BS: U.S. Stock Futures Erase Gains on Concern Over Bailout Rating
By Rita Nazareth
Dec. 6 (Bloomberg) -- U.S. stock futures erased gains after Standard & Poor’s said it may downgrade debt issued by Europe’s bailout fund, a day after it also put 15 euro nations on review.
Darden Restaurants Inc., operator of the Red Lobster and LongHorn Steakhouse chains, tumbled 7.8 percent after cutting its full-year sales and profit growth forecasts. 3M Co. added 2.5 percent as revenue may increase as much as 6 percent next year amid boost from acquisitions. General Electric Co. and LinkedIn Corp. advanced at least 0.9 percent after analysts raised their recommendations for the shares.
S&P 500 futures expiring in December fell less than 0.1 percent to 1,254.80 at 8:52 a.m. New York time, after an earlier advance of 0.5 percent. The benchmark gauge for American equities gained 1 percent yesterday amid optimism that Europe will tame its crisis. Dow Jones Industrial Average futures climbed 8 points, or 0.1 percent, to 12,074.
"If downgrades follow of all or some of the six remaining AAA-rated euro-zone countries, how will the EFSF keep a AAA rating?" Peter Boockvar, equity strategist at Miller Tabak & Co. in New York, wrote to clients before S&P’s announcement. "It likely won’t, and will it be an effective bailout tool with a subsequent higher cost of capital?"
The credit rating of the European Financial Stability Facility may be lowered by S&P, Moritz Kraemer, head of sovereign rating at S&P in New York, said on a conference call today. Germany, France and four other nations may lose their AAA ratings depending on the result of a summit of European Union leaders this week, S&P said yesterday.
Ratchet Up Efforts
German Finance Minister Wolfgang Schaeuble said S&P’s warning will help force European leaders to ratchet up efforts to resolve the crisis. European Central Bank President Mario Draghi will probably cut the benchmark rate a quarter point when policy makers meet Dec. 8, according to 58 economists in a Bloomberg survey.
Laszlo Birinyi says he knew it would be hard to make predictions for 2012 in October, when he saw a headline suggesting that markets would rise or fall depending on whether the tiny nation of Slovakia approved a bailout plan for Europe.
Birinyi, president of stock market research and money- management firm Birinyi Associates Inc., says markets are so volatile that it doesn’t take much to send them reeling, reports Bloomberg Markets magazine in its January issue.
“There are so many exogenous factors that to try to forecast the market with a degree of confidence is difficult,” Birinyi says.
The best strategy for stock investors, he says, is to stick with iconic brands, such as Apple Inc. or Ralph Lauren Corp., and with companies that offer “meaningful dividends” of at least 5 percent.
Scotch-Brite
3M rallied 2.5 percent to $82.96. Sales may be $30.2 billion to $31.5 billion, according to a presentation on the company’s website, in line with the $30.6 billion average estimate from analysts surveyed by Bloomberg. The maker of Scotch-Brite sponges and Nexcare thermometers expects earnings per share of $6.25 to $6.50 next year, also tracking estimates.
GE added 0.9 percent to $16.48. Sanford C. Bernstein & Co. raised its recommendation for the Fairfield, Connecticut-based company to “outperform” from “market perform,” citing rising dividends and energy orders starting in 2012.
LinkedIn jumped 4.8 percent to $73.30. The biggest professional-networking website was raised to “overweight” from “equalweight” at Morgan Stanley, which designated the stock as a “research tactical idea,” saying its valuation is “much more compelling.” LinkedIn fell 27 percent last month.
Darden Tumbles
Darden fell 7.8 percent to $44. Full-year earnings per share growth from continuing operations will be 4 percent to 7 percent, down from a previous forecast of 12 percent to 15 percent, the Orlando, Florida-based company said today in a statement. Total sales growth will be 6 percent to 7 percent, reduced from a prior forecast of 6.5 percent to 7.5 percent.
Clearwire Corp. slumped 6.7 percent to $2.10 on plans to raise $595 million through two sales of common stock, bolstering the finances of the wireless broadband provider as it tries to turn profitable.
The most widely followed “fear gauge” for stocks sends relatively weak signals most of the time about whether to buy or sell, according to Tobias Levkovich, Citigroup Inc.’s chief U.S. equity strategist. During the past four months, the Chicago Board Options Exchange Volatility Index, known as the VIX, fell to 27.84 from a second-half peak of 48.00. The readings are based on the prices paid for S&P 500 options.
‘Little Guidance’
“At current levels, the VIX provides little guidance for investing purposes,” Levkovich wrote in a Dec. 2 report. He added that the index “is not that effective as a market-timing tool unless it is at extremes.”
When the VIX was less than 30, the S&P 500 had an average gain of 2.9 percent in the next six months, according to the report. At less than 20, the average climbed to 3.8 percent. Levkovich found a bigger gap at 12 months, when increases averaged 6.9 percent when the index was less than 30 and 10.3 percent at less than 20.
Relatively high readings usually preceded larger gains in stocks, according to the report. When the volatility index was above 40, the S&P 500 rose 14 percent for the next six months and 29 percent for the next 12 months on average.
--With assistance from David Wilson and Alexis Leondis in New York. Editor: Jeff Sutherland
To contact the reporter on this story: Rita Nazareth in Sao Paulo at rnazareth@bloomberg.net
To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net
