U.S. stocks fell Monday amid upheaval for banking giant Citigroup and worries about aluminum maker Alcoa, which kicked off the earnings season after the bell with a hefty fourth-quarter loss.
Citigroup fell 1.15, or 17%, to 5.60 after the bank said it may sell a controlling stake in its Smith Barney brokerage business to rival Morgan Stanley. That Citigroup is entertaining a Smith Barney sale smacks of desperation amid increasingly dire fourth-quarter expectations, said one trader.
"It's called watering your weeds and pulling your flowers," said a trader at a mid-size Wall Street firm. "It's a great asset, a money maker that doesn't require capital. For him to be punting at the bottom of cycle..." On the options market, traders clamor for the right to sell Citi at $5 in January and February.
Bank of America, which recently closed an acquisition of Merrill Lynch, fell 1.55, or 12%, to 11.43. President-elect Barack Obama called for much stricter conditions on financial firms receiving taxpayer money under the Troubled Asset Relief Program, as he sought to shift the target of the plan from the banking system to homeowners in distress.
The Dow Jones Industrial Average closed down 125.45 points, or 1.46%, to 8474.05.
Among other sectors, materials were the second leading decliner, partly based on investors that appeared to be bracing for a grim quarter from aluminum giant Alcoa. According to a poll of Wall Street analysts from Thomson Reuters, the basic materials sector in the Standard & Poor's 500 is expected to see fourth-quarter profits fall by 69%, the most of any sector.
"The commodities bubble burst," said Ashwani Kaul, of the investment and advisory unit at Thomson Reuters.
On Monday, the front-month crude-oil futures contract on the New York Mercantile Exchange sank by more than $3 to $37.59 a barrel. Commodities, a favorite of hedge funds and proprietary trading desks during the bull market, have suffered from a one-two punch: forced selling because of "deleveraging" on Wall Street and a sharp slowdown in demand for raw materials.
Chevron warned last week that its bottom line will take a hit from oil's drop; its shares were off by more than 2.5% Monday. Rival Exxon Mobil slid by more than 1%.
Shares related to steelmakers, coal-mining and even farming are now among the first stocks sold when traders pull back from exposure to slowing economies in the U.S. and abroad. Shares of U.S. Steel fell 13% to $31.97; fertilizer maker Mosaic shed 11% to $34.56. Deere, the maker of agricultural equipment, closed down 10%.
The Standard & Poor's 500 fell 20, or 2.3%, to 870. The Nasdaq Composite Index slid 32.8, or 2.1%, to 1538.7. The small-stock Russell 2000 fell 12.46, or 2.6%, to 468.8.
Another sector facing a big earnings decline: consumer discretionary products: shares of Harley Davidson were down more than 11% after analysts at Goldman Sachs cut the motorcycle maker to sell from neutral. The S&P 500 sector is expected to see a decline of 56% in fourth-quarter earnings.
The data call for a decline of more than 15% in aggregate fourth-quarter earnings at S&P 500 companies, once all the reports are in hand. Such a decline would represent the sixth straight quarter of falling S&P profits. Market participants will also pay close attention to individual companies' comments on the outlook for future quarters, looking for hints about when the long-running U.S. recession will wind down.
"I would assume we'll get a lot more companies making statements this quarter," Kaul said. "There seems to be greater visibility [regarding the potential for future profits] now that we've gotten so much bad news out on the table."
But that's not to say the news - or the outlooks - will be all rosy. Beyond two safe-haven sectors in the S&P - health care and consumer staples - the prospect for an increase in earnings in other sectors is slim, Kaul said.
