U.S. Stocks Retreat, Led by Financials; Bear Stearns Tumbles

March 10 (Bloomberg) -- U.S. stocks fell for a third day, led by a plunge in financial shares, on speculation earnings estimates will prove to be too high as the economy slows and credit losses spread.

The decline in banks steepened on concern Bear Stearns Cos. was facing financial difficulties even after former Chief Executive Officer Alan ``Ace'' Greenberg said the speculation was ``ridiculous.'' Fannie Mae and Freddie Mac, the largest U.S. mortgage finance providers, both fell 13 percent on expectations they face increasing losses as the housing slump deepens.

The Standard & Poor's 500 Index declined 15.29 points, or 1.2 percent, to 1,278.08 at 2:17 p.m. in New York and is down 18 percent from its Oct. 9 record. The Dow Jones Industrial Average lost 113.65, or 1 percent, to 11,780.04. The Nasdaq Composite Index decreased 30.46, or 1.4 percent, to 2,182.03. Three stocks retreated for every one that rose on the New York Stock Exchange.

``You've got the issues surrounding the financial system and the undeniable fact that the pace of economic activity has slowed,'' said Dean Gulis, part of a group that manages $3 billion in Bloomfield Hills, Michigan, for Loomis Sayles & Co. ``This is not a happy environment for stocks.''

The S&P 500 dropped to the lowest since August 2006 on growing concern that the economy will slip into a recession after banks wrote down $188 billion in subprime-related securities losses and analysts forecast earnings for members of the index will decline this quarter and next. The benchmark for U.S. equities is approaching a so-called bear market, marked by a decline of at least 20 percent from a peak.

Banks Slump

Financial shares in the S&P 500 slumped 2.1 percent as a group today and contributed the most to the overall index's retreat. Producers of raw materials retreated 2.8 percent and telephone companies dropped 1.6 percent as a group.

Citigroup Inc. slipped 80 cents to $20.12. Bank of America Corp. declined $1.10 to $35.64. Citigroup and other U.S. banks had their combined earnings estimates cut by $8.8 billion at Morgan Stanley, which cited slower equity capital markets and a ``severe'' deterioration in credit conditions this year.

Citigroup's estimated earnings in 2008 were trimmed to $2.09 from $2.60 a share at Morgan Stanley, analysts led by Betsy Graseck said in a note to clients. Citigroup's shares may fall to $20, down from the earlier estimate of $22, Graseck said.

Bear Stearns Concern

Bear Stearns, the second-biggest underwriter of mortgage- backed bonds, fell $5.72, or 8.2 percent, to $64.36.

``There's an insolvency rumor and concerns on liquidity, that they just have no cash,'' said Michael Mainwald, head of equity trading at Lek Securities Corp. in New York.

There is no truth to the rumors, Russell Sherman, a spokesman for New York-based Bear Stearns, said in an interview. Greenberg, the former Bear Stearns chief executive officer and current board member, told CNBC that liquidity rumors are ``totally ridiculous.''

Blackstone Group LP, manager of the largest buyout fund, slumped 55 cents, or 3.8 percent, to $14.03, 55 percent below the offering price in its June initial public offering. The manager of the world's largest leveraged-buyout fund said fourth-quarter profit decreased 89 percent on lower takeover fees and the writedown of its holdings in bond insurer Financial Guaranty Insurance Co.

Profit excluding some compensation costs declined to $88 million, or 8 cents a share, from $808.1 million, or 72 cents, a year earlier, the New York-based company said. That fell short of the average estimate of 20 cents a share by seven analysts in a Bloomberg survey.

Countrywide

Countrywide Financial Corp. dropped 62 cents, or 12 percent, to $4.45. The mortgage lender is under investigation by the Federal Bureau of Investigation for possible securities fraud, according to a person familiar with the probe.

FBI spokesman Richard Kolko declined to comment yesterday. Jumana Bauwens, a spokeswoman for Calabasas, California-based Countrywide, said the company is unaware of any FBI probe. Bank of America, which is in the process of buying Countrywide, declined to comment, spokesman Scott Silvestri said.

Fannie, Freddie Mac

Fannie Mae fell $3.01 to $19.76 after Barron's said solvency may be tested at the largest source of financing for U.S. home loans.

Freddie Mac slid $2.52 to $17.13. The company ``could generate a writedown'' of as much as $5 billion should the McLean, Virginia-based company be required to mark to market half of its portfolio of subprime mortgages and mortgage bonds, Credit Suisse analyst Moshe Orenbuch said today in a report to clients.

Financial companies in the S&P 500 have dropped 19 percent since the start of the year, dragged down by the collapse of the subprime-mortgage market.

Freeport-McMoRan Copper & Gold Inc. lost $3.69 to $96.19. Copper fell on speculation a U.S. slowdown will exacerbate slowing demand from China, the world's largest user of the metal. Aluminum, zinc and tin also declined.

Concern that the U.S. has tipped into a recession grew last week after the Labor Department reported a drop of 63,000 jobs last month, the most since 2003, and home foreclosures climbed to a record.

Medco Health Solutions Inc. gained $1.31, or 3.1 percent, to $43.15. The biggest U.S. manager of drug benefits was upgraded to ``buy'' from ``neutral'' by Goldman Sachs Group Inc. analyst Randall Stanicky, who said the company is ``attractively valued.''

McDonald's Corp. climbed the most since January, gaining $1.64, or 3.1 percent, to $53.91. The world's largest restaurant company said Europe and Asia spurred the sales increase. U.S. same-store sales rose 8.3 percent, exceeding the 7.3 percent median analyst estimate in a Bloomberg survey.

European stocks fell for a third day and Asia's regional benchmark slid to a seven-week low.