U.S. Stocks Drop for 2nd Week on Concern About Company Profits

By Jeff Kearns

Aug. 30 (Bloomberg) -- U.S. stocks fell for a second week as an advance in oil prices and lower-than-estimated earnings at Dell Inc. spurred concern a yearlong drop in profits isn't over.

Technology stocks in the Standard & Poor's 500 Index posted their biggest weekly loss since June after consumer spending slowed and Dell's earnings trailed forecasts. Makers of food and household goods dropped for a second week after Credit Suisse Group AG said it expects slower growth from Coca-Cola Co., while quarterly profit declined more than analysts projected at Brown- Forman Corp., the maker of Jack Daniel's whiskey.

``The profit picture doesn't look that good,'' said Brett Hammond, who helps oversee $420 billion as chief investment strategist for TIAA-CREF in New York. ``Optimistic earnings estimates may prove to be disappointing as we move into the third and fourth quarters, so we don't see evidence of a sustained equity rally.''

The S&P 500 lost 0.7 percent to 1,282.83, extending this year's retreat to 13 percent. The Dow Jones Industrial Average decreased 0.7 percent to 11,543.55. The Russell 2000 Index of small-cap stocks added 0.3 percent to 739.50, advancing for the seventh time in eight weeks.

Profits among S&P 500 companies may slip 1.1 percent in the third quarter from a year ago before rising 42 percent in the fourth, according to analyst estimates compiled by Bloomberg.

Technology Spending

Dell, the world's second-biggest personal-computer maker, slid the most in the S&P 500, losing 14 percent to $21.73, after it said the U.S. slump in technology spending moved abroad. Dell said ``continued conservatism'' from some U.S. clients is spreading to Europe and Asia, and at least four analysts cut their targets for Dell's stock price.

Technology companies lost 3 percent for the week's biggest decline among 10 industry groups in the S&P 500. The Nasdaq Composite Index, which gets 43 percent of its market value from computer stocks, lost 2 percent to 2,367.52, the most in two months.

Crude oil advanced a second week, adding 0.8 percent to $115.46 a barrel, as Hurricane Gustav approached the Gulf of Mexico and oil producers shut at least 6.6 percent of output in the region. Futures are up 57 percent from a year ago.

Spending by U.S. consumers slowed in July as the impact of the tax rebates faded and a pickup in inflation eroded Americans' buying power. Purchases rose 0.2 percent, one-third the pace in June, the Commerce Department said yesterday, while prices surged the most in 17 years.

McDonald's, Starbucks

McDonald's Corp., the world's largest restaurant company, fell 2.2 percent to $62, declining for a third week, the longest losing streak since January. Starbucks Corp., the biggest coffee- shop chain, slipped 3 percent at $15.56.

``Are there still going to be challenges on the economic front? Absolutely,'' Michael Strauss, who helps oversee $43 billion at Commonfund in Wilton, Connecticut. ``There's still severe macroeconomic risk.''

Consumer staples companies in the S&P 500 dropped 2 percent for the second-biggest decline in the broader index. Brown-Forman posted the second-steepest loss after profit trailed analysts' estimates because it wrote down the value of dead agave plants used for making tequila. The shares declined 6.1 percent to $72.01.

Coca-Cola slid 4.2 percent to $52.07 for the biggest retreat in the Dow average after Credit Suisse downgraded the stock and said a stronger dollar may hurt profit growth. The world's biggest soft-drink maker faces increased competition from rival PepsiCo Inc. while an appreciating dollar will slow sales in Europe, Credit Suisse said.

Freddie, Fannie

Financial stocks rose for the first time in three weeks after Freddie Mac and Fannie Mae, the biggest backers of mortgage loans, rallied and Lehman Brothers Holdings Inc. climbed on a report it may cut 1,000 jobs and form a new company to buy securities linked to home loans.

``Financials have started to stabilize,'' said John Wilson, co-director of equity strategy at Morgan Keegan & Co., which manages $120 billion in Memphis, Tennessee. ``The market's been encouraged by the fact that they've held up. If they were breaking down, we'd be a lot more nervous.''

Fannie Mae jumped 37 percent to $6.84 after Chief Executive Officer Daniel Mudd replaced three top deputies in an effort to restore investor confidence after record losses and a 90 percent drop in the shares. Freddie rose the most in the S&P 500, adding 61 percent to $4.51, as the pace of mortgage-related purchases slowed and Citigroup Inc. said the firm has enough capital to last through the year. Lehman added 12 percent to $16.09.

MBIA Inc. had the second biggest gain among S&P 500 stocks, jumping 59 percent to $16.22. The world's largest bond insurer agreed to reinsure $184 billion in municipal bonds for Financial Guaranty Insurance Co., winning new business after losing its top AAA rating.

Small Stocks Outperform

The Russell 2000 added 3.5 percent in August, outperforming other U.S. stock benchmarks. Ambac Financial Group Inc. led the advance, almost tripling from July, followed by R.H. Donnelley Corp. and Radian Group Inc.

The S&P 500 and the Dow average both had their best month since April, rising 1.6 percent and 1.3 percent, respectively. The Nasdaq climbed the most since May, adding 2.1 percent.

The benchmark index for U.S. stock options snapped a six- week losing streak, the longest in five years. The VIX, as the Chicago Board Options Exchange Volatility Index is known, rose 9.8 percent to 20.65. The index measures the cost of using options as insurance against declines in the S&P 500.

Economic Growth

The U.S. economy expanded at a faster pace than previously estimated in the second quarter, boosted by surging exports and a smaller decline in inventories. The 3.3 percent annualized increase in gross domestic product was higher than forecast and compares with an advance estimate of 1.9 percent last month, the Commerce Department said Aug. 28.

``The economy is holding up better than feared,'' said Jim Paulsen, who helps oversee about $220 billion as chief investment strategist at Wells Capital Management in Minneapolis. ``It's hard to keep scaring people to death over a recession that's just not happening.'' U.S. unemployment was probably unchanged at a four-year high of 5.7 percent as initial jobless claims slipped for a fifth month to 420,000, according to economist estimates in a Bloomberg survey before government reports due next week.

To contact the reporter on this story: Jeff Kearns in New York at jkearns3@bloomberg.net.