Bloomberg News

U.S. Stocks Slump as Germany Damps Optimism on Crisis Solution

October 17, 2011

Oct. 17 (Bloomberg) -- U.S. stocks declined, after the biggest weekly gain in the Standard & Poor’s 500 Index since 2009, as financial shares slumped and the German government damped optimism of a quick fix to Europe’s debt crisis.

Banks in the S&P 500 tumbled 6.3 percent as a group. Citigroup Inc. and Wells Fargo & Co. slipped at least 1.6 percent as revenue dropped amid economic weakness and market turmoil linked to Europe. Alcoa Inc. and Caterpillar Inc. retreated more than 3 percent to pace losses among companies most-tied to the economy. Gannett Co. sank 8.7 percent after profit fell as newspaper advertising declined.

The S&P 500 decreased 1.9 percent to 1,200.86 at 4 p.m. New York time. The benchmark gauge for American equities rallied 6 percent last week. The Dow Jones Industrial Average retreated 247.49 points, or 2.1 percent, to 11,397 today.

“European leaders want to strike the right tone that they will fix things, but not create too much expectations,” Dan Veru, chief investment officer at Fort Lee, New Jersey-based Palisade Capital Management LLC, which manages $3.4 billion, said in a telephone interview. “If we don’t have a healthy financial system, it’s going to be difficult for there to be a sustainable economic recovery. In addition, the market is selling off because we got near the top of the trading range.”

The S&P 500 rose last week amid optimism over corporate earnings and steps by European leaders to support the region’s banks. It surged 11 percent from Oct. 3, its lowest close in more than a year, through Oct. 14. The rebound brought the gauge close to the top of a price range between 1,074.77 and 1,230.71, where it’s traded for more than two months.

No Complete Fix

Germany said European Union leaders won’t provide the complete fix to the euro-area debt crisis that global policy makers are pushing for at an Oct. 23 summit. Group of 20 finance ministers and central bankers concluded weekend talks in Paris endorsing parts of an emerging plan to avoid a Greek default, bolster banks and curb contagion.

“There’s not going to be a quick fix to the problems in Europe,” Brian Jacobsen, chief portfolio strategist at San Francisco-based Wells Fargo Funds Management, which oversees $215 billion, said in a telephone interview. “This economic recovery will be uneven in terms of geography and the sectors that are really benefiting from the slow growth.”

U.S. equity futures fell before the open of regular trading as data showed that manufacturing in the New York region contracted in October at a faster pace than forecast. Separate figures showed that industrial production in the U.S. advanced in September.

Alcoa, Caterpillar

The Morgan Stanley Cyclical Index of companies most-tied to the economy lost 3.1 percent. The Dow Jones Transportation Average, a proxy for the economy, retreated 2.8 percent. Alcoa, the largest U.S. aluminum producer, slumped 6.6 percent to $9.58. The shares had the biggest decline in the Dow. Caterpillar retreated 3.1 percent to $81.52.

The KBW Bank Index decreased 3.9 percent as 23 of its 24 stocks fell. The index jumped 6.9 percent last week.

Wells Fargo dropped 8.4 percent to $24.42. Investors shrugged off the record profit posted by Wells Fargo today and focused on a 6 percent decline in revenue to $19.6 billion. That missed the $20.2 billion estimate of analysts as low interest rates cut into profit on loans. Chief Executive Officer John Stumpf is focusing on costs as the 9.1 percent U.S. jobless rate and slow economy keep borrowers on the sidelines.

“The economic recovery has been more sluggish and uneven than anyone anticipated,” Stumpf said in a statement. “We can’t change the economic environment, yet we have worked hard to control the variables we can.”

Citigroup Slumps

Citigroup retreated 1.7 percent to $27.93, even as its quarterly profit beat analysts’ estimates, helped by an accounting gain and a reduction in losses tied to soured loans. Excluding the accounting adjustment, revenue fell 8 percent.

Gannett slumped 8.7 percent to $9.99. The owner of 82 newspapers and 23 television stations reported third-quarter profit decreased 1.6 percent as publishing revenue, including advertising and circulation, declined 5.3 percent.

American Airlines parent AMR Corp. dropped 6.1 percent to $2.76, after falling as much as 11 percent today, triggering a brief halt in trading. American Airlines said it recessed negotiations with its pilots union today after making “significant progress” toward a contract that would end more than five years of talks.

Halliburton Co., the world’s second-largest oilfield services provider, fell 7.9 percent to $34.48 on concern about oil-price volatility and the slower-than-expected growth in its international business.

M&A Deal

El Paso Corp. surged 25 percent, the most since 2002, to $24.45, as Kinder Morgan Inc. agreed to buy the company for $21.1 billion. The cash and stock offer is valued at $26.87 per El Paso share, or 37 percent more than the Oct. 14 closing price, Houston-based Kinder Morgan said in a statement yesterday.

Utility, telephone and consumer staples providers, which are least-tied to the economy, outperformed the S&P 500 today.

Stock market bulls and bears agree on at least one thing. The highest valuations for makers of household goods since 2008 signal the best is over after the industry rose more than any other group this year.

Bears say the easy money has been made in so-called defensive shares should the world slip into a recession. Bulls favor companies with faster earnings growth and cheaper valuations. The last time household-goods producers were this expensive versus the MSCI World, stocks were about to begin an advance in which bank, mining and industrial stocks jumped more than 137 percent, while consumer staples rose 76 percent.

‘Too Much Money’

“You’ve got too much money that has been bet that we’re going into a recession,” said Jeffrey Saut, who helps oversee $300 billion as chief investment strategist at Raymond James & Associates in St. Petersburg, Florida. “If we don’t go into a recession, you’ll get a whole rotation out of these highly valued defensive stocks into more aggressive stocks.”

Barton Biggs, who bought stocks when the market bottomed in March 2009, boosted bullish bets on equities in his Traxis Global Equity Macro Fund on improving U.S. economic data. The fund’s net long position rose to 65 percent from 40 percent about a month ago, according to Biggs, the founder of Traxis Partners LP, in an interview with Betty Liu on Bloomberg Television’s “In the Loop” program. Biggs said on Sept. 22 that bullish bets at all Traxis funds had fallen to 20 percent.

“I’m inclined to stay where I am, which is moderately, cowardly bullish,” Biggs said. “The thing that makes me want to hang in there is that the high frequency economic news from the U.S. has definitely improved. It’s gotten pretty good.”

--With assistance from Corinne Gretler in Zurich, Lynn Thomasson in Hong Kong and Lu Wang and Inyoung Hwang in New York. Editors: Jeff Sutherland, Michael P. 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: Nick Baker at nbaker7@bloomberg.net


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