BLBG: U.S. Stocks Retreat on Earnings Concern; Alcoa, Conoco Decline
U.S. stocks fell, extending losses from the market’s worst week since November, as a slump in oil prices dragged energy producers lower and investors speculated Alcoa Inc. will kick off another disappointing earnings season.
Alcoa, the aluminum producer that begins profit reports among Dow Jones Industrial Average companies today, dropped 6.6 percent as Deutsche Bank AG recommended selling the stock on a worsening earnings outlook. ConocoPhillips declined 2.9 percent after crude sank below $40 a barrel amid concern production cuts will fail to counter a slump in demand. Morgan Stanley gained 4.6 percent on plans to combine brokerage units with Citigroup Inc.
The Standard & Poor’s 500 Index slipped 1.1 percent to 880.16 at 11:03 a.m. in New York. The Dow average retreated 52.01 points, or 0.6 percent, to 8,547.17. The Russell 2000 Index slumped 0.8 percent.
“The market is in the process of factoring in a worst-case scenario for earnings,” said Dan Veru, chief investment officer at Palisade Capital Management in Fort Lee, New Jersey, which oversees about $2 billion. “The companies that are going to miss will miss by a wide margin.”
The S&P 500 slumped 4.5 percent last week as companies from Alcoa to Intel Corp. and Wal-Mart Stores Inc. spurred concern earnings will deteriorate, while the unemployment rate in the U.S. climbed to the highest level in almost 16 years.
Profits for companies in the S&P 500 probably fell 20 percent in the fourth quarter of 2008, according to analysts’ estimates compiled by Bloomberg. That would mark the sixth straight period of declining earnings, the longest stretch on record.
Valuations
The S&P 500 was valued at less than 15.9 times earnings at the start of trading, the lowest since February 1991, Bloomberg data show. The gauge may rise to 1,110 by the end of the year, a gain of 24 percent from the Jan. 9 close, as government measures revive the economy and investors move from cash into equities, according to Nomura Holdings Inc. strategist Ian Scott.
The index has rebounded 17 percent since Nov. 20 as investors speculated that President-elect Barack Obama will boost the world’s biggest economy with tax cuts, while the Federal Reserve slashed interest rates to as low as zero percent.
Obama said in an ABC interview yesterday that reviving the economy will require scaling back on campaign promises and personal sacrifice from all Americans.
Alcoa lost 68 cents to $10.13. The shares slumped 11 percent last week after the company said it will cut 13 percent of its 107,000 employees and reduce capital spending by half. Deutsche Bank downgraded Alcoa to “sell” from “hold” and reduced its price estimate on the shares 20 percent to $8.
Commodity Shares Slump
Raw-materials producers fell 2.4 percent, the most among 10 S&P 500 industries.
Energy shares declined as crude sank 6.4 percent to $38.20 a barrel in New York on concern production cuts by the Organization of Petroleum Exporting Countries will fail to counter a slump in demand. ConocoPhillips retreated $1.48, or 2.9 percent, to $50.51. Exxon Mobil Corp., the world’s largest oil company, slipped 0.9 percent to $76.86, while Chevron Corp. retreated 1.1 percent to $71.99.
Harley-Davidson Inc. dropped 11 percent to $14.82. The biggest U.S. motorcycle maker was cut to “sell” at Goldman Sachs Group Inc. and added to the brokerage’s “conviction sell” list. Goldman also slashed its price estimate on the stock to $11 from $30, citing slowing demand and the credit contraction.
Morgan Stanley Rallies
Morgan Stanley gained 4.8 percent to $19.98. The world’s second-biggest securities firm by market value may pay Citigroup Inc. as much as $3 billion for control of a venture that would combine their brokerage units and overtake Bank of America Corp. as the largest financial adviser to individuals, a person with knowledge of the discussions said.
Citigroup may book a gain of as much as $10 billion, helping to replenish capital depleted by the biggest losses in the bank’s history. Citigroup dropped 8 percent to $6.21, the steepest drop in the Dow.
Citigroup spokesman Michael Hanretta declined to comment. Jim Wiggins, a spokesman for Morgan Stanley, didn’t return calls seeking comment.
Bank of America Corp. lost 68 cents, or 5.2 percent, to $12.32. The lender that completed its purchase of Merrill Lynch & Co. earlier this month may post a $3.6 billion loss in the fourth quarter and slash its quarterly dividend, Citigroup analyst Keith Horowitz said.
JPMorgan Chase & Co. dropped 53 cents, or 2 percent, to $25.44.
Financial shares in the S&P 500 slumped for a fourth straight day, losing 1.9 percent as a group, even as a gauge of money-market stress favored by former Federal Reserve Chairman Alan Greenspan fell to the lowest level since the collapse of Lehman Brothers Holdings Inc.
The Libor-OIS spread, the difference between the three-month London interbank offered rate, or Libor, for dollars and the overnight indexed swap rate, dropped to 98 basis points. The last time it closed below 100 basis points was Sept. 12, the final working day before Lehman filed for bankruptcy, causing credit markets to freeze worldwide.
