U.S. Stocks Decline on Concern Bank Rescue Won't Stop Slowdown

By Lynn Thomasson

Oct. 2 (Bloomberg) -- U.S. stocks dropped for a second day as a jump in borrowing costs and reports showing a worsening economy spurred concern that the government's $700 billion bank bailout plan won't be enough to stimulate growth.

Caterpillar Inc., Alcoa Inc. and Deere & Co. tumbled more than 8 percent as three-month bank lending rates climbed to the highest since January, while the government said factory orders declined more than forecast. General Electric Co. plunged 9.6 percent after selling $12.2 billion in shares at a discount. Monsanto Co. slid 16 percent, its steepest loss since going public in 2000, after Merrill Lynch & Co. said slumping demand will hurt farm companies.

``If banks aren't willing to lend money to a bank, are they going to be willing to lend to an average person? No, they're not,'' said Frank Ingarra, money manager at Hennessy Advisors Inc., which oversees $1.1 billion in Novato, California. ``We could be at the start of a pretty bad recession.''

The Standard & Poor's 500 Index fell 46.78, or 4 percent, to 1,114.28. The Dow Jones Industrial Average declined 348.22, or 3.2 percent, to 10,482.85. The Nasdaq Composite Index slipped 4.5 percent to 1,976.72. Almost 14 stocks retreated for each that rose on the New York Stock Exchange.

The S&P 500 has slumped 24 percent this year as the subprime mortgage crisis brought down banks including Lehman Brothers Holdings Inc. and made borrowing more expensive. The index lost 8.1 percent over the past four days and is poised for its worst weekly retreat since the markets reopened after the Sept. 11, 2001, terrorist attacks.

Switzerland, Jordan

The benchmark gauge for U.S. stocks still trades for 21 times profit from the past 12 months. Only four of 48 developed and emerging nations tracked by MSCI Inc. -- Switzerland, Jordan, Colombia and Morocco -- have a higher price-to-earnings ratio, according to data compiled by Bloomberg.

All but 36 stocks in the S&P 500 fell today and its 10 major industry groups retreated more than 1 percent each. Commodities from oil to gold, corn and lumber also slumped.

Caterpillar, the biggest maker of earthmoving equipment, lost $4.73 to $52.22. Deere, the largest producer of tractors, declined 14 percent to $39.72.

The cost of borrowing in dollars in London for three months rose for a fourth day, signaling that banks haven't started to lend even after the U.S. Senate approved the plan to rescue beleaguered financial institutions. The three-month London interbank offered rate, or Libor, that banks charge each other for such loans climbed 6 basis points to 4.21 percent today, the highest since Jan. 11.

`Liquidity Crisis'

The market for commercial paper plummeted the most on record as banks and insurers were unable to find buyers for the short- term debt. Commercial paper outstanding tumbled $94.9 billion, or 5.6 percent, to a seasonally adjusted three-year low of $1.6 trillion for the week ended Oct. 1, the Federal Reserve said. Financial paper accounted for most of the decline.

``There's a liquidity crisis going on that's putting investors on edge,'' said Alan Gayle, the Richmond, Virginia- based senior investment strategist at Ridgeworth Investments, which oversees about $70 billion. ``Liquidity is like oxygen. Lack of it can cause serious damage in a very short time.''

The S&P 500 Industrials Index lost 6.8 percent, its steepest retreat since 2001, after the 4 percent decrease in bookings at factories topped the average forecast of economists in a Bloomberg survey. A separate government report showed first-time claims for unemployment benefits climbed to a seven-year high.

Jobs Report

Investors can expect more details tomorrow when the government releases its monthly jobs report at 8:30 a.m. New York time. The U.S. may have lost 105,000 jobs in September, the ninth consecutive decline, economists surveyed by Bloomberg forecast.

Billionaire Warren Buffett, the preeminent stock picker, described the world's largest economy yesterday as being ``flat on the floor'' after a cardiac arrest.

GE, which got a $3 billion investment from Buffett's Berkshire Hathaway Inc. yesterday, dropped $2.35 to $22.15. The company sold stock today at a 9.2 percent discount to yesterday's closing price as it seeks to fund its operations. GE's shares trade at a valuation of less than 10 times trailing earnings, the lowest since Bloomberg began tracking the data in 1990.

Raw-material producers in the S&P 500 sank to the lowest level since 2005, falling 8 percent as a group, after Merrill downgraded fertilizer stocks to ``underperform'' and Mosaic Co., the world's largest maker of phosphates, reported weaker-than- estimated earnings. The group's retreat was the steepest among 10 industries in the S&P 500.

Monsanto, Mosaic

Merrill analysts cut their rating on Monsanto, the world's biggest seed producer, to ``neutral'' from ``buy,'' sending its shares down as much as 21 percent. The stock pared the loss, ending the day at $82.01 with a 16 percent decline, after the company said fiscal 2008 profit was about $3.64 a share, up from a previous estimate of as much as $3.60.

Mosaic tumbled 41 percent to $39.65, its steepest retreat since its shares began trading in 2004. CF Industries Holdings Inc., a maker of nitrogen and phosphate fertilizers, slumped 35 percent to $58, the most since its initial public offering in 2005.

Alcoa slumped 8.9 percent to $19.38 after Goldman Sachs Group Inc. downgraded the largest U.S. aluminum producer to ``neutral'' from ``buy'' on concern metal demand will fall along with the weakening economy.

AK Steel Holding Corp., the No. 3 U.S.-based producer of the metal, fell 17 percent to $20.27.

Transporters Plunge

The Dow Jones Transportation Average lost 8.7 percent for the biggest drop in seven years. Con-way Inc., the second-largest U.S. trucking company, cut its annual profit outlook because of less freight demand and led the decline in the index of railroads, airlines and shippers. Con-way shares fell 20 percent to $34.16.

EBay Inc., the largest Internet auction company, lost 8.2 percent to $19.15. The shares were downgraded to ``equal-weight'' from ``overweight'' at Morgan Stanley, which said ``trends deteriorated more than expected'' in the third quarter.

International Business Machines Corp. had a second day of losses greater than 4 percent. The world's biggest seller of computer services fell $5.39 to $104.74 after Barclays Plc analysts cut third-quarter profit estimates for the company on slowing computer hardware and software sales.

All but two technology stocks in the S&P 500 retreated. The group slipped 4.4 percent.

`Hold My Nose'

The financial-market rescue legislation, which the House likely will act on tomorrow, passed the Senate on a 74-25 vote. It would give the Treasury Department authority to buy assets including mortgage-backed securities that are burdening financial institutions. The Senate added tax provisions to entice Republican votes in the House, where an earlier version of the bill failed on Sept. 29 and sank the Dow average by 777 points.

``If I were a congressman I would hold my nose and vote yes, but people shouldn't be under any illusions about what's going to happen,'' Charles Bobrinskoy, who helps manage about $13 billion as vice chairman of Ariel Investments in Chicago, told Bloomberg Television.

The U.S. Securities and Exchange said it will extend a prohibition on short-sales of financial stocks, keeping restrictions on bets against companies' shares in place while Congress works on the bailout plan. A gauge of 969 stocks on the no-short list lost 4.5 percent.

General Growth Properties Inc. had the biggest decline in the S&P 500. The mall owner slumped for a second day after proxy adviser Glass, Lewis & Co. said the company should have a ban on short selling its stock dropped. The shares fell the most since becoming publicly traded in 1993, losing 48 percent to $7.59.

Oil's $4 Decline

The more than $4 retreat in oil pushed the 40-company S&P 500 energy producers index to a 5.9 percent loss. Oilfield- service providers led the decline after Merrill analysts cut their share forecast for the group and said the credit crunch and investors' aversion to risk may push down demand for oil.

Schlumberger Ltd., the world's largest oilfield contractor, had a decline of as much as 9.2 percent. Weatherford International Ltd., another oilfield-services company, tumbled 21 percent to $18.53. Exxon Mobil Corp., the world's largest oil company, slipped 1.4 percent to $77.50.

Regions Financial Corp., Alabama's biggest bank, rallied 13 percent to $11.85 for the second-biggest advance in the S&P 500. Sanford C. Bernstein & Co. said the lender would be among the biggest beneficiaries of a higher limit on federal deposit insurance.

Sovereign Bancorp Inc., the second-largest U.S. savings and loan, jumped 8.9 percent to $5.25 after Friedman, Billings, Ramsey & Co. boosted the stock's rating to ``market perform'' from ``underperform,'' citing ``relative stability'' in the company's deposit base.

Constellation Energy Group Inc. had the top gain in the S&P 500, adding 15 percent to $27.23. Electricite de France SA, the world's biggest operator of nuclear reactors, is still assessing its options with buyout firm KKR & Co. in relation to Constellation after its takeover approach was rebuffed in favor of an offer from Buffett's MidAmerican Energy Holdings Co.

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