Bloomberg News

U.S. Stocks Decline Amid Growing Concern About European Funding

October 31, 2011

Oct. 31 (Bloomberg) -- U.S. stocks slumped, giving the Standard & Poor’s 500 Index its biggest decline in almost a month, amid concern European leaders will struggle to raise funds to contain the region’s sovereign debt crisis.

Stocks extended losses in the final hour of trading after Greek Prime Minister George Papandreou said he will put the European Union’s new agreement on financing for Greece to a referendum. Morgan Stanley and Citigroup Inc. dropped more than 7.5 percent, following the biggest weekly gain since July 2010 for financial shares in the S&P 500, as European banks retreated. Alcoa Inc. and Chevron Corp. tumbled at least 4.1 percent to pace declines in commodity shares.

The S&P 500 dropped 2.5 percent to 1,253.30 as of 4 p.m. New York time, erasing its 2011 gain and capping the biggest decline since Oct. 3. The benchmark gauge for U.S. equities rose 11 percent in October, the best month since 1991, snapping a five-month retreat. The Dow Jones Industrial Average lost 276.10 points, or 2.3 percent, to 11,955.01 today.

“We’ve been on a buying stampede,” Jeffrey Saut, chief investment strategist at Raymond James & Associates in St. Petersburg, Florida, said in a telephone interview. His firm manages $300 billion. “The market was due for a pullback,” he said. “Europe did get a rescue that buys them more time, but they are not anywhere near a resolution to their crisis.”

Stocks rose last week after European leaders agreed to expand the region’s bailout fund and U.S. economic growth accelerated. Earlier this month, the S&P 500 came within 1 percent of extending a drop from its peak in April to 20 percent, the common definition of a bear market. Since then, it has risen 14 percent.

Role of ‘Savior’

China can’t play the role of “savior,” the official Xinhua news agency said yesterday, as investors awaited the country’s response to Europe’s request for money to boost its bailout fund. Japanese Finance Minister Jun Azumi said today the government took unilateral steps to weaken the yen. Group of 20 leaders will gather Nov. 3-4 in Cannes, France, while central bankers from Australia, the U.S. and Europe will hold interest- rate policy meetings this week.

Papandreou’s gambit risks pushing the country into default if rejected by voters, and raises the ante with dissidents inside his own party. His popularity has plunged after a raft of austerity measures cut pensions and wages, increased taxes and sparked a wave of social unrest. An opinion poll published Oct. 29 showed most Greeks believe the accord on a new bailout package and a debt writedown is negative.

‘Act Decisively’

The Organization for Economic Cooperation and Development urged Group of 20 governments and central banks to “act decisively” to restore confidence as it lowered its growth forecasts for the U.S. and the euro area.

European stocks slumped, paced by losses in banks, as Italian and Spanish bonds declined. The KBW Bank Index retreated 4.1 percent. Morgan Stanley fell 8.7 percent to $17.64. Citigroup dropped 7.5 percent to $31.59.

MF Global Holdings Ltd., the holding company for the broker-dealer run by former New Jersey governor and Goldman Sachs Group Inc. co-chairman Jon Corzine, filed for bankruptcy after making bets on European sovereign debt.

“The spike in the yield on the Italian note coupled with the actions to ring fence MF Global put investors back on the defensive,” Peter Sorrentino, a senior fund manager at Huntington Asset Advisors in Cincinnati, which oversees $14.5 billion of assets, said in an e-mail. “This morning’s report of a decline in the Chicago business barometer reminded all that the economic fundamentals are still tenuous.”

Business Barometer

The Institute for Supply Management-Chicago Inc. said today its business barometer decreased to 58.4 in October from 60.4 the prior month. A level of 50 is the dividing line between expansion and contraction. Economists forecast the gauge would drop to 59, according to the median of 55 estimates in a Bloomberg News survey. Projections ranged from 56 to 62.5.

The Morgan Stanley Cyclical Index of companies most-tied to the economy lost 3.2 percent. The Dow Jones Transportation Average, a proxy for the economy, slid 2.4 percent.

Gauges of energy and raw material producers in the S&P 500 retreated at least 4.1 percent on concern about slower demand and as the dollar rallied, reducing the appeal of commodities as an alternative investment. Alcoa dropped 7 percent to $10.76. Chevron erased 4.2 percent to $105.05.

Yahoo! Inc. tumbled 5.6 percent to $15.64. The company is leaning toward selling its Asian assets and redistributing proceeds to shareholders, rather than selling itself to a group of buyers, according to people familiar with the situation. Dana Lengkeek, a spokeswoman for Yahoo, declined to comment.

Bullish Bets

Barton Biggs, the hedge fund manager who bought stocks when the market bottomed in 2009, boosted bullish bets on equities in his Traxis Global Equity Macro Fund after European leaders took action to contain the debt crisis.

The fund’s net long position has risen to 80 percent, Biggs, the founder of Traxis Partners LP, said in an interview with Betty Liu on Bloomberg Television’s “In the Loop” program. That compares with 65 percent on Oct. 17 and 40 percent about a month before that, and near 85 percent six months prior. Investors remain too pessimistic, meaning the rally will continue as they change their mind, he said.

“There’s a tremendous amount of money that’s trapped out of stocks,” Biggs said today. The rally is “going to continue for a while.”

Beating Estimates

American companies are beating Wall Street profit estimates for the 11th straight quarter, enough to revive a bull market that analysts say will eclipse any rally in the past 12 years. Price targets for companies in the index from more than 10,000 estimates suggest the S&P 500 will advance 13 percent to 1,447.93 in a year.

Companies from Google Inc. to Peabody Energy Corp. are delivering higher earnings at a time when Bill Gross, the co- chief investment officer of Pacific Investment Management Co., is warning that Europe’s debt crisis will spur a recession. While more than $6.3 trillion has been erased from global equities since May, analyst forecasts imply the benchmark measure will post its biggest rally since the 1990s technology bubble, when the gain since March 2009 is included.

“This is looking like it’s going to be a really decent quarter,” Warren Koontz, head of U.S. large-cap value stocks at Loomis Sayles & Co. in Boston, which manages about $150 billion, said in an Oct. 25 interview. “Valuations are very, very low relative to history, and you don’t have to make heroic assumptions on multiples to get reasonable returns.”

The S&P 500 traded at 11.7 times reported income on Oct. 3, within 14 percent of its price-earnings ratio at the bottom of the financial crisis in March 2009, Bloomberg data show. The index gained 3.8 percent last week.

--With assistance from Natalie Weeks in Athens and Whitney Kisling in New York. Editor: Jeff Sutherland

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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