Tuesday 5 February 2008

U.S. Stocks Drop on Bank Downgrades; American Express Declines

U.S. stocks declined for the first time in three days after analysts told investors to sell American Express Co., Wells Fargo & Co. and Wachovia Corp. on concern a recession will worsen defaults among consumers.

American Express, the third-biggest credit-card company, slumped after UBS AG said U.S. unemployment will rise, reducing profits. Wells Fargo and Wachovia, the fourth- and fifth-largest U.S. banks, dropped the most in seven years after Merrill Lynch & Co. said loan losses may increase. Concern spending will slow also dragged down retailers such as Tiffany & Co.

The Standard & Poor's 500 Index fell 14.6, or 1.1 percent, to 1,380.82 after rallying 4.9 percent last week. The Dow Jones Industrial Average decreased 108.03, or 0.9 percent, to 12,635.16. The Nasdaq Composite Index retreated 30.51, or 1.3 percent, to 2,382.85. Almost seven stocks declined for every four that advanced on the New York Stock Exchange.

``We probably have not seen the end of the bad news,'' said Craig Hester, who oversees $1.5 billion as chief executive officer of Hester Capital Management in Austin, Texas. ``The first wave has come through the residential mortgage market, and now we're beginning to see credit card delinquencies on the increase.''

American Express decreased $1.94 to $47.66. UBS analysts led by New York-based Eric E. Wasserstrom advised selling the shares because the recession ``will result in higher levels of unemployment in 2008-09, the primary driver of credit losses.''

``American Express is tied to small businesses and consumers in terms of spending,'' said Tim Smalls, head of U.S. trading at Execution LLC in Greenwich, Connecticut. ``That's an ongoing issue. This market is going to be choppy.''

Credit Cards

Shares of other credit card companies decreased. Discover Financial Services slid $1.62 to $16.34. Capital One Financial Corp. dropped $4.32 to $52.65.

Wells Fargo fell $2.26 to $31.39 and Wachovia dropped $3.23 to $35.53. Merrill Lynch lowered its recommendations on the stocks to ``sell'' from ``neutral,'' citing the latest Case- Shiller data, which showed ``rapidly declining California real- estate values.'' They said the valuations of the companies did not fully discount earnings and recession risk in 2008.

Citigroup Inc. dropped 47 cents to $29.22, Bank of America Corp. slipped $1 to $44.03 and JPMorgan Chase & Co. declined $2.03 to $46.22.

Loan Demand

``If economic growth is slowing, there may not be that much demand for borrowed money,'' said John Carey, who oversees about $13 billion at Pioneer Investment Management in Boston. ``The financial stocks make up a significant part of the market and facilitate a lot of other business transactions.''

Ambac Financial Group Inc. plunged $1.81, or 14 percent, to $11.39, the steepest decline in the S&P 500. MBIA Inc. dropped 97 cents, or 5.9 percent, to $15.39. The bond insurance industry may lose $34 billion on securities they guaranteed, causing them to be stripped of their AAA credit ratings, Citigroup Global Markets said in a Feb. 1 report.

Humana Inc. lost $2.86 to $78.98. The No. 2 provider of U.S.-funded health benefits fell on investor concern the next president may cut insurance subsidies, according to Christine Arnold, an analyst with Morgan Stanley in New York. The speculation overshadowed a 57 percent rise in quarterly earnings.

KB Home

KB Home plunged $2.34, or 8.1 percent, to $26.41. Chief Financial Officer Domenico Cecere sold 80,000 shares of the fifth-largest U.S. homebuilder, according to a filing with the U.S. Securities and Exchange Commission.

Centex Corp., the second-largest U.S. homebuilder, fell $2.33 to $26.67.

Wendy's International Inc. fell $1.25, or 5 percent, to $23.93. The U.S. hamburger chain that's been seeking a buyer since April reported fourth-quarter profit that rose less than analysts estimated. Executives said full-year profit may trail analysts' projections on higher costs for beef and chicken. The company didn't provide an update on a possible sale.

Dynegy Inc. gained 42 cents to $7.55, leading utilities shares higher. The owner of power plants in 13 U.S. states advanced after Barron's said the company's shares may double on increased cash flow and asset values.

Europe, Asia

Stocks in Europe and Asia advanced, helped by takeover speculation. The Dow Jones Stoxx 600 Index of European shares rose 0.2 percent after U.K. pub owner Mitchells & Butlers Plc received a merger proposal and Fortescue Metals Group Ltd. said it held talks with ``strategic'' investors.

The decline in the S&P 500 followed the index's best weekly gain since 2003. The Federal Reserve's second interest-rate cut in two weeks, Microsoft Corp.'s $44.6 billion bid for Yahoo! Inc. and a plan to rescue bond insurers lifted equities.

While the S&P 500 climbed 4.9 percent last week, it has lost 6 percent for the year. The Dow average has fallen 4.8 percent and the Nasdaq dropped 10 percent.

Job cuts announced by U.S. employers jumped 19 percent in January from a year earlier as businesses attempted to rein in costs, according to a report by a private placement firm.

Announcements increased to 74,986 last month from 62,975 in January 2007, Chicago-based Challenger, Gray & Christmas Inc. said. The figures aren't adjusted for seasonal effects, so economists prefer to focus on year-over-year changes instead of monthly figures.

Companies may trim their workforce further as the worst housing slump in a quarter century threatens to push the economy into a recession, economists said. The report followed government figures last week that showed the U.S. lost jobs in January for the first time in more than four years.

Stocks also fell after orders to U.S. factories rose less than economists forecast. The orders increased 2.3 percent, the Commerce Department said, less than the 2.5 percent median forecast in a Bloomberg News survey.

The Russell 2000 Index, a benchmark for companies with a median market value of $547 million, dropped 1 percent to 723.46. The Dow Jones Wilshire 5000 Index, the broadest measure of U.S. shares, fell 1 percent to 13,954.61. Based on its decline, the value of stocks decreased by $170.6 billion.