Bloomberg News

U.S. Stocks Decline Amid Disappointing Global Economic Reports

February 22, 2012

Feb. 22 (Bloomberg) -- U.S. stocks fell, a day after the Standard & Poor’s 500 Index failed to hold at an almost four- year high, as sales of previously owned houses missed estimates and data from Europe and China spurred economic concern.

Dell Inc., the world’s third-largest maker of personal computers, tumbled 5.8 percent after its sales forecast missed estimates. Toll Brothers Inc. and KB Home dropped more than 4.1 percent to pace a slump in homebuilders. Banks had the biggest loss in the S&P 500 among 24 groups, falling 1.7 percent. Gannett Co., the owner of 82 newspapers including USA Today, surged 4.2 percent as it will boost its dividend.

The S&P 500 retreated 0.3 percent to 1,357.66 at 4 p.m. New York time. The Dow Jones Industrial Average lost 27.02 points, or 0.2 percent, to 12,938.67 after the 30-stock gauge rose above 13,000 yesterday for the first time since 2008. The Russell 2000 Index of small companies dropped 0.8 percent to 816.50.

“You can ride this, but you’ve got to be very careful and sit near the exit,” David Darst, the New York-based chief investment strategist at Morgan Stanley Smith Barney, said in a telephone interview. His firm has $1.6 trillion in client assets. “Most of the economies are slowing. Earnings will be slowing. The market is overbought.”

Stocks fell as purchases of previously owned homes rose to a 4.57 million annual rate, less than forecast, data from National Association of Realtors showed. China’s manufacturing may shrink for a fourth month, according to data from HSBC Holdings Plc and Markit. European services and manufacturing output unexpectedly contracted. Fitch Ratings lowered Greece’s credit rating and said a default is highly likely.

Monthly Gain

Today’s loss trimmed the S&P 500’s gain in February to 3.5 percent. Still, the index was poised for a third straight month of gains, the longest streak in a year, on higher-than-estimated economic data and expectations Europe would tame its crisis. The S&P 500 yesterday failed to hold above its April 2011 peak of 1,363.61, which was the highest level since June 2008.

“We have a trifecta of worrisome news,” Alan Gayle, a senior strategist at RidgeWorth Capital Management in Richmond, Virginia, which oversees about $47 billion, said in a telephone interview. “The softness in economic data suggests that global momentum remains muted. We have slower earnings growth and the market is facing some technical resistance.”

Earnings at S&P 500 companies will grow 7.4 percent this year, according to the average analyst estimate in a Bloomberg survey, following a 15 percent increase in 2011.

Dell Tumbles

Dell tumbled 5.8 percent to $17.15. Sluggish sales have raised concerns about Dell’s comeback plan, which has relied on streamlining operations to boost earnings. After an almost 25 percent gain in Dell’s shares this year, some investors may have been overly optimistic about the company’s ability to turn around its operations, said Brian Marshall, an analyst at ISI Group Inc. in San Francisco.

A gauge of homebuilders in S&P indexes dropped 2.7 percent. Toll Brothers declined 5.2 percent to $22.48. The largest U.S. luxury-home builder reported an unexpected first-quarter loss. KB Home decreased 4.2 percent to $11.26.

Financial shares dropped on speculation Europe’s rescue package for Greece won’t resolve the region’s debt crisis. Euro- area finance ministers signed off yesterday on a 130 billion- euro ($172 billion) rescue for Greece aimed at averting the first sovereign default in the currency union’s 13-year history.

The KBW Bank Index declined 2 percent as all of its 24 stocks retreated. Citigroup Inc. dropped 3 percent to $32.36. Regions Financial Corp. erased 3 percent to $5.80.

Wal-Mart, Gannett

Wal-Mart Stores Inc. fell the most in the Dow, slumping 2.5 percent to $58.60. The shares retreated 3.9 percent yesterday after the world’s largest retailer reported fourth-quarter profit that trailed analysts’ estimates.

Gannett surged 4.2 percent to $15.61. The company said it will raise its quarterly dividend to 20 cents a share from 8 cents. The publisher’s goal is to return more than $1 billion to shareholders by 2015, the company said.

Intuit Inc. gained 5.9 percent to $60.92. The seller of TurboTax software for filing with the Internal Revenue Service boosted its full-year earnings forecast.

Energy shares added 0.2 percent for the biggest increase among 10 groups in the S&P 500. Nabors Industries Ltd. climbed 7 percent, the most in the benchmark gauge, to $21.78. The world’s largest land-drilling contractor reported fourth-quarter sales and earnings that exceeded analysts’ estimates.

A two-week retreat in the Dow Jones Transportation Average may signal a warning for the rally that has added $1.35 trillion to American equity values this year, according to analysts who use charts to predict markets.

Leading Indicator

The gauge has fallen 3.8 percent since Feb. 3, a period in which the Dow Jones Industrial Average climbed 0.8 percent and reached the highest level since May 2008. The transportation average is viewed by some analysts as a leading indicator because truckers, airlines and couriers may be the first to experience the effects of an economic slowdown.

“This market does seem to be overdue for a pullback,” Chuck Carlson, chief executive officer at Horizon Investment Services LLC in Hammond, Indiana, said in a phone interview. Horizon oversees $150 million and uses the relationship between the industrial and transportation gauges to determine how much cash to hold. A divergence “doesn’t always necessarily signal a change in the major trend, but it can foreshadow a bit of a correction,” he said.

Futures traders are pricing in the biggest increase in U.S. equity hedging costs since 2010 after the S&P 500 rose within 2 points of erasing last year’s slump.

Wider Gap

April futures on the Chicago Board Options Exchange Volatility Index closed at 25.15 yesterday, or 6.96 points higher than the level of the gauge, according to data compiled by Bloomberg. The gap widened to 7.02 points on Feb. 17. The last time two-month futures were that high in relation to the index known as the VIX was July 2010.

The S&P 500 has surged 24 percent since Oct. 3 on optimism Europe will resolve the debt crisis. Now, traders are increasing hedges to protect against losses, according to Dominic Salvino, a specialist on the CBOE floor for Group One Trading.

“The consensus bet is that we’re going to have turmoil or some levels of higher volatility in the future,” Liam Dalton, who oversees about $1.8 billion as chief executive officer of Axiom Capital Management Inc. in New York, said in a telephone interview yesterday. “If you were to talk about a breakdown in cooperation in Europe, it would affect everything. If the sentiment goes negative, then you can get these periods of increased volatility.”

--With assistance from Lu Wang in New York. Editors: Jeff Sutherland, 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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