Bloomberg News

U.S. Stocks Fall as Fitch Says Europe a Risk to American Banks

November 16, 2011

Nov. 16 (Bloomberg) -- U.S. stocks tumbled, erasing yesterday’s gains, as Fitch Ratings said further contagion from Europe’s debt crisis will pose a risk to American banks and amid concern higher oil prices will hamper economic growth.

Financial shares led Standard & Poor’s 500 Index losses as Citigroup Inc. and Morgan Stanley dropped at least 4.1 percent. Dell Inc. sank 3.2 percent as the personal computer maker told investors to expect slower sales growth for the rest of the year. Abercrombie & Fitch Co. tumbled 14 percent as profit at the clothing retailer trailed estimates. Rambus Inc. plunged 61 percent after losing a jury trial against Micron Technology Inc. and Hynix Semiconductor Inc. Micron surged 23 percent.

The S&P 500 slid 1.7 percent to 1,236.91 at 4 p.m. New York time. The Dow Jones Industrial Average fell 190.57 points, or 1.6 percent, to 11,905.59. Oil rose above $100 a barrel.

“It’s fear of the unknown spooking the market,” Madelynn Matlock, who helps oversee about $14.5 billion at Huntington Asset Advisors in Cincinnati, said in a telephone interview. “There may be more exposure to Europe out there than people really think even if banks think they are covered. It’s going to be a tough market for quite a while,” she said. “Increasing oil prices is a concern because it’s like a tax on the consumer.”

Stocks extended losses after Fitch said that while U.S. lenders have “manageable direct exposures” to Greece, Ireland, Italy, Portugal and Spain, further turmoil in those markets poses a “serious risk.” Equities also fell after the Bank of England Governor Mervyn King said Britain faces a “markedly weaker” outlook for the economy as Europe’s crisis threatens global growth.

Financial Shares Tumble

Diversified financial companies slumped the most among 24 industries in the S&P 500, losing 3.9 percent as a group. Citigroup decreased 4.1 percent to $26.86. Morgan Stanley sank 8 percent to $14.66.

JPMorgan Chase & Co. and Goldman Sachs Group Inc., among the world’s biggest traders of credit derivatives, disclosed to shareholders that they have sold protection on more than $5 trillion of debt globally. Just don’t ask them how much of that was issued by Greece, Italy, Ireland, Portugal and Spain, known as the GIIPS.

As concerns mount that those countries may not be creditworthy, investors are being kept in the dark about how much risk U.S. banks face from a default. Firms including Goldman Sachs and JPMorgan don’t provide a full picture of potential losses and gains in such a scenario, giving only net numbers or excluding some derivatives altogether.

No Advantage

“If you don’t have to, generally people don’t see the advantage to doing it,” said Richard Lindsey, a former director of market regulation at the U.S. Securities and Exchange Commission who worked at Bear Stearns Cos. from 1999 through 2006. “On the other hand, if there were a run on Goldman Sachs tomorrow because the rumor was that they had exposure to Greece, you’d see them produce those numbers.”

Dell slumped 3.2 percent to $15.13. The company missed third-quarter revenue estimates after walking away from $2 billion in potential PC sales to focus on more profitable technology. It gave up billions in “low-value” PC opportunities because it wanted to preserve margins, Vice Chairman Jeff Clarke told analysts yesterday.

Abercrombie & Fitch tumbled 14 percent, the biggest decline in the S&P 500, to $48.10. The company’s cost of goods sold rose 34 percent to $429.3 million in the three months ended Oct. 29. Abercrombie, along with other apparel retailers, is contending with higher prices for materials such as cotton and oil and higher labor costs in Asia.

Jury Trial

Rambus plummeted a record 61 percent to $7.11. It lost a $3.95 billion jury trial over its allegations that Micron and Hynix conspired to prevent its memory chips from becoming an industry standard. Micron surged 23 percent, the most in the S&P 500, to $6.74.

Marathon Petroleum Corp., HollyFrontier Corp. and other U.S. refiners declined on an announcement that the Seaway pipeline will be reversed, which may boost the costs of crude and narrow profits from making fuel. Marathon slumped 12 percent to $32.64. HollyFrontier lost 10 percent to $24.82.

Benchmark gauges briefly recovered as Boston Federal Reserve President Eric Rosengren said Europe’s debt crisis may warrant coordinated action by the Fed and the European Central Bank. Earlier today, economic reports also limited losses. Industrial production in the U.S. rose 0.7 percent in October, more than the 0.4 percent median forecast. Confidence among U.S. homebuilders unexpectedly climbed in November.

Not All Fine

“The economic data has been getting better, but I don’t think the market should look at that thinking all is fine,” Wasif Latif, vice president of equity investments at USAA Investment Management Co. in San Antonio, which oversees about $50 billion, said in a telephone interview. “There’s a probability that Europe goes back into recession. That can put pressure on the rest of the world,” he said. “When oil goes up, consumers feel that in their pocketbooks.”

Tyco International Ltd. rallied 2.6 percent to $46.99 after quarterly earnings rose more than analysts estimated and the company said its planned separation into three businesses is progressing on schedule.

Autodesk Inc. rose 4.5 percent to $35.58. The maker of design software reported third-quarter profit of 44 cents a share, exceeding the 41-cent average analyst estimate.

ING’s Forecast

The S&P 500 will rally to 1,450 next year as the U.S. economy continues to expand while corporate profits and dividends increase, according to ING Investment Management.

Paul Zemsky, the head of asset allocation for ING, said in a meeting today in New York that while equity markets will remain volatile in the first half of 2012 as European leaders sort through the region’s fiscal issues, stocks will rebound as the American economy expands at a pace of 2.5 percent. Zemsky’s 2012 projection for the S&P 500 would be a gain of 15 percent from yesterday’s close.

Investors shouldn’t “get confused by the noise emanating out of Europe and focus on fundamentals,” said Douglas Cote, chief market strategist at ING, which oversees $550 billion, at the meeting today in New York. Cote predicts profit by S&P 500 companies in 2012 will set a record this year and surpass it in 2012, rising to $105 a share.

--With assistance from Christine Harper, Michael J. Moore and Inyoung Hwang in New York. Editor: Nick Baker

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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