U.S. Stocks Drop as Financials Have Biggest Decline in 8 Years

By Lynn Thomasson

July 24 (Bloomberg) -- U.S. stocks tumbled, sending financial shares to their worst drop in eight years, after home sales slid more than forecast and investor Bill Gross predicted the housing slump will cost banks and brokerages $1 trillion.

Citigroup Inc., Bank of America Corp. and Goldman Sachs Group Inc. retreated and shares of builders posted their biggest decline ever as a report showed sales of previously owned homes fell to the lowest level in a decade. Ford Motor Co., the world's third-largest carmaker, plunged the most since August 2000 after reporting a loss twice as big as analysts estimated.

``I would feel very uncomfortable for the average investor to get too aggressive in financials,'' said Stephen Wood, who helps manage $213 billion as a senior portfolio strategist at Russell Investments in New York. The recovery in the housing market ``isn't going to be coming any time soon.''

The Standard & Poor's 500 Index dropped the most since June 26, losing 29.65 points, or 2.3 percent, to 1,252.54. The Dow Jones Industrial Average slid 283.1, or 2.4 percent, to 11,349.28. The Nasdaq Composite Index tumbled 45.77, or 2 percent, to 2,280.11. Five stocks retreated for each that gained on the New York Stock Exchange. European shares declined as German business confidence sank, while Asian shares advanced.

Banks Tumble

Financial stocks in the S&P 500 fell 6.7 percent as a group, the third drop in the past three weeks greater than 5 percent. Today's slump follows a six-day, 30 percent rally spurred by better-than-estimated earnings reports from Citigroup, JPMorgan and Wells Fargo and legislation to rescue Fannie Mae and Freddie Mac.

The S&P 500 pared its rebound from an almost three-year low on July 15 to 3.1 percent.

Citigroup, the largest U.S. bank by assets, lost 9.8 percent to $19.06. Bank of America, the second-biggest, sank 8.4 percent to $30.64. JPMorgan, the No. 3, retreated 6.7 percent to $39.14. Goldman, the biggest securities firm, slid 4.1 percent to $180.26.

The slump in sales of previously owned U.S. homes signaled weakening consumer confidence is hurting demand. Resales dropped 2.6 percent to a lower-than-forecast 4.86 million annual rate from a 4.99 million pace the prior month, the National Association of Realtors said. The median home price dropped 6.1 percent from June last year.

Washington Mutual Slides

Washington Mutual Inc. dropped 13 percent to $4.03, bringing the stock's two-day decline to 31 percent. Gimme Credit LLC said unsecured creditors were ``pulling funds'' from the biggest U.S. savings and loan, citing a decline in federal funds purchased and commercial paper. The company fell yesterday after Piper Jaffray Cos. advised investors to sell the stock and Merrill Lynch & Co. and Friedman Billings Ramsey Group Inc. analysts said the bank may need more capital.

Washington Mutual said in an e-mailed statement that it does all of its business through banking operations and ``does not rely on commercial paper.''

The 28 percent jump in the S&P 500 Financials Index during the five trading days ended July 22 was the biggest one-week advance for any of the S&P 500's 10 industry groups since daily calculations on the indexes began in 1989, according to Harrison, New York-based research firm Bespoke Investment Group LLC.

An S&P index of 15 homebuilders slumped 12 percent, its biggest drop ever, as 13 of its companies retreated.

Ryland Group Inc., the U.S. homebuilder for first-time buyers, tumbled 19 percent to $21.43 and led the group's decline after reporting a second-quarter loss that exceeded analysts' estimates.

A total of $5 trillion of mortgage loans belong to ``risky asset categories,'' Gross, manager of the world's largest bond fund at Pacific Investment Management Co., said in commentary posted on the firm's Web site today.

$1 Trillion Forecast

His $1 trillion forecast implies that credit-market losses are less than halfway over. Since the start of 2007, global financial firms have reported $468.1 billion in losses and writedowns, according to data compiled by Bloomberg News. Firms worldwide have raised $344.6 billion of capital since the third quarter of 2007.

``As long as housing prices go down, no one can say how much the banks are going to lose and how long it will last,'' said Charles Knott, who oversees $800 million as chief investment officer at Knott Capital Management in Exton, Pennsylvania.

The number of vacant houses hit an all-time high in the second quarter as the U.S. real estate recession pushed homeowners into foreclosure and lenders seized properties. A total of 18.6 million U.S. homes stood empty, more than at any time in history and 6.9 percent higher than a year earlier, the U.S. Census Bureau said.

Consumer Shares Slide

Homebuilders, automakers and hotel owners dragged a group of consumer stocks down 2.8 percent as oil rose from a seven-week low on speculation crude's retreat during past two weeks has been too much. Crude for September delivery added $1.05, or 0.8 percent, to $125.49 a barrel.

Ford tumbled 15 percent to $5.11. Excluding costs the company considers one-time expenses, the loss was $1.38 billion, or 62 cents a share. On that basis, Ford was expected to report a loss of 28 cents a share, the average estimate of 12 analysts surveyed by Bloomberg.

Starwood Hotels & Resorts Worldwide Inc. fell the most since July 2002, tumbling 11 percent to $35.26. The third-largest U.S. lodging company said full-year profit may drop more than analysts estimated as consumers and businesses trim travel spending to cope with a weakened economy and higher gasoline prices.

Marriott International Inc., the biggest hotel chain, slumped 8.7 percent to $26.06.

McDonald's, AT&T

McDonald's Corp., the biggest restaurant company, lost 2.2 percent to $58.37. Deutsche Bank analysts led by Jason West cut their recommendation on the shares to ``hold'' from ``buy,'' writing that higher beef costs and fewer customer visits may reduce profitability.

AT&T Inc. led phone companies in the S&P 500 to a 3.1 percent drop after JPMorgan Chase & Co. cut the largest U.S. telephone carrier to ``neutral'' from ``outperform'' on concern the company's wireline business will deteriorate. AT&T fell 4.1 percent to $31.70 for the steepest drop since February.

Amazon.com Inc. added the most since in a year, gaining 12 percent to $78.72. Second-quarter profit topped analysts' estimates after Chief Executive Officer Jeff Bezos promoted free shipping and lower prices to entice U.S. customers. Full-year sales may rise to as much as $20.1 billion, compared with an earlier forecast of as much as $20 billion, the company said.

A bigger-than-forecast increase in jobless claims also weighed on stocks. A government report showed the number of Americans filing first-time claims for unemployment benefits rose last week to 406,000, the highest in almost four months, signaling the slowing economy is weakening the labor market.

`Drifting Over'

``You are starting to see a lot of the problems in the financial area drifting over into more of the real economy,'' Tobias Levkovich, the chief U.S. equity strategist at Citigroup Inc. in New York, said in an interview on Bloomberg Television.

Except for Canada, all of the 23 developed nations in the MSCI World Index experienced bear-market plunges of 20 percent or more since September as credit losses increase and record commodity prices stoke inflation. Brazil today became the 23nd out of 25 developing countries in the MSCI Emerging Markets Index to enter a bear market.

Chipotle Mexican Grill Inc. fell the most since McDonald's sold the company to the public in January 2006, losing 20 percent to $67.30. The fast-food chain reported 0.9 percent less second- quarter profit than analysts estimated, according to Bloomberg data, amid higher costs for beef and cheese.

Qualcomm Inc. surged the most since May 2002, jumping 17 percent to $52.43. The world's biggest maker of mobile-phone chips increased its 2008 sales and profit targets and settled a patent dispute with handset maker Nokia Oyj.

To contact the reporter on this story: Lynn Thomasson in New York at lthomasson@bloomberg.net.