U.S. Stocks Drop on Economy Concern; Merrill, MetLife Decline

Dec. 3 -- U.S. stocks dropped for the first time in five days, led by financial companies, after Deutsche Bank AG said bond losses will hurt brokerage profits and concern grew that economic growth will slow.

Morgan Stanley and Merrill Lynch & Co., the second- and third-biggest U.S. securities firms, slumped after Deutsche Bank AG said declining fixed-income markets will hurt fourth-quarter earnings. MetLife Inc. spurred declines in insurers after forecasting 2008 profit below analysts' projections. General Electric Co. fell after Citigroup Inc. analysts cut their profit estimate for the second-biggest U.S. company by market value.

The Standard & Poor's 500 Index lost 8.87, or 0.6 percent, to 1,472.27 of 2:30 p.m. in New York. About two stocks fell for every one that rose on the New York Stock Exchange. The Nasdaq Composite Index decreased 15.57, or 0.6 percent, to 2,645.39. The Dow Jones Industrial Average added 52.51, or 0.4 percent, to 13,319.21.

``People are contending with several different issues right now, and trying to get your arms around all of it is very difficult,'' said Jason Cooper, who helps manage $2.5 billion at 1st Source Investment Advisors in South Bend, Indiana. ``I'm more cautious than bullish.''

Benchmark indexes pared their losses after U.S. Treasury Secretary Henry Paulson said he's confident the government and banks will agree on a plan this week to minimize home foreclosures.

Brokerage Stocks

Morgan Stanley slipped 74 cents to $51.98. Merrill declined 52 cents to $59.42. Lehman Brothers Holdings Inc., the fourth- biggest U.S. securities firm, dropped $1.01 to $61.62. Lower revenue from fixed-income markets and possible losses from bond holdings reduced fourth-quarter profit at securities firms and may crimp next year's revenue as well, Deutsche Bank's securities analyst Mike Mayo wrote.

Financial companies in the S&P 500 declined 1.1 percent as a group and contributed the most to the index's decline. The 93- member S&P 500 Financials Index has tumbled 17 percent this year as securities firms and banks announced more than $50 billion of writedowns for their subprime assets.

U.S. stocks last week posted their biggest weekly gain since March after Fed officials signaled more interest rate cuts may be on the way. A report today showed manufacturing expanded in November at the slowest pace in 10 months, adding to evidence that the central bank may need to reduce borrowing costs to sustain growth.

Fed Outlook

Eric Rosengren, president of the Federal Reserve Bank of Boston, said today the economy's expansion will trail its long- term pace for two quarters.

``We are currently expecting the economy to grow well below potential for the next two quarters, before gradually improving over the course of next year,'' Rosengren said in a speech in Boston. ``Our research suggests that the foreclosure crisis will get worse before it gets better, but our forecast is quite dependent on how far house prices fall.''

Rosengren didn't discuss monetary policy in his speech, eight days before Fed officials meet to decide whether to lower their benchmark interest rate a third straight time.

``Uncertainty is generally not that good for stock markets, and right now we've got a fair amount of uncertainty,'' said Edward Hemmelgarn, who oversees about $350 million as president of Shaker Investments Inc. in Cleveland. ``It's hard to get conviction one way or the other. That causes people to sit on the sidelines until they can get more confident.''

Traders today boosted bets that the Fed will reduce its target for the overnight lending rate between banks by at least 0.25 percentage point at its Dec. 11 policy meeting, based on Fed funds futures.

Metlife Falls

MetLife, the biggest U.S. life insurer, slipped $1.15 to $64.44. Operating profit next year will be between $5.90 and $6.20 a share, the company said. That's less than the $6.31 average estimate of 16 analysts surveyed by Bloomberg.

Other insurers also declined. American International Group Inc., the world's largest insurer, fell $1.23 to $56.90. Prudential Financial Inc., the second-largest U.S. life insurer, declined $1.06 to $93.08.

GE dropped $1.35 to $36.94. Citigroup analysts led by Jeffrey Sprague reduced their 2008 profit estimate to $2.45 a share from $2.50, citing weakness in GE's consumer finance and health-care businesses.

Economy Watch

The Institute for Supply Management's manufacturing index dropped to 50.8, matching economists' forecasts, from 50.9 the prior month, the Tempe, Arizona-based group said today. Fifty is the dividing line between contraction and expansion. While manufacturers eliminated jobs last month, companies also reported increases in exports, production and orders.

``The market's grappling with whether or not we're in a recession,'' said Keith Wirtz, who helps oversee $23 billion as chief investment officer at Fifth Third Asset Management in Cincinnati. ``We're getting mixed news and the market is reacting by moving south.''

General Motors Corp. led declines in auto-related companies, falling 89 cents to $28.94. The largest U.S. automaker trimmed its first-quarter North American production plan 11 percent after November U.S. sales fell the same amount.

Ford Motor Co., the second-biggest U.S. automaker, declined 16 cents to $7.35. U.S. sales rose 0.4 percent last month, ending 12 straight months of declines, Ford said. The automaker also plans to cut first-quarter North American production 7.4 percent from year-earlier levels. Johnson Controls Inc., the largest maker of automotive batteries, lost 47 cents to $38.15.

E*Trade Financial Corp. posted the biggest decline in the S&P 500, dropping 49 cents, or 11 percent, to $4.11. The online bank and brokerage was downgraded to ``sell'' from ``neutral'' at Banc of America Securities, which cited the ``dwindling'' value of its retail brokerage business and mortgage-related losses at its bank.

Homebuilders Climb

D.R. Horton Inc. and Lennar Corp. led homebuilders to their biggest two-day advance since August after Paulson said a deal to fix some subprime mortgage rates before they reset higher may be reached this week. The Treasury chief today proposed letting state and local governments ``temporarily'' exempt taxes on bonds issued to help refinance subprime borrowers.

A gauge of homebuilders in S&P indexes gained 1.5 percent, bringing its two-day advance to 10 percent. D.R. Horton, the second-biggest U.S. homebuilder by sales, climbed 35 cents to $12.32.

Lennar increased 65 cents to $16.49. The largest U.S. builder and Morgan Stanley formed a land investment venture that purchased 11,000 properties from Lennar for $525 million. Merrill Lynch & Co. analysts reiterated their ``buy'' rating on Lennar, saying the land sales will boost the company's liquidity.

International Business Machines Corp. added $1.28 to $106.46. The world's biggest computer-services company said it plans to buy back as much as $1 billion of its own shares.