, its worst slide in 75 years, amid concern surging borrowing costs will trigger a global recession.

`Downside Risks’

“There are significant downside risks still to the market and the economy,” Nouriel Roubini, a New York University professor of economics, told Bloomberg Television. “We’re going to be surprised by the severity of the recession and the severity of the financial losses.”

Roubini, who predicted the financial crisis in 2006, said unemployment will reach 9 percent, home prices will fall another 15 percent and the recession will last 18 to 24 months.

The VIX, as the Chicago Board Options Exchange Volatility Index is known, climbed 1.2 percent to 55.67. The measure, also called the market’s “fear gauge,” fell by a fifth yesterday.

Financial stocks made up 20 biggest gains in the S&P 500, each with rallies above 15 percent. The S&P 500 measure of banks, insurers and asset managers climbed 6.4 percent.

Morgan Stanley jumped 20 percent to $21.73. Citigroup added 21 percent to $19.04, Merrill Lynch gained 20 percent to $21.20. Goldman Sachs Group Inc. climbed 11 percent to $123.16. Regional banks KeyCorp, National City Corp. and Huntington Bancshares Inc. each rallied more than 30 percent.

`Dramatic Step’

Paulson urged banks receiving the government capital to use it to spur economic growth and not hoard it, while not identifying any of the lenders targeted. “Thousands” of financial companies will participate in the plan, which boosts bank capital in exchange for preferred stock, Paulson said in a statement.

“Financials are much more attractive now that the government has taken this dramatic step,” said Tom McManus, who oversees $16 billion as chief investment officer for Wachovia Corp. in Charlotte. “I think it probably makes sense to defer some discretionary spending to be investing in stocks.”

Goldman, Morgan Stanley and 10 other banks were raised to “buy” by Citigroup analyst Prashant Bhatia, who called the government’s actions a “game changer.”

The government’s plan to inject cash into financial institutions, coupled with similar actions by countries around the world, may jumpstart the stalled global financial system, Blackstone Group LP Chief Executive Officer Stephen Schwarzman said today at the Super Return Middle East conference in Dubai.

Money Market Rates

Money-market rates fell on expectations the plans will bolster lending. The London interbank offered rate, or Libor, that banks charge each other for three-month dollar loans slid 12 basis points to 4.64 percent today, the biggest drop since March 17, according to the British Bankers’ Association. It was at 4.82 percent on Oct. 10, the highest level since December.

Johnson & Johnson rose 2.5 percent to $64.27. The world’s largest maker of health-care products reporter higher-than- estimated profit driven by sales of products including painkillers, contact lenses and allergy pills that remain on consumer shopping lists even in an economic crisis.

To contact the reporter on this story: Lynn Thomasson in New York at lthomasson@bloomberg.net;

Last Updated: October 14, 2008 15:51 EDT
By Lynn Thomasson

Source: Bloomberg

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