The Fed
Well, what do you expect?
Despite rising inflation expectations the Fed keeps rates on hold
FOR the first time since the credit crisis began, the Federal Reserve’s open-market committee decided to keep American interest rates on hold. In a statement released after its policy meeting on Wednesday June 25th the Fed said the dangers to GDP growth had “diminished somewhat” but conceded that the continued rise in energy prices meant the risks of inflation had increased.
This was a shift in judgment, if a subtle one, about where the biggest threat to America’s economy lies. But there was no hint that higher interest rates are imminent. Richard Fisher, the president of the Dallas Fed, was the only member of the ten-strong rate-setting committee to vote for a rise.
After a series of cuts since the summer, the fed-funds rate, at 2%, looks uncomfortably low when set against headline inflation at 4.2%. Yet the Fed seems confident that inflation will moderate. One reason is that higher inflation reflects a jump in the cost of oil and food rather than a broad acceleration in prices. When commodity prices shoot higher, the standard policy response is to treat the resulting rise in inflation as a once-and-for-all shift in relative prices. An interest-rate increase big enough to squeeze inflation back down in short order would cause a needlessly large rise in unemployment.
As long as the public believes the Fed will act to control inflation, today’s price increases are unlikely to feed tomorrow’s wage claims, and a wage-price spiral can be averted. The trouble is, expectations of inflation have started to pick up. A survey by the University of Michigan shows that inflation is expected to be over 5% in the next year, the highest reading since 1982. And expected inflation for the next five to ten years is 3.4%, the highest since 1995. This trend is mirrored in other rich countries. In Britain expectations have risen to their highest level since the central bank’s survey began in 1999. A poll of the euro area, carried out by the European Commission, also shows a rise in the balance of consumers expecting higher inflation.
Until recently, central bankers have looked on the stability of inflation expectations with satisfaction. The public seemed to trust that independent monetary stewards would not be tempted, as politicians might be, to keep interest rates too low to control inflation. But now that faith is in doubt, policymakers seem to be shifting tack. The Fed’s statement referred to a pick up in “some” indictors of expectations but reckoned that this was a sign only of greater “uncertainty” about the outlook. In a speech on June 9th Ben Bernanke, the Fed chairman, admitted to gaps in knowledge about how the actions of central banks affect inflation expectations and how these in turn have a bearing on inflation. Such qualifications are a hint that inflation expectations may have lost their place at the heart of policymaking.
One reason not to worry is that perceptions often differ from reality. Consumers may be overly sensitive to changes in the price of frequent purchases, such as food and fuel, while they overlook the stability of other prices. As the effect of the commodity shock fades, expectations are likely to follow recorded inflation back down again.
If, however, an inflation psychology is returning, not all the rich world’s central bankers appear to be treating it with the same degree of trepidation. The European Central Bank has signalled that it will raise interest rates at its next meeting on July 3rd, to show that inflation remains its main concern. That the central bankers at its American counterpart are sitting on their hands, for the moment, reflects the greater threat of a sharp downturn in the economy there. But if the Fed’s rate-setters are too complacent about rising inflation expectations, they run the risk of squandering the credibility their predecessors earned at such a high price.
Commentary by Margaret Carlson
June 26 (Bloomberg) -- Most of us know what a brush-off looks like. You can be sure Barack Obama recognized the snub conveyed in this 27-word statement: ``President Clinton is obviously committed to doing whatever he can and is asked to do to ensure Senator Obama is the next president of the United States.'' Signed Matt McKenna, spokesman.
Message: I Don't Care. P.S. You Are Dead To Me. In the pantheon of kiss-off adverbs, ``obviously'' ranks up there with ``frankly.'' The only way to drive ``get lost'' home harder would have been to add, ``If you have any further questions, do not hesitate to call.''
Forget Obama's difficulty bringing Hillary Clinton into the fold. At least those two held private peace talks at Senator Dianne Feinstein's gated Washington house earlier this month. Tomorrow, they will have a public reconciliation in a place called Unity, a New Hampshire village so small it doesn't have a traffic light and gives neither of them a home-court advantage. In the Democratic primary in January, Obama and Clinton each won 107 votes there.
Surprise! A previous commitment prevents Bill from joining his wife. You have to wonder if a date was chosen when Bill would have a plausible reason not to attend. He will be in London's Hyde Park for a concert celebrating Nelson Mandela's birthday.
Each Has Beefs
So how long will it be before Bill and Obama actually talk? A long time, if Obama doesn't personally pay homage. The problem is that each has beefs with the other. Obama thinks Clinton unfairly compared him to Jesse Jackson. Clinton thinks Obama compared him unfavorably to Ronald Reagan when he said Reagan ``changed the trajectory of America... in a way that Bill Clinton did not.'' Clinton says he thinks the Obama folks race-baited him. Obama complained he was being double-teamed by Hillary, with Bill playing the part of vice presidential attack dog.
Bill is now furious that among Obama's first hires was Patti Solis Doyle, whom a desperate Hillary fired in a campaign shake- up. By making Doyle chief of staff to his yet-unnamed vice presidential choice, Obama signaled in a not-so-gentle way that his choice would not be Hillary. Why poke a stick in the Clintons' eyes? It's the most inexplicable thing a candidate's done all year, and I'm including Dennis Kucinich claiming to have seen a UFO.
Who did what to whom is now beside the point. Obama won, and it's the candidate's job to reach out to the loser(s), especially when one of the losers happens to be a former president, albeit one recently guilty of some very unpresidential behavior.
What Bill Wants?
Even if it comes to begging, Obama must do it. Even with that, it will be hard. Figuring out What Bill Wants could be trickier than deducing What Hillary Wants. Friends say she's given up on being offered No. 2. She'd like her debt paid off.
Not so much Bill. He's never cared about money. It was Hillary who did the cattle futures, and donated Bill's used underwear to charity for a tax deduction. Bill sees whatever they owe as just a few more speeches to wealthy businessmen in Dubai.
Obama has significant strengths in the negotiations. Now that there isn't going to be a Clinton Restoration, Bill's path to worldwide glory runs through Obama. He'd like to remain the first virtual black president, a title conferred by Pulitzer Prize-winning author Toni Morrison. That might happen.
When asked if Bill was a ``brother'' at a debate, Obama said yes, the only qualification being his dance moves. You can picture Clinton basking in the attention, giving a fist pump on stage at the convention followed by a Hollywood hug.
Bill's Own Plane
Obama could promise Clinton that ``roving ambassadorship'' that Hillary talked about for Bill had she won. It would be like a presidency-without-domestic-portfolio. And since the job would come with a plane, it would even allow Clinton to get rid of the likes of superbachelor Ron Burkle if he wants. Hillary surely would.
You can see what's holding Obama back. Why pay off the millions of dollars Hillary owes failed strategist Mark Penn and others who forced Obama to campaign three months after it was impossible for Clinton to win?
And does he really need the Clintons to defeat John McCain, a septuagenarian running to succeed a president with abysmal approval ratings in the midst of an economy in the tank, a war that a huge majority of the public is against, and 80 percent of voters saying the country's on the wrong track?
But why bet against a pair of Comeback Kids? It was only in 2000 when Hillary, fresh from her husband's impeachment, abdicated the White House for a state she had mainly visited as a tourist to run for the Senate.
Hillary's Career Arc
Seven years later, New York Senator Clinton was favored to win the presidency. That's a career arc almost as good as Obama's.
Far from making himself look weak, Obama would look strong taking the high road of reconciliation. If it turns out that all the Clintons really think about is themselves -- not about the party, the country or Obama -- and he keeps behaving the way he has, they will do the minimum. At the very least, publicly asking for their help will make it harder for the former first couple to go AWOL on him.
As good as Obama's lead in the polls looks now, politics is a dicey game. Let's fast-forward to 2011. Senate Majority Leader Hillary Clinton, the presumed 2012 presidential nominee, is proposing a congressional proclamation to honor the first black presidential candidate. Obama will travel from Illinois where he is practicing law to hear it. No one, least of all Obama, should ever forget that neither Elvis nor Mrs. Elvis is ever leaving the building.
(Margaret Carlson, author of ``Anyone Can Grow Up: How George Bush and I Made It to the White House'' and former White House correspondent for Time magazine, is a Bloomberg News columnist. The opinions expressed are her own.)
June 26 (Bloomberg) -- The Federal Reserve is sounding the alarm on inflation without committing to raise interest rates.
The Federal Open Market Committee left its benchmark rate at 2 percent yesterday and said ``upside risks'' to prices have picked up. The statement also said consumer spending is ``firming,'' while acknowledging that rising energy prices will curb growth into 2009.
The FOMC cited ``the elevated state'' of some measures of inflation expectations and dropped an April forecast of a ``leveling out'' in commodity prices. The officials want to keep their options open on rate changes in case the credit crisis worsens and the economy deteriorates after consumers spend their tax rebates, Fed watchers said.
``It is a baby step in the direction of raising rates,'' said Stephen Stanley, chief economist at RBS Greenwich Capital Markets in Greenwich, Connecticut. The central bankers signaled ``they are not expecting to tighten in the near term. That is as far as they are willing to go,'' he said.
Two-year Treasury yields, more sensitive to Fed rate expectations than longer-dated debt, initially rose after the central bank's announcement, before dropping later. The notes yielded 2.78 percent at 8:08 a.m. in New York, from 2.81 percent late yesterday.
The FOMC said employment had weakened and financial markets remained under ``considerable stress,'' even as growth risks ``diminished somewhat.''
Pledge to Act
Chairman Ben S. Bernanke and his colleagues stopped short of specifying that inflation was a greater concern than growth. They reiterated language from their April meeting that the Fed will ``act as needed'' to promote both economic expansion and stable prices.
Traders trimmed bets on a rate increase in the next three months after the announcement. Odds that the Fed will keep its benchmark at 2 percent in September rose to 23 percent today from 2 percent a week ago, according to futures contracts quoted on the Chicago Board of Trade.
``I don't think they are signaling a rate hike as a possibility at the next meeting,'' said Cary Leahey, senior economist at Decision Economics Inc. in New York. ``Before they would tighten credit, they would have a statement that would say `we do have a tightening bias' and they would say that as clearly as they can.''
Bernanke Message
Yesterday's statement reflected Fed officials' comments this month that the central bank must keep price expectations in check to avoid a spiraling in inflation. Bernanke said June 9 that officials would ``strongly resist'' a jump in those expectations.
The FOMC cited ``the elevated state'' of some measures of inflation expectations, and dropped an April forecast of a ``leveling out'' in commodity prices.
The decision wasn't unanimous, with Dallas Fed President Richard Fisher dissenting for a fourth straight time, favoring the first rate increase in two years.
Oil prices touched a record $139.89 June 16, extending a rally that helped push the consumer price index up 4.2 percent in the 12 months to May compared with an average of 2.7 percent over the past decade.
Dow Chemical Co. said two days ago that higher raw materials costs will cause the company to raise prices by as much as 25 percent in July, following an increase of as much as 20 percent. United Parcel Service Inc. cut its second-quarter profit forecast June 23 because of rising fuel costs and slowing U.S. growth.
`Tentative Signs'
``Higher headline rates of inflation have shown only a few tentative signs of embedding themselves in core inflation or in longer-term inflation expectations,'' Fed Vice Chairman Donald Kohn said in a speech to a conference today in Frankfurt.
American consumers foresee average annual inflation of 3.4 percent over the next five years, the highest expectation since 1995, according to the Reuters/University of Michigan survey. The five-year outlook among investors has been more stable, at 2.43 percent, up from 2.31 percent in January, according to a measure derived from inflation-linked Treasuries.
``What they're saying is, we have a duty to price stability, and we want you to know that we are mindful of that duty, but we may not think it's appropriate to act on that duty in the short run,'' said Neal Soss, chief economist at Credit Suisse in New York, who used to work as an aide to former Fed chief Paul Volcker.
Financial Stress
Credit markets have yet to normalize and bank losses are mounting as the economic slowdown adds to stresses from the subprime mortgage collapse. The gap between investors' expectations for the Fed's main rate and the rate that banks charge each other for funds increased this month, a sign of continued turmoil.
The difference between the three-month London Interbank Offered Rate and the overnight index swap rate widened to 0.73 percentage point yesterday from 0.68 point at the end of May. Former Fed chairman Alan Greenspan said this month the credit crisis will be over when the spread narrows past 0.25 point.
The worst housing recession in a quarter century is showing few signs of ending. Reports this week showed sales of new homes extended their decline in May, consumer confidence dropped to a 16-year low and orders for durable goods stagnated.
Yesterday's statement contained no mention of the contraction in gross domestic product that many officials judged likely at their April meeting. The Commerce Department today lifted its estimate of GDP growth for the first quarter to a 1 percent annual pace, from a previous estimate of 0.9 percent.
``I hope we'll be in good enough shape by later in the year'' that the Fed could raise rates, House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, said in an interview with Bloomberg Television. Frank added he was ``skeptical'' there will be sufficient improvement by then.
June 26 (Bloomberg) -- A divided U.S. Supreme Court ruled that the Constitution protects individual gun rights, striking down the District of Columbia's handgun ban and raising election- year questions about weapons restrictions elsewhere.
The 5-4 ruling resolves a constitutional question that had lurked for two centuries: whether the Second Amendment covers people who aren't affiliated with a state-run militia.
``The enshrinement of constitutional rights necessarily takes certain policy choices off the table,'' Justice Antonin Scalia wrote for the majority. ``These include the absolute prohibition of handguns held and used for self-defense in the home.''
Scalia said the ruling doesn't cast doubt on concealed weapons bans or laws barring handgun possession by convicted felons and the mentally ill. Still, the decision may make gun restrictions in Chicago, New York City and other cities more vulnerable to legal challenges.
The court divided along now-familiar grounds, with Chief Justice John Roberts and Justices Clarence Thomas, Samuel Alito and Anthony Kennedy joining Scalia. Justices John Paul Stevens, Stephen Breyer, Ruth Bader Ginsburg and David Souter dissented, and Stevens read from his dissent on the bench.
``The right the court announces was not `enshrined' in the Second Amendment by the framers,'' Stevens wrote. ``It is the product of today's law-changing decision.''
State Impact
Washington's 32-year-old gun law, perhaps the strictest in the nation, barred most residents from owning handguns and required that all legal firearms be kept unloaded and either disassembled or under trigger lock. Six city residents challenged the law, saying they wanted firearms available in their homes for self-defense.
Today's decision didn't resolve whether the Second Amendment binds the states in addition to the federal government and the nation's capital. The ruling upheld the first federal appeals court decision ever to void a law on Second Amendment grounds.
Adopted in 1791 as part of the Bill of Rights, the Second Amendment reads in its entirety: ``A well regulated militia, being necessary to the security of a free state, the right of the people to keep and bear arms, shall not be infringed.''
The majority justices said they had ``no doubt, on the basis of both text and history, that the Second Amendment conferred an individual right to keep and bear arms.''
1939 Case
The Supreme Court hadn't considered the Second Amendment since 1939, when it issued a ruling that both sides in the debate later claimed as support for their arguments.
Scalia today said that ruling limited only the types of weapons protected by the Second Amendment. He said the Constitution protects only those weapons ``typically possessed by law-abiding citizens,'' including handguns.
The Bush administration took a middle ground in the case, contending that, while the Second Amendment protects individual rights, it allows reasonable regulations and doesn't necessarily require the D.C. law to be overturned. The administration urged the court not to raise any doubts about federal weapons restrictions, including the ban on machine guns and the prohibition on firearms possession by convicted felons.
In an unusual move, Vice President Dick Cheney broke from the administration and urged stronger protections for gun rights. Cheney, acting in his capacity as president of the Senate, joined more than 300 lawmakers in urging the court to strike down the handgun ban.
The case is District of Columbia v. Heller, 07-290.
June 26 (Bloomberg) -- Crude oil jumped more than $4 a barrel as the dollar weakened, Libya threatened to cut production and OPEC's president said prices may reach $170 by the summer.
Libya may curb output because of U.S. efforts to intimidate OPEC, the head of the national oil company said. The group's president, Chakib Khelil, said crude may surge on a European interest rate increase, France 24 reported. Oil, gold and copper climbed today as the dollar dropped because the Federal Reserve gave no signal of higher interest rates yesterday.
``OPEC's president said prices might be going to $170 at the same time Libya said it may cut output, which touched off buying in a market that was already moving higher on the weak dollar,'' said Jim Ritterbusch, president of Galena, Illinois-based energy consulting firm Ritterbusch & Associates. ``Traders then piled on because they were afraid they missed something.''
Crude oil for August delivery rose $4.09, or 3 percent, to $138.64 a barrel at 11:02 a.m. on the New York Mercantile Exchange, after rising as much as $4.40 a barrel. Prices reached a record $139.89 on June 16.
``These days there are so many people with fingers poised on the trigger that moves are exaggerated,'' Ritterbusch said.
The dollar is also lower on a forecast that the European Central Bank will boost interest rates. The currency's drop against the euro made commodities cheaper for buyers outside the U.S. The dollar was at $1.5737 per euro as of 10:42 a.m.
``There's no reason for prices to rise $4 in 10 minutes,'' said Peter Beutel, president of energy consultant Cameron Hanover Inc. in New Canaan, Connecticut. ``Things are very unsettled and now the worry is that the European Central Bank may raise rates, which would be the same as another Fed cut.''
Benchmark Rate
The Federal Reserve yesterday left its benchmark interest rate at 2 percent and said ``uncertainty about the inflation outlook remains high'' as energy and commodity prices continue to rise. Leaving the interest rate unchanged ended the most aggressive series of rate cuts in two decades.
``Commodities are rallying because there's a lack of confidence that the Fed will raise rates,'' said Phil Flynn, a senior trader at Alaron Trading Corp. in Chicago. ``They didn't raise rates yesterday and it doesn't look like they will raise them soon. Their statement yesterday was too wishy-washy.''
A decision by the ECB to increase interest rates in July may cause the dollar to decline and prompt investors to buy more oil, Khelil, who is also the Algerian oil minister, told the Paris- based television channel. Prices would ease toward the end of the year, he said.
Summer Support
Threats against Iran would also support prices during the summer, he said. A political crisis that would stop Iran's oil production would push prices over $200 a barrel, to possibly $400 a barrel, he said.
Saudi Arabia pledged it will pump an extra 200,000 barrels a day next month to calm the oil market at a June 22 meeting. The kingdom hosted the summit of 35 producing and consuming countries in the Red Sea port of Jeddah.
``The Saudis go out of their way to have this specific meeting outside the OPEC frameworks, and if you're the OPEC president, you want to be important, so you come out of it and say $150 to $170,'' said Roger Read, an analyst at Natixis Bleichroeder in Houston. ``He's trying to prove he matters and OPEC matters and the Saudis don't make all the decisions.''
Libya's National Oil Corp. Chairman Shokri Ghanem declined to say when a decision would be made on whether to lower Libyan production or give any indication of the size of the cut under consideration. Libya ranks third in terms of oil production in Africa, behind Angola and Nigeria.
Sanctions
He said the reductions may also be made because of threats of sanctions against Iran and U.S. legislation allowing lawsuits against the Organization of Petroleum Exporting Countries.
``If they want the production capacity of OPEC to increase, they should facilitate foreign investments, not threaten with freezing their assets in the U.S,'' Ghanem said.
President George W. Bush has said he'd veto a so-called NOPEC bill passed in May by the House of Representatives, because it may limit the availability of gasoline and further increase fuel prices.
Brent crude oil for August settlement rose $3.43, or 2.1 percent, to $137.17 a barrel on London's ICE Futures Europe exchange. Prices climbed to a record $139.32 on June 16.
June 26 (Bloomberg) -- Sales of previously owned homes in the U.S. rose in May from the lowest level in at least nine years as a slide in prices lured some buyers into the market.
Resales increased 2 percent to a 4.99 million annual rate, higher than forecast, from a 4.89 million pace in April, the National Association of Realtors said today in Washington. The Commerce Department separately said the economy grew at a 1 percent annual pace in the first quarter, capping the weakest six-month expansion in five years.
The supply of homes for sale remains about twice the level representing a stable market, according to the NAR, and figures have yet to show any sign of sustained sales gains. Federal Reserve officials yesterday said the housing contraction will likely damp growth into 2009.
``It's going to be a long, painful end'' to the housing industry's decline, Mark Zandi, chief economist at Moody's Economy.com in West Chester, Pennsylvania, said in an interview with Bloomberg Radio. ``Prices have come down enough that affordability has been restored in some markets and we're starting to see some buyers come back in.''
Stocks dropped and Treasuries rose today on growing concern that earnings at banks and consumer companies will trail forecasts. The Standard & Poor's 500 Stock Index fell 1.9 percent to 1,296.36 at 11:29 a.m. in New York. Benchmark 10-year note yields fell to 4.05 percent from 4.10 percent late yesterday.
Price Declines
The median price of existing homes dropped 6.3 percent from May last year to $208,600, the NAR said. Last year's nationwide drop in prices of single-family homes was probably the first since the 1930s, according to the group.
Economists forecast home resales would rise to a 4.95 million pace, according to the median of 72 projections in a Bloomberg News survey. April's level matched a record low. The group's total figures, which include single-family homes and properties such as condominiums, date from 1999.
``Sales will probably fall another 5 percent or 10 percent before bottoming by the end of the summer,'' Michelle Meyer, an economist at Lehman Brothers Holdings Inc. in New York, said in an interview with Bloomberg Television. ``It will be a feeble recovery, we will kind of bounce along the bottom.''
Resales rose in three of four regions, led by a 5.5 percent gain in the Midwest. Purchases increased 4.6 percent in the Northeast and 2 percent in the West. Sales dropped 0.5 percent in the South.
The Commerce Department's revised gain in gross domestic product was up from the preliminary estimate of 0.9 percent released last month. A decline in residential construction subtracted 1.1 percentage points from growth in the period.
Drag on Economy
Declines in residential construction have been a drag on growth since the first quarter of 2006. In addition, demand for furniture and building materials has sagged and home prices and consumer confidence have fallen.
``It feels to us as though we're pretty much on the bottom, but that doesn't make you feel too good,'' Robert Toll, chief executive officer of Toll Brothers Inc., the largest U.S. luxury- home builder, said in a Bloomberg Television interview June 24. ``We have noticed some good times coming back in some markets, but in other markets, there's no sign of recovery.''
On June 3, Horsham, Pennsylvania-based Toll reported a loss for the third straight quarter.
Labor Department figures today separately showed that the number of Americans collecting unemployment benefits reached a four-year high of 3.14 million in the week ended June 14. Initial jobless claims held at 384,000 last week, the department also reported.
Annual Change
Compared with a year earlier, home sales were down 16 percent in May.
Sales of existing single-family homes climbed 1.6 percent to an annual rate of 4.41 million pace. Purchases of condos and co- ops increased 5.5 percent to a 580,000 rate.
``Home sales are rising in distressed markets,'' said Paul Bishop, a senior economist at the agents group. About one-third of total purchases last month were ``short sales'' that reflected foreclosures or distressed properties, according to NAR estimates.
The number of previously owned unsold homes on the market at the end of May fell 1.4 percent to 4.49 million from 4.55 million in April. The total represented 10.8 months' supply at the current sales pace. The agents' group has said that a five-to-six month's supply reflects a balanced market.
Types of Properties
Existing home sales account for about 85 percent of the U.S. housing market, while new home sales make up the rest. Monthly figures for resales are compiled from contract closings and may reflect sales agreed upon weeks or months earlier.
Recent reports suggest the housing slump will continue. The Mortgage Bankers Association's index of loan applications to purchase homes fell last week to the lowest level in more than five years.
The Commerce Department said yesterday that sales of new homes fell to a 512,000 pace last month, the second-lowest reading since 1991. At that pace, it would take 10.9 months to sell all the houses currently on the market.
Fed policy makers yesterday left the benchmark interest rate at 2 percent, ending the most aggressive series of rate cuts in two decades, and said growth risks had diminished while higher energy costs boosted the threat of inflation.
The ``ongoing housing contraction,'' stricter lending rules and the jump in fuel costs were among the trends the central bankers predicted would hurt economic growth.
June 26 (Bloomberg) -- U.S. stocks tumbled, sending shares of General Motors Corp., Citigroup Inc. and CBS Corp. to the lowest levels in more than nine years, as credit-market writedowns and a slowing economy threatened to extend the longest slump in quarterly profits since 2002.
GM, the largest automaker, plunged the most in three years as Goldman Sachs Group Inc. advised selling the stock and oil rose by more than $3 a barrel. Citigroup led an index of financial stocks to a five-year low as Goldman analysts said the lender may report an $8.9 billion second-quarter charge and cut its dividend. Research In Motion Ltd., maker of the BlackBerry, posted its biggest drop since 2002 on concern competition with Apple Inc.'s iPhone is reducing earnings.
The Standard & Poor's 500 Index lost 25.61, or 1.9 percent, to 1,296.36 at 11:29 a.m. in New York, extending its 2008 retreat to 12 percent. The Dow decreased 229.12, or 1.9 percent, to 11,582.71, its lowest level since September 2006. The Nasdaq Composite Index sank 59.98, or 2.5 percent, to 2,341.28. Eight stocks fell for each that rose on the New York Stock Exchange.
``Most investors are going to sit on the sidelines until they're more certain the sharks have left the waters and it's safe to go back in,'' said Bruce McCain, the Cleveland-based head of investment strategy at Key Private Bank, which oversees about $30 billion. ``The writeoffs have been far worse than anyone would have imagined.''
All 10 industry groups retreated as Nike Inc.'s U.S. earnings and Oracle Corp.'s profit forecast also disappointed investors and the government reported initial jobless claims that were higher than economists' projections.
Earnings Slump
Earnings at companies in the S&P 500 slid 18 percent on average in the first quarter, the third straight retreat, according to data compiled by Bloomberg. Analysts project profits will drop 8.9 percent this quarter, according to a Bloomberg survey last week.
The S&P 500 has dropped more than 17 percent from a record in October as economic growth slowed, oil climbed to a record and global financial firms racked up almost $400 billion in credit- related writedowns. The Commerce Department said the U.S. economy expanded at an annual rate of 1 percent in the first quarter, capping the weakest six months of growth in five years, as measures of inflation accelerated more than previously projected.
Citigroup dropped $1.15, or 6.1 percent, to $17.70, the lowest level since October 1998. Goldman added the shares to its ``conviction sell'' list. The bank also lowered its recommendation on U.S. brokerages to ``neutral'' from ``attractive,'' saying the pace of deterioration in the industry ``appears to be far worse than'' it originally anticipated.
`Challenging News Flow'
Merrill Lynch & Co., the third-biggest U.S. securities firm, declined $1.61 to $33.85, a five-year low. Goldman analysts predicted the company will post a $3.55-a-share loss in 2008, compared with their previous estimate for an 8-cent profit.
``Investors can expect more challenging news flow over the summer,'' said Andreas Nigg, head of international equities at Vontobel Asset Management in Zurich, which oversees $39 billion worldwide. ``Until the housing market stabilizes and banks stop bleeding, consumer confidence will remain shaky.''
Research In Motion plunged $17.40, or 12 percent, to $124.94. Second-quarter earnings will be as low as 84 cents a share, the company said. That missed the average prediction by analysts of 92 cents, according to a Bloomberg survey. The report marked Research In Motion's first earnings disappointment in five quarters.
`Escalating Headwinds'
General Motors fell $1.42, or 11 percent, to $11.39, the steepest slide since March 2005. Lear Corp., the second-largest maker of vehicle seats, lost $3.07, or 17 percent, to $15.05. Goldman downgraded both stocks to ``sell'' from ``neutral.''
``We expect escalating headwinds from volume/mix pressures driven by gas prices, falling confidence and tightening credit,'' the brokerage wrote in a report.
GM and Chrysler LLC may face a cash crunch next year as U.S. sales decline on a slowing economy and rising gasoline prices that are pushing buyers toward more fuel-efficient vehicles, Fitch Ratings said yesterday.
Fitch lowered the issuer default ratings at GM and Auburn Hills, Michigan-based Chrysler to B-, six steps below investment grade, from B.
Chrysler spokesman Dave Elshoff said in an interview that the company has no plans to file for bankruptcy, countering speculation in financial markets.
Companies in the S&P 500 that rely on discretionary consumer spending lost 2.5 percent as a group, retreating to an almost four-year low. CBS, the broadcast controlled by billionaire Sumner Redstone, slid 61 cents to $19.58, its lowest price since October 1998.
Oracle, Nike Plunge
Oracle Corp., the world's second-largest software maker, slipped 61 cents to $21.94. The company said it expects first- quarter profit before some items of 26 cents to 27 cents a share. Analysts had expected 27 cents, according to the average of 16 estimates in a Bloomberg survey. Sales will rise between 18 percent and 20 percent, Oracle said.
Nike Inc. retreated $5.90, or 8.9 percent, to $60.073, the biggest drop since September 2001. The world's largest athletic- shoe maker said pretax income in the U.S. declined 10 percent to $390.7 million in the three months that ended May 31. U.S. orders through November were unchanged.
Lennar Corp. declined $1, 6.7 percent, to $13.57. The second-largest U.S. homebuilder reported a loss that exceeded analysts' estimates as the company was forced to cut prices to attract buyers.
Economy Watch
Initial jobless claims totaled 384,000 in the week ended June 21, unchanged from the previous week's tally that was higher than previously estimated, the Labor Department said. The total number of people collecting benefits rose by 82,000 to 3.139 million in the week ended June 14, the highest since February 2004.
The revised gain in gross domestic product was up from a preliminary estimate of 0.9 percent issued last month, the Commerce Department said.
Bed Bath & Beyond Inc. climbed $1.29, or 4.5 percent, to $29.86 for the top gain in the S&P 500. The largest U.S. home- furnishings retailer reported profit that fell less than analysts estimated because of higher sales.
The S&P 500 Energy Index lost 0.5 percent, the smallest retreat among 10 industry groups, as crude climbed.
European stocks fell after Belgium-based lender Fortis scrapped its dividend and said it will sell shares. Asian stocks advanced.
U.S. stocks rose yesterday, sending the S&P 500 to its best gain in two weeks, after the Federal Reserve said risks to economic growth have diminished and gave no indication it will raise interest rates anytime soon.
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