U.S. Stocks Tumble on Credit Concerns; Banks, Brokers Retreat

Date: Friday, August 10, 2007
Author: Michael Patterson, Bloomberg

Aug. 9 (Bloomberg) -- U.S. stocks tumbled as subprime mortgage contagion and hedge fund losses halted a three-day rally and sent brokerage shares to their worst rout since 2002.

``The fear is feeding on itself,'' said Jeffrey Kleintop, who helps oversee more than $173 billion as chief market strategist at LPL Financial Services in Boston. ``It's what you don't know that seems to be taking over the market.''

Citigroup Inc., JPMorgan Chase & Co. and Goldman Sachs Group Inc. led the declines after BNP Paribas SA, France's biggest bank, barred withdrawals from funds that owned subprime loans. The Dow Jones Industrial Average fell 387 points and the S&P 500 slid 3 percent, their worst declines since a Feb. 27 drop spurred by a sell-off in China.

The S&P 500 decreased 44.4 to 1453.09, while the Dow average fell 2.8 percent to 13,270.68. The Nasdaq Composite Index slipped 56.49, or 2.2 percent, to 2556.49. A gauge of stock market volatility rose to a four-year high.

Stock-market swings have been more pronounced this year versus last. The S&P 500 has gained or lost at least 2 percent on six days. That only happened twice all of last year.

Losses swept through all 18 western European markets and wiped out more than half of a three-day recovery in U.S. markets. A jump in rates charged for overnight loans and speculation that more banks and brokerages will report declining values in credit investments exacerbated the selling.

The U.K.'s FTSE 100 slid 1.9 percent and Germany's DAX decreased 2 percent. France's CAC 40 lost 2.2 percent. Brazil's Bovespa retreated 3.3 percent.

Volatility Rises

About 2.8 billion shares changed hands on the New York Stock Exchange, the most since July 2002. All 10 industry groups in the S&P 500 dropped more than 2 percent today.

The Chicago Board Options Exchange Volatility Index gained 24 percent to 26.48, its highest since April 2003. Larger readings in the so-called VIX, derived from prices paid for S&P 500 options, indicate traders expect bigger share-price swings in the next 30 days.

Citigroup, the biggest U.S. bank, declined $2.59, or 5.2 percent, to $46.90 for the worst drop since September 2002. Bank of America Corp., the second largest, fell $1.35 to $48.35. JPMorgan retreated $2.34, or 5 percent, to $44.17, its steepest decline since January 2003.

Goldman Sachs, the largest securities firm, slid $11.05, or 5.7 percent, to $182.25. The company's North American Equity Opportunities Fund is selling some holdings after it lost 15 percent of its value from the start of the year through July 27, the Wall Street Journal reported on its Web site, citing an unidentified person familiar with the matter. Spokespeople at Goldman didn't immediately respond to requests for comment.

`Connect the Dots'

``Any flag that goes up in the financial sector, people are trying to connect the dots to some major trauma,'' said Billy Groeneveld, head equity markets trader at vFinance Inc. in Boca Raton, Florida. ``A lot of these banks have haven't pulled back the curtain yet.''

The S&P 500 Diversified Financials Index tumbled 4.4 percent for the biggest decline since October 2002 as all 27 of its members fell.

BNP Paribas joined Bear Stearns Cos. and Union Investment Management GmbH in stopping fund redemptions. The BNP Paribas funds had about 1.6 billion euros ($2.2 billion) of assets on Aug. 7, after declining 20 percent in less than two weeks, a spokesman said. Its shares fell 3.4 percent to 82.57 euros.

'Hates Uncertainty'

Dutch investment bank NIBC Holding NV also said today it lost at least 137 million euros ($189 million) on U.S. subprime investments this year.

``The market hates uncertainty, and that's what you've got in spades right now,'' said Malcolm Polley, who oversees $1 billion at Stewart Capital Advisors in Pittsburgh.

Home Depot Inc. lost $2.01, or 5.3 percent, to $35.79 for the largest drop in the Dow average. The largest home-improvement retailer scaled back plans for a stock buyback and said it was in talks with buyout firms Bain Capital LLC, Carlyle Group and Clayton Dubilier & Rice about restructuring the sale of HD Supply, which provides tools and lumber to construction companies. The $10.3 billion acquisition price of the unit may be lowered, Home Depot said. Financing for the purchase may be at issue as investors shun riskier debt.

Credit Risk Rises

The risk of owning corporate bonds soared today. Credit- default swaps on the CDX North America Investment Grade Index rose as much as 11 basis points to 71 basis points, according to Phoenix Partners Group in New York, indicating a decline in perceptions of credit quality.

The dollar increased versus the euro and yields on benchmark 10-year Treasury notes dropped 0.1 percentage point to 4.78 percent as investors sought the safety of U.S. government debt.

The overnight rates banks charge each other to lend in dollars jumped to the highest in six years. The so-called dollar London interbank offered rate rose to 5.86 percent from 5.35 percent today.

The European Central Bank said it would provide unlimited cash as the fastest increase in overnight Libor since 2004 signaled banks are cutting the supply of money. The Federal Reserve added $24 billion in temporary reserves to the banking system.

``What happened with Libor is clearly evidence of a liquidity panic in really what should be the most efficient part of the markets,'' said John Lewis, who helps manage about $150 million at Sweetwater Asset Management LLC in Columbus, Ohio. ``That's going to be reason for concern for everybody in just about every asset class.''

Brokerages Cut

Sanford C. Bernstein & Co. cut its 2007 and 2008 profit estimates for Goldman, Morgan Stanley, Merrill Lynch & Co., Lehman Brothers Holdings Inc. and Bear Stearns on concern that tighter credit markets will reduce earnings from bond trading and underwriting debt to fund leveraged buyouts.

``Based on history, we believe that today's credit re- pricing is going to be painful for the brokerage firms,'' New York-based analysts including Brad Hintz wrote in a report published today.

Morgan Stanley, the second-biggest securities firm, lost $3.58 to $61.81. Merrill, the third largest, retreated $3.49 to $74.68. Lehman, the biggest U.S. underwriter of mortgage bonds, declined $4.63 to $60.15. Bear Stearns, the No. 2 mortgage-bond underwriter, fell $7.07 to $114.05.

In Europe, Commerzbank AG dropped 4.8 percent to 30.01 euros even as the lender said second-quarter profit more than doubled on a gain from the sale of its Jupiter fund unit. Deutsche Bank, Germany's biggest bank, fell 4.6 percent to 98.07 euros.

Fannie, Freddie

Fannie Mae and Freddie Mac declined after President George W. Bush said the two largest mortgage finance companies must complete a ``robust reform package'' before the government will allow them to buy home loans beyond current federal limits.

Bush's comments came after Senate Banking Committee Chairman Christopher Dodd and other lawmakers asked regulators to ease restrictions on the mortgages and mortgage bonds that Fannie Mae and Freddie Mac can buy. Fannie Mae shares lost 82 cents to $65.93. Freddie Mac declined 97 cents to $61.67.

The U.S. economy will grow less than previously forecast as the rout in subprime borrowing hampers consumer spending, economists said. Growth will slow to an average 2.6 percent annual pace in the second half of the year, 0.2 percentage point less than economists forecast in July, according to a Bloomberg News Survey taken Aug. 1 to Aug. 8.

Energy shares in the S&P 500 declined 3.4 percent as a group after crude oil prices fell 56 cents, or 0.8 percent, to $71.59 a barrel in New York on concern reduced U.S. economic expansion will cut fuel demand at a time of higher-than-normal supplies.

Exxon Drops

Exxon Mobil Corp., the world's biggest energy company, dropped $3.95 to $83.60. Chevron Corp., the second-largest U.S. oil producer, lost $3.22 to $81.11.

In economic data today, initial jobless claims rose by a more-than-forecast 7,000 to 316,000 in the week ended Aug. 4, the Labor Department said. The four-week moving average, a less volatile measure, increased to 307,750 from 306,000.

KLA-Tencor Corp. added 70 cents to $59.41. The second- largest U.S. chip-equipment manufacturer raised its dividend 25 percent and said it plans to buy back as much as 5 percent of its shares outstanding.

Tenet Healthcare Corp. climbed 27 cents, or 6.2 percent, to $4.66 for the top gain in the S&P 500. The second-biggest publicly owned U.S. hospital chain ``may consider strategic alternatives,'' S&P analyst Jeffrey Englander wrote in a note to clients. ``The company is not for sale,'' Steven Campanini, a spokesman for Dallas-based Tenet, said in an interview today.

The Russell 2000 Index, a benchmark for companies with a median market value of $695 million, dropped 1.4 percent to 784.87. The Dow Jones Wilshire 5000 Index, the broadest measure of U.S. shares, declined 2.7 percent to 14,640.32. Based on its decline, the value of stocks decreased by $507.4 billion.

Bank of America Corp. (BAC US)
Bear Stearns Cos. (BSC US)
BNP Paribas SA (BNP FP)
Chevron Corp. (CVX US)
Citigroup Inc. (C US)
Exxon Mobil Corp. (XOM US)
Fannie Mae (FNM US)
Freddie Mac (FRE US)
Goldman Sachs Group Inc. (GS US)
Home Depot Inc. (HD US)
JPMorgan Chase & Co. (JPM US)
KLA-Tencor Corp. (KLAC US)
Lehman Brothers Holdings Inc. (LEH US)
Merrill Lynch & Co. (MER US)
Morgan Stanley (MS US)
Tenet Healthcare Corp. (THC US)

To contact the reporter on this story: Michael Patterson in New York at mpatterson10@bloomberg.net .