Bloomberg News

U.S. Stocks Drop as Bernanke Gives No Hint of New Stimulus Plan

June 07, 2011

June 7 (Bloomberg) -- U.S. stocks fell a fifth day, the longest slump for the Standard & Poor’s 500 Index in almost a year, as Federal Reserve Chairman Ben S. Bernanke gave no hint of a new round of economic stimulus even as the recovery slows.

Cisco Systems Inc., Bank of America Corp. and Hewlett- Packard Co. lost more than 1 percent to lead losses in the Dow Jones Industrial Average. Six of 10 industry groups in the S&P 500 fell, with the index erasing a rally of up to 0.8 percent in the final minutes of trading, as Bernanke gave no indication of a new round of asset purchases known as quantitative easing.

The S&P 500 retreated 0.1 percent at 1,284.94 at 4 p.m. in New York, its lowest level since March 18. The Dow average reversed a rally of as much as 89 points to close down 19.15 points, or 0.2 percent, to 12,070.81 today.

“It’s pretty obvious that the data has cooled off,” said Kevin Caron, a market strategist in Florham Park, New Jersey, at Stifel Nicolaus & Co, which has $115 billion in client assets. “While Bernanke’s comments suggest that the Fed will be there to provide liquidity, I don’t think that his assessment is that there will be additional asset purchases. The market reacted to the absence of direct commitment to quantitative easing.”

The S&P 500 has fallen 4.5 percent over the last five days as signs of a slowing economy spurred concern analyst estimates for 20 percent earnings growth this year are too optimistic. Still, the benchmark gauge for American equities rose 2.2 percent this year amid higher-than-estimated corporate earnings and government stimulus measures.

Economic Weakness

Recent data showing weakness in the economy, including a rise in the unemployment rate to 9.1 percent in May, has increased the odds the Fed will hold the benchmark interest rate near zero into next year. At the same time, Bernanke and his fellow policy makers plan this month to complete a $600 billion bond purchase program, and they’re discussing the tools they’d use to withdraw stimulus, according to minutes of their meeting in April.

Fed Chairman Bernanke said the central bank should maintain record monetary stimulus to boost an “uneven” and “frustratingly slow” economic recovery.

“The economy is still producing at levels well below its potential; consequently, accommodative monetary policies are still needed,” Bernanke, 57, said today in a speech to a conference in Atlanta. “Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established.”

Cisco Slumps

Some of the biggest U.S. companies slumped. Cisco, the largest maker of networking gear, dropped 3 percent to $15.51. Bank of America declined 1.7 percent to $10.65. Hewlett-Packard sank 1.1 percent to $35.57.

Sprint Nextel Corp. dropped 2 percent to $5.49. The third- largest U.S. wireless operator was cut to “sell” from “hold” at Stifel Nicolaus & Co., which said analysts’ expectations on the company’s planned Network Vision program to consolidate technologies to improve voice quality and data speeds may “very well prove to be overly aggressive.”

Talbots Inc. plunged 41 percent, the most in the Russell 2000 Index, to $2.63. The women’s clothing retailer said fiscal second-quarter sales will decline “significantly” and profit margins would narrow on price markdowns and fewer customer visits.

Earlier gains in U.S. stocks today came amid speculation a five-week slide left American equities cheap compared with prospects for earnings growth. The benchmark gauge yesterday fell to about 12.2 times its companies’ forecast operating earnings, the cheapest valuation in more than nine months, according to data compiled by Bloomberg.

Intel Rallies

Intel Corp. rallied 1.1 percent to $22.06. A potential foundry relationship between the world’s largest chipmaker and Apple may be forming, according to Citigroup. “Given the growth opportunity this opens for x86 processors, we would view such a foundry relationship, were it to happen, positively,” Citigroup wrote in a note to clients.

Barton Biggs, the hedge-fund manager who bought stocks when the market bottomed in March 2009, said technology companies such as Cisco Systems Inc. and Intel are attractively priced and that he’s avoiding financial shares.

With older technology companies, “you can almost buy them as big-capitalization value. They’re way too cheap,” said Biggs, who runs New York-based Traxis Partners LP, in an interview today on Bloomberg Television’s “InBusiness” with Margaret Brennan.

Tech Valuation

A gauge of information-technology companies in the S&P 500 has a price-to-earnings ratio of 14.7 times reported earnings, compared with 14.6 for the broader measure. That’s close to the lowest valuation for the technology gauge compared with the S&P 500 since December 2009. Cisco’s P/E ratio is 11.7, while Intel’s is 10.1.

Temple-Inland Inc. soared 40 percent to $29.49. International Paper Co., the world’s largest pulp-and-paper maker, made a $3.31 billion hostile takeover bid for the company to expand production of containerboard used in shipping boxes. Temple-Inland, based in Austin, Texas, rejected the bid.

U.S. stocks are unlikely to drop much more even as the Federal Reserve stops buying bonds because there’s more than enough money available, according to Brian Belski, Oppenheimer & Co.’s chief investment strategist.

“There’s plenty of money in the system,” a report by Belski said, noting that M2 climbed at a 6.9 percent compound annual rate since 1950. The increase is in line with the comparable figure for the S&P 500, 6.4 percent a year. Any pullback by the Fed “shouldn’t mean stocks will suffer longer term,” Belski wrote.

What’s holding back the stock market and the economy is “a general lack of sustainable confidence,” rather than a lack of money, he wrote. “Summer will likely set the stage for a fits- and-starts market for the remainder of 2011.”

--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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