U.S. Stock Futures Drop; Moody's Reviews Morgan Stanley Rating

By Patrick Rial and Adria Cimino

Oct. 10 (Bloomberg) -- U.S. stock futures sank, indicating the Standard & Poor's 500 Index will extend the longest losing streak since 1996, after Moody's Investors Service said it may cut Morgan Stanley's credit rating and shifted Goldman Sachs Group Inc.'s outlook to negative.

Morgan Stanley dropped 5.1 percent and Goldman also slipped in Germany. American International Group Inc., the recipient of $122.8 billion from the U.S. government, lost 4.2 percent after the Wall Street Journal said the company has already tapped $70.3 billion from the Federal Reserve. Exxon Mobil Corp. fell 3.3 percent as oil headed for its biggest weekly decline since 2004.

S&P 500 futures expiring in December tumbled 21.90, or 2.4 percent, to 890.60 as of 8:56 a.m. in London. Dow Jones Industrial Average futures dropped 2.4 percent to 8,396. Nasdaq- 100 Index futures retreated 1.5 percent to 1,253.

``No one has any confidence at the moment,'' said Simon Rudolph, Executive VP and portfolio manager at Franklin Templeton Investments Asia Ltd. ``A lot of investment managers are having redemptions at the moment so they have been selling because there is no choice.''

U.S. stocks slumped yesterday, wiping out almost $900 billion in market value, with the Dow Jones Industrial Average closing below 9,000 for the first time since 2003. The S&P 500 slid 7.6 percent to 909.92, capping a seven-day decline, the longest losing streak since 1996.

Morgan Stanley sank 5.1 percent to $11.81 in Germany, while Goldman Sachs fell 0.7 percent to $100.66. They were the biggest U.S. securities firms before they became bank holding companies last month.

Credit Rating

The review of Morgan Stanley's A1 long-term credit rating affects about $200 billion of debt, Moody's said. The ratings assessor affirmed its Prime-1 grade for Morgan Stanley's short- term debt.

The negative outlook for Goldman Aa3 long-term rating affects $175 billion of debt, and the company's short-term ratings were also affirmed at Prime-1.

More than $20 trillion has been wiped off equity markets in the last 12 months as the financial crisis that started with non- performing U.S. subprime loans spread to economies globally.

The Dow's 35 percent drop in 2008 puts it on course for its worst year since 1931. The S&P 500 extended its 2008 tumble to 38 percent and is poised for its worst yearly performance since 1937. The measure's valuation slid to 10.9 times estimated earnings, the cheapest versus reported earnings since 1985.

`Rules of Valuation'

Europe's Dow Jones Stoxx 600 Index trades at 8.67 times profit, while the MSCI World is valued at 11.08 times the reported earnings of companies in the index, according to Bloomberg data.

``The problem is the rules of valuation no longer exist,'' said Pierre-Yves Gauthier, founding partner of Alphavalue SAS in Paris. ``It's best to remain cautious. The economic slowdown is here. A recession could be heavy.''

AIG lost 4.2 percent to $2.29. The company has already tapped $70.3 billion from the Federal Reserve, mostly for collateral obligations and covering securities lending-related losses, the Wall Street Journal said.

The insurance company has had to put up additional collateral to owners of swap contracts AIG insures because the underlying assets have fallen in value, the newspaper said.

Citigroup Inc., the biggest U.S. bank by assets, retreated 3.2 percent to $12.51.

Earnings Estimates

UBS AG slashed its 2009 earnings estimates for U.S. banks by an average 26 percent, as analysts cited the outlook for higher credit losses in commercial loans.

Analysts expect a 5.6 percent drop in third-quarter profit at S&P 500 companies, according to Bloomberg data. Earnings at financial companies are forecast to slump 64 percent on average in the period.

Exxon retreated 3.3 percent to $65.75. Crude tumbled more than $4 a barrel and headed for its biggest weekly decline since December 2004, pacing a slump in commodities on concern that a recession will hurt demand.

To contact the reporter for this story: Patrick Rial in Tokyo at prial@bloomberg.net.