Thursday, June 24, 2010

U.S. Stocks Drop

U.S. Stocks Drop, S&P 500 Posts Longest Decline in Seven Weeks

By Rita Nazareth

June 24 (Bloomberg) -- U.S. stocks fell, sending the Standard & Poor’s 500 Index to its longest losing streak in seven weeks, as banks dropped on concern over financial regulation and after the cost to protect from a Greek default surged to a record, while consumer shares retreated.

Bank of America Corp. and JPMorgan Chase & Co. dropped more than 2.2 percent. Retailers slumped after Bed Bath & Beyond Inc., whose shares lost 5.6 percent, missed earnings estimates. Nike Inc. slid 4 percent as the athletic shoemaker’s sales trailed projections. Dell Inc. declined 6.4 percent after its 2011 forecast disappointed some investors.

The S&P 500 lost 1.7 percent to 1,073.69 at 4 p.m. in New York, giving it a four-day slump of 3.9 percent. The Dow Jones Industrial Average slipped 145.64 points, or 1.4 percent, to 10,152.80.

“It’s such a weak environment,” said Wasif Latif, vice president of equity investments at USAA Investment Management Co., which oversees $45 billion in San Antonio. “European issues seem to be far from over. There’s concern about financial regulation. Minus the government stimulus, data showed there’s not a whole lot going on in the economy. The drop in retailers indicates they got ahead of themselves. There’s de-risking.”

Stocks extended losses in the final two hours of the day, with the S&P 500 falling as low as 1,071.81. Traders said the annual rebalancing of Russell Investments’ indexes, which takes effect after 4 p.m. New York time tomorrow, may have swayed prices today.

$3.9 Trillion

Russell estimates that $3.9 trillion is benchmarked to its U.S. stock market measures, which include the Russell 1000 Index of the biggest American companies and the Russell 2000 Index of smaller stocks. Investors that mimic the performance of those measures must buy and sell shares to match Russell’s adjustments.

“The Russell rebalancing could be exaggerating moves in a low-volume environment,” said Peter Boockvar, equity strategist at Miller Tabak & Co. in New York.

Volume on U.S. stock exchanges has averaged 8.27 billion shares a day since June 11, less than the 2010 average of 9.48 billion. Changes to the indexes unleash trading that can make rebalancing day among the busiest of the year. In 2009, 12.8 billion shares changed hands on June 26, the year’s 16th-highest total, according to data compiled by Bloomberg. In the prior four years, volume on rebalancing day was in the top 10.

‘Volume Spike’

“It’s a liquidity event where volumes spike,” said Brett Mock, chairman of the Security Traders Association, a trade group based in Darien, Connecticut. “Volume has been below average the last couple weeks, which suggests that this year’s rebalance will be concentrated in one to two days rather than a week or two.”

Stocks fell even after government reports showed unemployment claims fell from a two-month high and durable-goods orders excluding transportation equipment increased.

The number of Americans applying for jobless benefits decreased by 19,000 to 457,000 in the week ended June 19, according to the Labor Department. Orders for goods meant to last at least three years, excluding autos and aircraft, rose in May for the third time in four months. The 0.9 percent increase followed a 0.8 percent decrease in April, figures from the Commerce Department showed. Yesterday, data showed that new-home sales sank to a record low in the U.S.

“The economic figures this morning were encouraging given the disappointments we had with housing data,” said Hank Smith, who helps oversee $6 billion as chief investment officer of Haverford Trust Co. in Radnor, Pennsylvania. “Because of subpar growth, we’ll get mixed economic numbers.”

European Stock Slump

European stocks fell today, led by indexes in Greece, Spain and Portugal. Credit-default swaps on Greece rose 38 basis points to an all-time high of 970 basis points, according to CMA DataVision. Contracts on Portuguese government securities climbed 16 basis points to a two-week high of 336.5, while Spain rose 4 to 269.

Bank of America fell 2.7 percent to $15.02. The largest U.S. lender by assets had its second-quarter profit estimate cut to 20 cents a share from 29 cents, excluding some items, at Collins Stewart Plc, which cited the likely affect from financial-reform legislation.

JPMorgan declined 2.2 percent to $38.03.

Trading of bearish options jumped for the Financial Select Sector SPDR, an exchange-traded fund tracking U.S. banks, brokerages and insurers. More than 601,000 puts changed hands, more than triple the 20-day average and 14 times more than calls giving the right to buy the ETF.

Final Language

Members of the U.S. Senate and House of Representatives are negotiating the final language of legislation that may limit banks’ trading in over-the-counter derivatives as well as how they invest their own capital. Some analysts say the proposed laws have become tougher in recent weeks.

“It’s starting to really cross over, quite clearly, not into the area of financial regulatory reform but into punishment of Wall Street,” Brian Gardner, a former congressional staffer who is now a Washington analyst for Keefe, Bruyette & Woods Inc., said in an interview with Bloomberg Television. “It’s become a net negative.”

An index of retailers in the S&P 500 slumped 2.7 percent, the most among 24 groups. It has fallen 18 percent since rising to the highest level since September 2007 in April.

Bed Bath & Beyond retreated 5.6 percent to $39.12. The home-furnishings retailer forecast second-quarter earnings of no more than 63 cents a share. Analysts estimated earnings of 64 cents on average.

Nike, Dell

Nike lost 4 percent to $69.63. The largest maker of athletic shoes reported fourth-quarter revenue of $5.08 billion, missing the average analyst estimate of $5.15 billion in a Bloomberg survey.

Dell had the biggest decline in the S&P 500, dropping 6.4 percent to $12.93. The world’s third-largest personal-computer maker yesterday said it expects fiscal 2011 revenue to increase by 14 percent to 19 percent over fiscal 2010, or between $60.31 billion and $62.95 billion. Analysts surveyed by Bloomberg estimate revenue of $61.79 billion.

“This is despite its upbeat comments of an enterprise PC refresh,” Kaufman Brothers LP’s analyst Shaw Wu wrote in a note today. “We continue to be concerned with the company’s still high dependence on the competitive PC market.”

Housing Market

Home Depot Inc. and Lowe’s Cos. fell at least 2.7 percent as analysts from Janney Montgomery Scott LLC downgraded shares of the two largest U.S. home-improvement retailers to “neutral” from “buy,” saying the housing market recovery is slower than anticipated.

Pfizer Inc. dropped 2.8 percent to $14.46. The world’s biggest drugmaker said it suspended trials of an experimental pain relief drug for osteoarthritis after reports that patients’ conditions worsened and led to joint replacements.

Hasbro Inc. rose 4.2 percent to $42.86 on takeover speculation. The world’s second-biggest toymaker denied reports that it’s in talks regarding a possible takeover, saying its board spurned an approach from a private-equity firm. The Wall Street Journal reported earlier that the toymaker was in discussions with Providence Equity Partners Inc.

Poultry companies rose after President Barack Obama said Russia, once the largest importer of U.S. chicken, agreed to lift a ban. He spoke during a joint press conference with Russian President Dmitry Medvedev.

Tyson Foods Inc., the largest U.S. meat producer, gained 0.9 percent to $17.87. Sanderson Farms Inc. rose 4 percent to $52.60. Pilgrim’s Pride Corp. added 5.4 percent to $7.23.

‘Head-And-Shoulders’

The S&P 500 is near a level that, if broken, could lead the U.S. equity benchmark to a 14-month low, according to BTIG LLC.

Should the index fall 2.2 percent from today’s close, it would complete what analysts who study charts to make forecasts define as a “head-and-shoulders” pattern. That occurs after three successive rallies that an index can’t sustain. The middle peak -- the head -- marks the highest point. A drop below the “neckline” of 1,050, which passes through the lowest point of the pattern, could take the benchmark to 883, according to Michael O’Rourke, chief market strategist at BTIG.

“The pattern being formed is far from textbook,” said Yardley, Pennsylvania-based O’Rourke, whose firm serves institutional investors. “It lacks symmetry. For an ideal symmetry, the right shoulder should occur in late July, early August. This is not my base case, but instead investors should be on alert in case the pattern completes.”

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