Bloomberg News

U.S. Stocks Fall as GDP Trails Estimates, Debt Concerns Remain

July 29, 2011

July 29 (Bloomberg) -- U.S. stocks sank, pushing the Standard & Poor’s 500 Index toward its biggest weekly loss in a year, after gross domestic product grew less than estimated in the second quarter and investors awaited the outcome of negotiations to avoid a federal default.

Energy and materials stocks led losses in the S&P 500 as the GDP report sent the gauge tumbling as much as 1.4 percent. Exxon Mobil Corp. and DuPont Co. dropped at least 0.7 percent. Merck & Co. fell 2 percent as the drugmaker said it plans to slash its workforce by an additional 12 to 13 percent by 2015. Insurers MetLife Inc. and Genworth Financial Inc. gained more than 3.8 percent on better-than-estimated earnings.

The S&P 500 fell 0.1 percent to 1,298.95 at 2:40 p.m. in New York. The benchmark for U.S. equities is headed for its third straight month of losses, the longest slump since 2008. The Dow Jones Industrial Average lost 40.15 points, or 0.3 percent, to 12,199.96 after slumping as much as 157 points.

“The market is on hold with a slight negative bias as we await an outcome in Washington,” Tim Hoyle, director of research at Radnor, Pennsylvania-based Haverford Trust, which manages $6 billion, said in a telephone interview. “Today’s GDP number is a bigger concern to us as long-term investors than when a bill is going to get passed in Congress, but this mess is hurting business and consumer confidence.”

The S&P 500 has tumbled 3.4 percent this week as concern mounted that lawmakers will fail to agree to increase the U.S. debt ceiling by the Treasury Department’s Aug. 2 deadline.

Support for Plan

President Barack Obama said Republicans and Democrats are in “rough agreement” on their plans to raise the U.S. debt limit with just four days before a threatened U.S. default and the time for compromise is “now.”

House Republicans said they have secured the votes to pass House Speaker John Boehner’s plan today. Obama opposes that plan. Senate Majority Leader Harry Reid said he will take action to move to a vote on his competing plan, and at the same time held out hope for a deal with Republican leaders.

“If we don’t come to an agreement, we could lose our country’s AAA credit rating, not because we didn’t have the capacity to pay our bills -- we do -- but because we didn’t have a AAA political system to match our AAA credit rating,” Obama said at the White House.

Equities extended losses today as the Commerce Department reported GDP rose at a 1.3 percent annual rate in the second quarter following a 0.4 percent gain in the prior quarter that was less than previously estimated. The median forecast of economists surveyed by Bloomberg News called for a 1.8 percent increase. Household purchases, about 70 percent of the economy, climbed 0.1 percent.

‘Moving Parts’

In a separate report, the Institute for Supply Management- Chicago Inc. said today its business barometer fell to 58.8 in July, lower than forecast, from 61.1 the prior month. Figures greater than 50 signal expansion.

“There are a lot of moving parts to this market from economic reports to this drama over the debt ceiling,” Mike Shea, a managing partner and trader at Direct Access Partners LLC in New York, said in telephone interview. “Investors and traders seem to feel confident that a deal will get done in Washington.”

Investors last week pulled more money from money-market mutual funds than any week this year as U.S. lawmakers failed to resolve the impasse over raising the debt ceiling.

Withdrawals reached $37.5 billion, with about 70 percent of the redemptions coming from institutional funds that invest in U.S. government securities, according to data from the Investment Company Institute, a Washington-based trade group.

‘Macro Uncertainties’

The S&P 500 has declined 4.7 percent from an almost three- year high in April amid speculation that the sovereign debt crisis in Europe is spreading and concern that U.S. lawmakers will fail to reach a deal on raising the nation’s debt limit. The gauge has rallied 93 percent since reaching a 12-year low in March 2009.

“Earnings look good, but macro uncertainty remains. The macro data has to turn,” Binky Chadha, Deutsche Bank AG’s chief U.S. equity strategist in New York, said in a telephone interview. “This market hasn’t moved up since the low in March 2009 unless the two key boxes of earnings and macro are checked.”

The standoff in Washington has overshadowed an earnings season that has seen per-share profit top analyst estimates at about 78 percent of the 305 companies in the S&P 500 that released results since July 11, data compiled by Bloomberg show. Net income has grown 20 percent and sales have increased 15 percent for the group, the data show.

Merck, Newmont

Merck dropped 2 percent to $34.24 for the biggest decline in the Dow. The second-largest U.S. drugmaker said it plans to slash its workforce by an additional 12 to 13 percent by 2015, expanding a restructuring program to save as much as $4.6 billion a year.

Newmont Mining Corp. fell 3.7 percent to $55.58. The largest U.S. gold producer reported second-quarter profit that trailed analysts’ estimates as mining costs increased.

The S&P 500 Energy Index fell 0.5 percent as oil futures tumbled.

Southwestern Energy Inc., the biggest natural-gas producer in Arkansas’ Fayetteville Shale, fell the second-most in the S&P 500, slumping 5 percent to $45.10 after production declined at some of its wells in the second quarter.

Exxon Mobil, the largest U.S. oil company, slipped 1.4 percent to $80.32 as the price of oil fell, heading for the first weekly drop since June.

Yahoo Sinks

Yahoo! Inc. sank 2.3 percent to $13.19, after rising as much as 4.2 percent. Alibaba Group Holding Ltd. reached an agreement with its largest shareholders Yahoo, ending a four- month spat over how to compensate investors after an ownership change in China’s most-popular online-payment service.

Starbucks Corp. rose 1.1 percent to $40.43. The world’s largest coffee-shop operator reported third-quarter earnings that exceeded analysts’ estimates as customer traffic increased in the U.S. Profit was 36 cents a share, compared with the average estimate of analysts surveyed by Bloomberg of 34 cents.

Insurance companies gave a boost to financial stocks, which rose the most among 10 S&P 500 groups.

Genworth Financial rose 5.5 percent to $8.25. The mortgage guarantor and life insurer reported second-quarter sales of $2.66 billion, beating the average analyst estimate of $2.63 billion in a Bloomberg survey. Chief Executive Officer Michael Fraizer also said he is weighing a split of the company and the possibility of share buybacks.

MetLife Jumps

MetLife increased 3.8 percent to $41.34. The biggest U.S. life insurer posted second-quarter results that beat analysts’ estimates as profit climbed outside its home market. MetLife has freed up $1 billion in capital by selling operations in Venezuela and Taiwan and portions of the businesses in Japan and the U.K., Chief Executive Officer Steven Kandarian said.

Real estate investment trusts that buy mortgage debt tumbled the most in more than a year on concern the markets that finance them will be roiled if the U.S. government defaults on its debt.

A Bloomberg index of the shares of 32 mortgage REITs, including New York-based Annaly Capital Management Inc. and Atlanta-based Invesco Mortgage Capital Inc., dropped 2 percent after falling as much as 8.5 percent, the most since May 2010.

The companies fell as the cost of overnight repurchase agreements, or repo, financing for government-backed mortgage securities jumped 0.09 percentage point to 0.2 percentage point as of 9:35 a.m., the highest since Jan. 19, according to data from ICAP Plc.

Newell, Expedia

Newell Rubbermaid gained 7.1 percent to $15.39. The maker of Sharpie pens and Rubbermaid containers reported second- quarter profit excluding some items of 46 cents a share, 9 percent higher than the average analyst estimate, Bloomberg data show.

Expedia Inc. climbed 12 percent to $32.42 for the biggest gain in the S&P 500. The online travel site reported second- quarter earnings excluding some items of 55 cents a share, beating the average analyst estimate by 12 percent, Bloomberg data show.

--With assistance from Linzie Janis and Adam Haigh in London and Lynn Thomasson in Hong Kong. Editors: Jeff Sutherland, Michael P. Regan

To contact the reporter on this story: Nikolaj Gammeltoft in New York at ngammeltoft@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net


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