U.S. Stocks Retreat on Inflation Concern, Housing Data, Losses

By Eric Martin

Aug. 19 (Bloomberg) -- U.S. stocks tumbled for a second day after wholesale prices climbed twice as fast as economists projected, housing starts fell and concern grew that the nation's biggest financial firms will post more losses.

American International Group Inc., the world's largest insurer, and Lehman Brothers Holdings Inc., the biggest mortgage- bond underwriter, retreated more than 3 percent after analysts warned of additional credit writedowns. D.R. Horton Inc. lost 1.1 percent as the government said builders broke ground on the fewest houses in 17 years last month. Staples Inc. retreated 7.4 percent after producer prices increased 1.2 percent in July and the retailer said profit decreased.

The Standard & Poor's 500 Index lost 5.67 points, or 0.4 percent, to 1,272.93 at 9:41 a.m. in New York. The Dow Jones Industrial Average declined 72.55, or 0.6 percent, to 11,406.84. The Nasdaq Composite Index slipped 10.84, or 0.5 percent, to 2,406.14. Three stocks dropped for each that rose on the New York Stock Exchange.

``Inflation is certainly a problem,'' said Dan Veru, who helps manage $2.8 billion at Palisade Capital Management in Fort Lee, New Jersey. ``All the investment banks and the investment banking subsidiaries of commercial banks are going to suffer, because there's not going to be as much profitability from the business anymore.''

Japan, Germany

The S&P 500 is down 19 percent from an October record after the biggest U.S. housing slump since the Great Depression slowed consumer spending and spurred turmoil in credit markets. Signs that economies in Asia and Europe are deteriorating also weighed on global equities today, sending the MSCI World Index to a 0.8 percent drop. The Bank of Japan said it became more pessimistic about the outlook for the world's second-largest economy. In Germany, producer-price inflation accelerated at the fastest pace since October 1981.

AIG dropped lost 90 cents to $20.70. The insurer may be forced to raise capital on a ``large scale,'' Goldman said.

Lehman fell 43 cents to $14.60. The company may post losses from credit-related investments and other assets when it reports fiscal third-quarter earnings, JPMorgan Chase analysts led by Kenneth Worthington said. He estimated a loss of $3.30 a share for the third quarter, more than three times the average analyst estimate in a Bloomberg survey.

``The credit environment continues to be difficult,'' they wrote. ``It will be another difficult quarter for Lehman.''

The Wall Street Journal reported today that Lehman is in talks to sell parts of its investment management business, citing people familiar with the matter. Patrick Meyer, a spokesman for Lehman in London, declined to comment on the report.

Prices paid to U.S. producers in July rose 1.2 percent, doubling economists' projection of 0.6 percent, as companies faced escalating energy costs. So-called core producer prices that exclude fuel and food climbed 0.7 percent. Economists estimated a 0.2 percent increase.

Builders in the U.S. broke ground in July on the fewest houses in 17 years, signaling the residential-construction slump will continue to hurt economic growth. The 11 percent decrease to an annual rate of 965,000, the lowest since March 1991, followed a 1.084 million pace the prior month, the Commerce Department said today in Washington.

Staples fell $2.13 to $22.45. The world's largest office- supplies retailer said second-quarter earnings per share probably fell 15 percent on a drop in North American sales.

Credit market turmoil has driven the U.S. into a recession and may topple some of the nation's biggest banks, said Kenneth Rogoff, former chief economist at the International Monetary Fund.

``The worst is yet to come in the U.S.,'' Rogoff said in an interview in Singapore. ``The financial sector needs to shrink; I don't think simply having a couple of medium-sized banks and a couple of small banks going under is going to do the job.''

The U.S. housing slump has triggered more than $500 billion of credit market losses for banks globally and led to the collapse and sale of Bear Stearns Cos., the fifth-largest U.S. securities firm.

To contact the reporters on this story: Eric Martin in New York at emartin21@bloomberg.net; Michael Patterson in London at mpatterson10@bloomberg.net.