U.S. Stocks Drop on Credit Woes; Bear Stearns Leads Banks Lower
2007-08-03 18:32 (New York)
By Eric Martin
Aug. 3 (Bloomberg) -- Stocks tumbled on evidence losses in
the mortgage market may slow the economy and reduce bank profits,
sending the Standard & Poor's 500 Index to its worst three-week
retreat since 2003.
Bear Stearns Cos., the manager of two hedge funds that
collapsed last month, helped carry financial shares to their
biggest decline in five years after S&P cut the company's credit
outlook. Energy shares fell to the lowest since May, led by Exxon
Mobil Corp. and Chevron Corp., on speculation weaker job growth
and falling oil prices will hurt earnings.
The S&P 500 erased its gain for the week, falling 39.14, or
2.7 percent, to 1433.06 in its worst day since Feb. 27. The Dow
Jones Industrial Average slumped 281.42, or 2.1 percent, to
13,181.91. The Nasdaq Composite Index sank 64.73, or 2.5 percent,
to 2511.25.
The sell-off exacerbated a rout last week that wiped $2.1
trillion in value from global equity markets. Shares declined in
Europe, with benchmark indexes dropping in all 18 western
European markets except Luxembourg. An index of market volatility
in the U.S. rose to a four-year high.
``We're just seeing more and more credit problems,'' said
Michael Strauss, who helps manage $40 billion at Commonfund in
Wilton, Connecticut. ``It's going to be difficult for the market
to trade with any confidence.'
Almost 12 stocks fell for every one that rose on the New
York Stock Exchange as all 24 industry groups in the S&P 500 and
all 30 members of the Dow fell.
The yield on the benchmark 10-year Treasury note fell 9
basis points, or 0.09 percentage point, to 4.68 percent. The
dollar fell the most in almost a month against the euro, trading
within a cent of its record low. Some 2.1 billion shares changed
hands on the NYSE, 29 percent more than the three-month average.
Stocks opened the day lower after the Labor Department said
employers added fewer jobs than economists forecast in July and a
private report showed growth in U.S. service industries slowed.
Bear Stearns
Bear Stearns had its credit-rating outlook cut to negative
by S&P on concern declining prices for mortgage-backed securities
will decrease earnings. The perceived risk of owning the New
York-based company's bonds rose to the highest in at least six
years.
Stocks fell to their lows of the day after the firm said its
return on equity in July may be close to the lowest ever and
borrowing costs may slow mergers and acquisitions.
'As Bad as I've Seen It'
``I've been out here for 22 years, and this is as bad as
I've seen it in the fixed-income markets,'' Chief Financial
Officer Samuel Molinaro said on a conference call with analysts.
He compared the crisis to 1998, when hedge fund Long-Term Capital
Management collapsed and Russia defaulted on its debt. Bear
Stearns fell $7.28, or 6.3 percent, to $108.35, the lowest since
2005.
The S&P 500 Financials Index fell 3.8 percent, its steepest
loss since 2002, and contributed the most to the drop in the
overall S&P 500. An index of brokerages and money managers in the
S&P 500 has fallen 15 percent since reaching a record on May 30.
Countrywide Financial Corp., the largest U.S. mortgage
lender, sank $1.77 to $25. CIT Group Inc., the biggest U.S.
independent commercial finance company, lost $1.87 to $36.68.
Lehman Brothers Holdings Inc., the largest U.S. underwriter of
mortgage bonds, dropped $4.67, or 7.7 percent, to $55.78.
American Home Mortgage Investment Corp., which traded at
more than $10 a week ago, sank 76 cents to 70 cents after it
became the second-biggest residential lender to fail this year.
The last day for most employees will be today, Chief Executive
Officer Michael Strauss told the staff in an e-mailed memo
obtained by Bloomberg.
Investment bankers cut off credit earlier this week, leaving
the lender unable to fund at least $750 million of mortgages.
Mary Feder, a company spokeswoman, didn't return a call
seeking comment.
`One of the Biggest Bubbles'
The U.S. subprime-market rout has ``got a long way to go,''
said Jim Rogers, who predicted the start of the commodities rally
in 1999.
``This was one of the biggest bubbles we've ever had in
credit,'' Rogers, chairman of New York-based Beeland Interests
Inc., said in an interview from Hong Kong.
Credit-market losses stemming from subprime lending are
leading to a tightening of funds available for investment, and
helping to drive up the cost of borrowing for consumers and
companies.
Union Investment Asset Management Holding AG, Germany's
third-largest mutual fund manager, halted redemptions from a fund
after clients withdrew $137 million in the past month. The ABS-
Invest Fund, sold to institutional investors across Europe, has
about 6 percent of its assets in securities related to subprime
mortgage loans.
'Big Logjam of Credit'
``You've got a big logjam of credit that can't clear,'' said
Brian Barish, who helps oversee about $10 billion at Cambiar
Investors in Denver. ``Add a lot of fear and rumor, and it makes
for a tough situation.''
Crude oil fell on concern economic growth will slow,
reducing demand for gasoline and other fuels. Futures for
September delivery lost $1.38, or 1.8 percent, to $75.48 a barrel
and dropped 2 percent in the week. Exxon, the biggest oil
company, fell $3.10 to $82.08. Chevron dropped $2.87 to $81.02.
Network Appliance Inc. dropped $5.74, or 20 percent, to
$22.97. Revenue at the maker of computers that store and
distribute data was $684 million to $688 million in the quarter
ended July 27, short of the forecast of $745 million to $753
million, the company said today in a statement. Net income was 8
cents to 9 cents a share, instead of 14 cents to 15 cents.
GM, Take-Two
General Motors Corp., the largest U.S. automaker, fell
$1.35, or 4 percent, to $32.04. Toyota Motor Corp. reported
first-quarter profit that beat analysts' estimates as a weaker
yen increased revenue from Corolla compacts and Camry sedans sold
outside Japan. Toyota's American depositary receipts advanced 31
cents to $118.90.
Take-Two Interactive Software Inc. tumbled $2.75 to $14.16.
The company said it delayed the release of the next ``Grand Theft
Auto'' video game until the second quarter of fiscal 2008 and
lowered its sales and profit forecast for this year.
Procter & Gamble Co. dropped 42 cents to $62.88. The largest
U.S. consumer-goods company said it will spend as much as $30
billion over the next three years to buy back shares.
SanDisk Corp., the world's largest maker of flash memory
cards, added 66 cents to $53.43. Samsung Electronics Co., the
world's second-largest chipmaker, will shut down some of its
production lines for as long as two days because of a power
outage, costing the company up to $54 million in lost sales and
potentially boosting sales of competitors.
Volatility Surge
The Chicago Board Options Exchange Volatility Index rose to
25.16, the highest since April 2003. Higher readings in the so-
called VIX, derived from prices paid for S&P 500 options,
indicate more risk in stocks.
In economic reports, the Labor Department said 92,000 jobs
were added to payrolls in July compared with a forecast for an
increase of 127,000 in a Bloomberg survey of economists. The
jobless rate rose to 4.6 percent in July from 4.5 percent in
June. Economists in a Bloomberg survey had expected it to remain
at 4.5 percent.
The report said homebuilders cut payrolls by 12,000 after a
3,000 increase the previous month as the housing slump continues.
Homebuilders Slump
A gauge of homebuilders in S&P indexes dropped 5.3 percent
as a group as all 16 of its members declined. D.R. Horton Inc.,
the second-largest U.S. builder, slipped 69 cents to $16.46.
Pulte Homes, the third biggest, lost $1.40 to $18.59.
After the employment report, JPMorgan pushed back its
forecast for when the Federal Reserve will change interest rates.
The firm expects an increase in the middle of next year, compared
with its prior prediction of around the end of this year.
The Institute for Supply Management said its non-
manufacturing index dropped to 55.8 last month, from 60.7 in
June. Economists in a survey had expected a reading of 59 for
July. The index, which shows service industries still expanding,
has averaged 56.8 in the past 12 months.
The Russell 2000 Index, a benchmark for companies with a
median market value of $647 million, dropped 3.6 percent to
755.42. The Dow Jones Wilshire 5000 Index, the broadest measure
of U.S. shares, fell 2.7 percent to 14,432.34. Based on its
decline, the value of stocks decreased by $497 billion.
Today's sell-off left the S&P 500 with a 1.8 percent drop
for the week and a 1 percent advance for the year. The Dow lost
0.6 percent this week and is up 5.8 percent in 2007.
BigGains !!
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