Bloomberg News

U.S. Stocks Decline as Banks Drop Amid Economic-Growth Concerns

June 06, 2011

June 6 (Bloomberg) -- U.S. stocks fell for a fourth day amid concern economic growth is slowing and the Federal Reserve will boost capital requirements for the nation’s largest banks.

Bank of America Corp. and Citigroup Inc. slumped at least 3.9 percent. Wells Fargo & Co., the largest U.S. home lender, retreated 2.2 percent after Rochdale Securities LLC’s Richard Bove cut his recommendation on the stock. Lowe’s Cos. declined 2.3 percent as JPMorgan Chase & Co. reduced its recommendation for the second-largest U.S. home-improvement retailer.

The S&P 500 fell 1.1 percent to 1,286.17 at 4 p.m. in New York today, the lowest level since March 18. The benchmark gauge for American equities is trading at about 12.2 times its companies’ estimated operating earnings, the cheapest valuation since September, according to data compiled by Bloomberg. The Dow Jones Industrial Average slipped 61.30 points, or 0.5 percent, to 12,089.96 today.

“The markets are getting concerned that economic growth is not sustainable,” said Mark Bronzo, who helps manage $26 billion at Security Global Investors in Irvington, New York. “I am surprised that the bank sector continues to underperform as they have been laggards all year. Concerns over what the new fin regulations will require, and no real loan growth, continue to hold back these names.”

Disappointing Economic Reports

U.S. stocks have fallen for five straight weeks as slower- than-estimated growth in jobs fueled concern that earnings forecasts are too optimistic. Labor Department figures last week showed that payrolls grew at the slowest pace in eight months and the U.S. jobless rate unexpectedly climbed to 9.1 percent in May. A separate report last week showed that manufacturing expanded at the slowest pace in more than a year. Still, the S&P 500 rose 2.3 percent this year.

Financial shares had the second-biggest decline in the S&P 500 within 10 industries today, falling 2 percent. The group is the worst-performing of the 10 main industries in the index this year, down 6.6 percent. Bank of America fell 4 percent to $10.83. Citigroup declined 4.5 percent to $38.07.

Fed Governor Daniel Tarullo said on June 3 that regulators should use capital surcharges to discourage mergers by large banks that would increase risk without yielding significant public benefits.

Tarullo also signaled the Fed aims to use tougher capital standards related to the size of a firm to curb risks posed by “systemically important financial institutions.” The Fed is developing a metric for banks with more than $50 billion in assets that gradually increases capital requirements according to measures of systemic importance, Tarullo said.

Wells Fargo Slump

Wells Fargo slumped 2.2 percent to $26.26. Rochdale’s Bove cut his recommendation to “sell” from “neutral,” citing a poor economic environment, weak housing prices, slowing manufacturing indicators and negative regulatory environment.

Lowe’s lost 2.3 percent to $22.87. The second-largest U.S. home improvement retailer was cut to “neutral” from “overweight” at JPMorgan Chase & Co., which said that earnings risk is rising.

The five-week drop in U.S. stocks has driven technology company valuations to the lowest level in more than a decade, making them too cheap to pass up for some of the nation’s biggest money managers.

The largest group in the benchmark gauge for American equities lost 7 percent through June 3, or about $190 billion in value, since the market peaked on Feb. 18, falling more than any industry outside financials. Computer stocks trade for 9.3 times reported earnings before interest, taxes, depreciation and amortization, 1.3 times the index’s multiple, data compiled by Bloomberg show. The ratio is the smallest since at least 1998.

Slowing Recovery

While signs of a slowing recovery and the initial public offering of LinkedIn Corp. have spurred concern the industry has entered a speculative bubble, the numbers show something different. Profits will rise 35 percent faster than the S&P 500 in 2011, and executives are boosting computer and software spending, data from Bank of America Corp. and Bloomberg show.

“We see the best supply-demand trend in technology,” said Michael Sansoterra, a money manager at RidgeWorth Capital Management in Atlanta, which oversees $48.5 billion including Broadcom Corp. and Google Inc. shares. “You can measure it pretty much every way you want and it looks attractive.”

Harley-Davidson Inc. climbed 2.8 percent to $36.86. The largest motorcycle manufacturer in the U.S. posted “solid” sales in April and May even amid weather disruptions and an economic slowdown, and investors should buy the stock on weakness, Wells Fargo analysts said in a note. The stock is down almost 13 percent since the end of March.

Climb to Record

The S&P 500 will climb to a record over two years after retreating in the next three months, according to Brian Belski of Oppenheimer & Co. Investors will turn to equities as bonds “unwind,” according to Belski. He recommended buying companies with “discernible and sustainable” growth prospects, including 3M Co., Allstate Corp. and Home Depot Inc.

“The S&P 500 will hit new all-time highs sometime over the next two years,” wrote New York-based Belski, the firm’s chief investment strategist, in a note dated today. “While the short- term picture for equities is admittedly cloudy, we remain comfortable with our view that U.S. stocks are slowly transitioning toward the next secular bull market.”

Belski expects the S&P 500 will end 2011 at 1,325, with companies in the index earning $90 a share. Belski’s estimate is below the average compiled by Bloomberg as of May 31. The average forecast of 13 strategists calls for the benchmark measure to end 2011 at 1,402 and profit to reach $95.61 a share. He predicts the benchmark gauge for U.S. stocks will end 2012 at 1,475 with a per-share profit of $103 for the year.

--Editors: Joanna Ossinger, Michael Regan

To contact the reporter on this story: Rita Nazareth in New York at rnazareth@bloomberg.net

To contact the editor responsible for this story: Michael Regan at mregan12@bloomberg.net


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