Bloomberg News

U.S. Stocks Little Changed on Concern Over Europe Bailout Rating

December 07, 2011

Dec. 6 (Bloomberg) -- U.S. stocks were little changed as concern the European Financial Stability Facility may lose its top credit rating tempered optimism about efforts to tame the region’s credit crisis.

JPMorgan Chase & Co. and Citigroup Inc. dropped at least 1.3 percent. Darden Restaurants Inc., operator of the Red Lobster chain, tumbled 10 percent after cutting its full-year sales and profit growth forecasts. 3M Co. added 1.9 percent as revenue may increase as much as 6 percent next year amid a boost from acquisitions. General Electric Co. rose 2.3 percent as Sanford C. Bernstein & Co. raised its recommendation.

The S&P 500 dropped less than 0.1 percent to 1,256.84 at 11 a.m. New York time. The benchmark gauge gained 1 percent yesterday even as S&P put 15 euro nations on review for possible downgrade. The Dow Jones Industrial Average added 35.34 points, or 0.3 percent, to 12,133.17 today.

“The European crisis is an on and off switch,” Alan Gayle, a senior strategist at RidgeWorth Capital Management in Richmond, Virginia, which oversees about $44 billion, said in a telephone interview. “While the market was not overly shocked by S&P announcements, they do create a sense of urgency for European leaders. The good news is that they are coming up with proposals, but that also raises questions on whether they will be in fact able to deal with them.”

German Finance Minister Wolfgang Schaeuble said S&P’s warning will help force European leaders to ratchet up efforts to resolve the crisis. Six nations may lose their AAA ratings depending on the result of a summit of European Union leaders this week, S&P said yesterday. Today, S&P said the European Financial Stability Facility may lose its top credit rating if any of its guarantors have their own debt grade cut.

3M Rallies

3M rallied 1.9 percent to $82.49. Sales may be $30.2 billion to $31.5 billion, according to a presentation on the company’s website, in line with the $30.6 billion average estimate from analysts surveyed by Bloomberg. The maker of Scotch-Brite sponges and Nexcare thermometers expects earnings per share of $6.25 to $6.50 next year, also tracking estimates.

GE added 2.3 percent to $16.71. Sanford C. Bernstein raised its recommendation for the Fairfield, Connecticut-based company to “outperform” from “market perform,” citing rising dividends and energy orders starting in 2012.

Toll Brothers Inc. added 1.3 percent to $21, pacing a rally in homebuilders. The largest U.S. luxury-home builder reported earnings that beat analysts’ estimates as prices rose and sales improved at its East Coast communities.

Financial stocks had the biggest decline in the S&P 500 among 10 industries, falling 0.4 percent. JPMorgan lost 1.3 percent to $33.06. Citigroup lost 1.5 percent to $29.39.

Better Results

Bank of America Corp. gained 1.1 percent to $5.86. Its trading results have improved in its investment banking unit this quarter, Chief Executive Officer Brian T. Moynihan said. Separately, a filing in Manhattan federal court said that Bank of America reached a $315 million settlement with class action plaintiffs who sued its Merrill Lynch unit over claims tied to mortgage-backed securities.

Darden fell 10 percent to $42.74. Full-year earnings per share growth from continuing operations will be 4 percent to 7 percent, down from a previous forecast of 12 percent to 15 percent, the Orlando, Florida-based company said today in a statement. Total sales growth will be 6 percent to 7 percent, reduced from a prior forecast of 6.5 percent to 7.5 percent.

Laszlo Birinyi says he knew it would be hard to make predictions for 2012 in October, when he saw a headline suggesting that markets would rise or fall depending on whether the tiny nation of Slovakia approved a bailout plan for Europe.

Doesn’t Take Much

Birinyi, president of stock market research and money- management firm Birinyi Associates Inc., says markets are so volatile that it doesn’t take much to send them reeling, reports Bloomberg Markets magazine in its January issue.

“There are so many exogenous factors that to try to forecast the market with a degree of confidence is difficult,” Birinyi says.

The best strategy for stock investors, he says, is to stick with iconic brands, such as Apple Inc. or Ralph Lauren Corp., and with companies that offer “meaningful dividends” of at least 5 percent.

The most widely followed “fear gauge” for stocks sends relatively weak signals most of the time about whether to buy or sell, according to Tobias Levkovich, Citigroup Inc.’s chief U.S. equity strategist.

During the past four months, the Chicago Board Options Exchange Volatility Index, known as the VIX, fell to 27.84 from a second-half peak of 48.00. The readings are based on the prices paid for S&P 500 options.

‘Little Guidance’

“At current levels, the VIX provides little guidance for investing purposes,” Levkovich wrote in a Dec. 2 report. He added that the index “is not that effective as a market-timing tool unless it is at extremes.”

When the VIX was less than 30, the S&P 500 had an average gain of 2.9 percent in the next six months, according to the report. At less than 20, the average climbed to 3.8 percent. Levkovich found a bigger gap at 12 months, when increases averaged 6.9 percent when the index was less than 30 and 10.3 percent at less than 20.

Relatively high readings usually preceded larger gains in stocks, according to the report. When the volatility index was above 40, the S&P 500 rose 14 percent for the next six months and 29 percent for the next 12 months on average.

--With assistance from David Wilson and Alexis Leondis in New York. Editor: Jeff Sutherland

To contact the reporter on this story: Rita Nazareth in Sao Paulo at rnazareth@bloomberg.net

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


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