U.S. Stocks Fall Amid Europe Downgrade Concern as JPMorgan Drops
January 13, 2012, 5:39 PM ESTBy Rita Nazareth
Jan. 13 (Bloomberg) -- U.S. stocks retreated, snapping a four-day rally for the Standard & Poor’s 500 Index, as euro- region governments braced for credit downgrades by S&P and after JPMorgan Chase & Co.’s profit slumped 23 percent.
After the market close, S&P said France was downgraded, while Germany had its credit rating affirmed. All 10 groups in the S&P 500 fell as financial, industrial and technology measures declined at least 0.7 percent. JPMorgan, the largest U.S. bank by assets, dropped 2.5 percent. Bank of America Corp., Intel Corp. and Alcoa Inc. lost more than 1.3 percent. Eastman Kodak Co. tumbled 23 percent as it is said to be in talks with Citigroup Inc. to provide bankruptcy financing.
The S&P 500 slid 0.5 percent to 1,289.09 as of 4 p.m. New York time, paring a drop of as much as 1.4 percent. The Dow Jones Industrial Average slid 48.96 points, or 0.4 percent, to 12,422.06. The market will be closed on Jan. 16 for a holiday.
“People are keeping a very careful eye on Europe and they are nervous with earnings,” Mark Bronzo, who helps manage $23.4 billion at Security Global Investors in Irvington, New York, said in a telephone interview. “Most people expected France to be downgraded. It’s critical that any downgrades in Europe do not involve Germany,” he said. In the U.S., “JPMorgan’s earnings were OK, but the quality is not good.”
Germany, Belgium, Estonia, Finland, Ireland, Luxembourg and the Netherlands had their ratings affirmed by S&P as France lost its AAA rating. France was cut to AA+ and the rating has a negative outlook, S&P said in a statement. Cyprus, Italy, Portugal and Spain were cut by two notches S&P said. The long- term ratings on Austria, Malta, Slovakia and Slovenia were cut one notch.
‘Size and Scope’
European leaders’ attempts to address economic woes hasn’t “produced a breakthrough of sufficient size and scope to fully address the Eurozone’s financial problems,” S&P said. The region continues to face tightening credit conditions among other problems, S&P said.
Concern about potential downgrades overshadowed data showing that confidence among U.S. consumers rose more than forecast in January to the highest level in eight months, a sign household spending may hold up early this year. Separate figures showed that the U.S. trade deficit widened more than forecast in November as American exports declined and companies stepped up imports of crude oil and automobiles.
The S&P 500 rose 0.9 percent since Jan. 6, capping the second straight week of gains, amid lower borrowing costs at auctions in Europe. Investors also watched fourth-quarter results. S&P 500 companies, which beat estimates in the previous 11 quarters, are forecast to report a 4.6 percent increase in per-share profit during the September-December period, according to projections compiled by Bloomberg.
On the Sidelines
Financial companies slumped 0.8 percent, the most among 10 groups in the S&P 500. JPMorgan dropped 2.5 percent to $35.92. Investment-banking revenue declined 30 percent to $4.36 billion from a year earlier as many clients stayed on the sidelines on concern the European debt crisis would lead to a global economic slowdown.
“Financials would have to participate for the market to do well,” James Dunigan, who helps oversee $104 billion as chief investment officer in Philadelphia for PNC Wealth Management, said in a telephone interview. “We’ll look to see whether all that disruption in Europe had an effect in overall earnings reports. If that bleeds over into our export numbers, it may have an impact on the earnings side.”
Banks Tumble
Bank of America lost 2.7 percent to $6.61, while Morgan Stanley retreated 3.2 percent to $16.63. Citigroup fell 2.7 percent to $30.74. Goldman Sachs Group Inc. slid 2.2 percent to $98.96.
The Morgan Stanley Cyclical Index retreated 1.1 percent amid concern about global economic growth. The Dow Jones Transportation Average dropped 0.6 percent. Intel, the world’s biggest chipmaker, declined 2.4 percent to $25.14. Alcoa slumped 1.3 percent to $9.80.
Kodak tumbled 23 percent to 52 cents. The imaging company may seek protection from creditors within weeks and then hold an auction to sell its patent portfolio, said three people familiar with the matter, who asked not to be identified because the talks are private. Kodak may seek about $1 billion in so-called debtor-in-possession financing, though terms may change, two people said.
Weaker Coal Market
Patriot Coal Corp. declined 13 percent to $7.87. The U.S. mining company said it will idle production in West Virginia because of a weaker market for coal used by steelmakers. Other coal producers fell. Alpha Natural Resources Inc. dropped 10 percent, the most in the S&P 500, to $20.19. Arch Coal Inc. retreated 9.8 percent to $14.13.
Charles Schwab Corp. lost 2.5 percent to $12.16. The independent, San Francisco-based brokerage was downgraded to “market perform” from “outperform” at Wells Fargo & Co.
BankUnited Inc. rallied 5.8 percent to $24.48 as it is exploring a sale one year after its private-equity owners took the lender public, according to a person with knowledge of the matter. BankUnited is working with Goldman Sachs Group Inc., said the person, who declined to be identified because the discussions are private. The company could still decide against a sale.
Stock investors shouldn’t get used to the relative calm that markets are now showing, according to Andrew Garthwaite, a global equity strategist at Credit Suisse Group AG.
‘Abnormally Sensitive’
Volatility is likely to rise this year, Garthwaite wrote yesterday in a report. He attributed the outlook to excessive borrowing in developed economies, which ensures that investors will be “abnormally sensitive” to shifts in economic growth and government policy, he added.
“Sentiment in the market has clearly changed over the past three months,” wrote Garthwaite, who is based in London.
Even so, developed-country debt is still $8 trillion too high, the report said. Garthwaite came up with that estimate by comparing the borrowing relative to gross domestic product with a figure based on the debt-to-GDP ratio’s trend during the past three decades.
The need to reduce this burden creates “a considerable amount of tail risk,” or potential for unlikely stock-market outcomes, the report said. He mentioned 11 possible surprises for this year. One was a breakup of the euro region, which he estimated would send the S&P 500 falling to 800, or 38 percent less than yesterday’s close.
--With assistance from David Wilson 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: Michael P. Regan at mregan12@bloomberg.net
