U.S. Stocks Tumble, Sending S&P 500 to Bear Market; Banks Slide

By Eric Martin

July 9 (Bloomberg) -- U.S. stocks tumbled, sending the Standard & Poor's 500 Index into its first bear market since 2002, on growing concern the biggest mortgage finance companies may not weather the housing slump.

Fannie Mae and Freddie Mac led financial shares to their biggest decline in six years after Fannie's borrowing costs surged on concern it won't be able to fund its business. Cisco Systems Inc. dropped to the lowest level since September 2006 and Intel Corp. slid to a six-month low on analyst predictions that a slowing economy may hurt sales. Bank of America Corp. and Citigroup Inc. fell as Credit Suisse AG said 40 percent of the biggest U.S. lenders may need to cut dividends or raise more capital.

The S&P 500 lost 29.01 points, or 2.3 percent, to a two-year low of 1,244.69, with a third of the drop occurring in the last 20 minutes of trading. The Dow Jones Industrial Average fell 236.77, or 2.1 percent, to 11,147.44. The Nasdaq Composite Index plunged 59.55, or 2.6 percent, to 2,234.89. Almost four stocks declined for each that rose on the New York Stock Exchange.

``The trouble with the financials is that so much of it is a black box,'' Nick Sargen, who helps oversee $30 billion as chief investment officer of Fort Washington Investment Advisors in Cincinnati, said in an interview with Bloomberg Television. ``Everybody thought the worst of the writedowns were passed in April. And behold, here we are now and that wasn't the case.''

The S&P 500 extended its retreat from an October record to more than the 20 percent threshold that signals the start of a so-called bear market. The Dow has fallen 21 percent from its October all-time high and closed in a bear market on July 2.

Bear Markets

The S&P 500 has had eight previous bear markets since 1962, according to data compiled by Birinyi Associates, a stock research firm based in Westport, Connecticut. Stocks have fallen an average of 33 percent over 382 days during those retreats. The S&P 500's retreat from its peak has lasted 274 calendar days so far. The Dow has had 11 previous bear markets since 1962, averaging a decline of 29 percent over 322 days.

A 46 percent tumble in financial shares and a 27 percent decline by consumer companies dependent on discretionary spending led the S&P 500's retreat from its Oct. 9 closing record of 1,565.15. MBIA Inc., the bond insurer whose credit rating was reduced five times by Moody's Investors Service, slid the most since the S&P 500's all-time high, falling 94 percent. Washington Mutual Inc., the biggest U.S. savings and loan, had the No. 2 retreat, falling 84 percent as declining home prices and rising gas and food prices spurred foreclosures.

Fannie, Freddie

Fannie Mae slipped $2.31, or 13 percent, to $15.31, its lowest price in 16 years. Freddie Mac lost $3.20, or 24 percent, to $10.26, also the lowest since 1992. Fannie's 3.25 percent benchmark notes priced to yield 3.27 percent, or 74 basis points more than comparable U.S. Treasuries, the Washington-based company said in an e-mailed statement. That's the biggest spread since Fannie Mae first sold two-year benchmark notes in 2000.

Fannie and Freddie, which are rated Aaa by the world's largest credit-rating companies, are being treated by derivatives traders as if they are rated five levels lower. Credit-default swaps tied to $1.45 trillion of debt sold by the two are trading at levels that imply the bonds should be rated A2 by Moody's Investors Service, according to data compiled by the firm's credit strategy group.

No `Clarity'

``The market's not giving any of these financial companies a break,'' Sean Clark, the Philadelphia-based chief investment officer of Clark Capital Management Group, which oversees $1.3 billion, said in an interview on Bloomberg Television. Investors are ``looking at more writedowns that could be huge and upcoming. The clarity just isn't there.''

Bank of America slid $1.48, or 6.3 percent, to $22.06. Citigroup lost 95 cents, or 5.5 percent, to $16.44. Regions Financial Corp., Alabama's biggest bank, declined $1.35, or 12 percent, $9.60.

Credit Suisse analysts lowered 2008 earnings-per-share estimates 17 percent across the bank industry. Wachovia Corp.'s price target was cut to $14 a share from $18, and Regions Financial Corp. was lowered to $12 from $21.

Wachovia Corp., the fourth-biggest U.S. lender, fell $1.25, or 8 percent, to $14.29. Regions tumbled 12 percent to $9.60.

Banks may be forced to slash their dividends or raise ``more expensive and dilutive forms of capital over the next few quarters,'' Credit Suisse said.

The S&P 500 Financials Index tumbled 5.2 percent, its steepest retreat since July 2002.

`Challenging'

Cisco lost $1.30, or 5.7 percent, to $21.58, leading technology shares to a 3.2 percent tumble as a group.

``Enterprise spending remains challenging and there has been further slowing in the U.S., especially in the West Coast region'' for Cisco, New York-based UBS analyst Nikos Theodosopoulos wrote in a report today. ``We also see Europe slowing from last quarter.''

Intel fell $1.11, or 5.3 percent, to $19.81. Merrill's Srini Pajjuri said some customers have curbed spending and Advanced Micro Devices Inc. may win more server sales from Intel with its new Barcelona processor.

Profits at S&P 500 companies declined 11 percent on average in the second quarter, according to the average estimate of analysts surveyed by Bloomberg. Income is projected to slump 60 percent on average at financial companies.

Global stock markets have erased more than $11 trillion this year as record oil prices and more than $400 billion in credit- related losses threaten to push the U.S., the world's largest economy, into recession.

Dividend at Risk?

New York Times Co. dropped to the lowest in 12 years after Lehman Brothers Holdings Inc. lowered its earnings estimates for the newspaper publisher. The company's dividend is at risk of being cut in coming years, Lehman analyst Craig Huber also said today in a note to clients. New York Times lost $1.05, or 7 percent, to $14.01.

The S&P 500 Steel Index gained 3.7 percent. UBS predicted ``robust'' earnings from the group, and said the industry is undervalued. Nucor Corp. added $2.43, or 3.9 percent, to $65.59. U.S. Steel Corp. climbed $7.62, or 5.1 percent.

The Russell 2000 Index, a benchmark for companies with a median market value 23 times smaller than the S&P 500, fell 2.8 percent to 663.75. The Dow Jones Wilshire 5000 Index, the broadest measure of U.S. shares, dropped 2.2 percent to 12,658.17. Based on its retreat, the value of stocks decreased by $347 billion.

The benchmark index for U.S. stock options climbed the most in a week. The VIX, as the Chicago Board Options Exchange Volatility Index is known, added 9 percent to 25.23. The index measures the cost of using options as insurance against declines in the S&P 500.

``We're in the bear market,'' Barry James, president of James Investment Research, which manages $2 billion in Dayton, Ohio, said in an interview with Bloomberg Television. There is ``a lot of downward pressure obviously on the financials and on lending at both the corporate and consumer level, and that will continue to hurt earnings. We're getting to the point of getting another playable rally, but until then, look out below.''

To contact the reporter on this story: Eric Martin in New York at emartin21@bloomberg.net.