U.S. Stocks Drop as Housing, Consumer Data Offset Buffett Buys

By Eric Martin

Oct. 17 (Bloomberg) -- U.S. stocks fell, capping a day that sent the Standard & Poor's 500 Index swinging between gains and losses at least 28 times, as worsening consumer confidence and housing data overshadowed Warren Buffett's advice to buy shares.

Caterpillar Inc., the largest maker of bulldozers, and homebuilder D.R. Horton Inc. slumped more than 7 percent on a Commerce Department report that construction of single-family homes plunged to the lowest level in a quarter century. The Dow Jones Industrial Average climbed more than 300 points before surrendering gains in the final hour of trading.

The S&P 500, which rose as much as 4 percent, ended down 5.88 points, or 0.6 percent, at 940.55, trimming its best weekly advance since February. The Dow retreated 127.04, or 1.4 percent, to 8,852.22 to cap its best week since 2003. The Nasdaq Composite Index slipped 0.4 percent to 1,711.29. Four stocks fell for every three that gained on the New York Stock Exchange.

``The market's a discounting mechanism and it's discounting a very dire scenario,'' said Gus Scacco, a money manager at AG Asset Management in New York, which oversees $1.8 billion. ``You're factoring in risks that go beyond earnings.''

The expiration of options added to trading swings today, sending the Chicago Board Options Exchange Volatility Index, or VIX, to a record. The S&P 500 climbed 4.6 percent this week, rebounding from its worst weekly drop in 75 years. The index is down 36 percent in 2008 as losses and writedowns from mortgage- related investments at banks worldwide swelled to $660 billion. The Dow added 4.8 percent this week.

Whipsawed

Investors were whipsawed this week as governments injected $2 trillion to bail out banks amid growing signs the credit crisis will spur a contraction in the global economy. The S&P 500 posted its biggest gain since the 1930s on Oct. 13, rallying 12 percent, before plunging the most since the crash of 1987 on Oct. 15 as retail sales had their steepest drop in three years.

Europe's Dow Jones Stoxx 600 Index added 3.8 percent today, while the MSCI Asia Pacific Index rose 0.4 percent.

The S&P 500 is valued at 11.5 times estimated profit for its companies. When that price-to-earnings ratio sank to 10.9 on Oct. 10, the index was the cheapest compared with the multiple using trailing profit since June 1985.

Caterpillar lost $3.05, or 7.2 percent, to $39.32, the steepest drop in the Dow average. The company had its share- price estimate lowered to $46 from $66 at Credit Suisse Group AG.

Housing Slump

D.R. Horton slid 8.3 percent to $6.77 and helped lead an S&P index of homebuilders to a 2.4 percent retreat. Housing starts slid to an 817,000 annual pace last month, down 6.3 percent from August's 872,000 level that was lower than previously estimated, the Commerce Department said. Building permits, a sign of future construction, dropped 8.3 percent to a 786,000 pace, matching the lowest level since November 1981.

Wal-Mart Stores Inc., the largest retailer in the world, slumped 1.6 percent to $53.77. Confidence among Americans fell by the most on record, with the Reuters/University of Michigan preliminary index of consumer sentiment losing to 57.5 this month from 70.3 in September.

American International Group Inc. tumbled 33 cents, or 14 percent, to $2.10 as the Federal Reserve said it needed to tap two-thirds of its $122.8 billion credit line. The company, once the world's biggest insurer, has borrowed $82.9 billion in the month since it agreed to a U.S. takeover, the Fed said yesterday, up from $70.3 billion a week ago.

JPMorgan Chase & Co., Bank of America Corp. and Citigroup Inc. each dropped at least 2.8 percent, sending the S&P 500 Financials Index to a 2.3 percent loss.

Robotic Surgery

Intuitive Surgical Inc. dropped 12 percent to $189.13. Next year's profit estimates for the maker of robotic systems for surgeries are too high because spending by hospitals likely will slow, Oppenheimer & Co. analyst Amit Hazan wrote in a note today.

The VIX, which measures the cost of using options as insurance against further declines in the S&P 500, jumped 4 percent to a record close of 70.33 as almost 80 million options expired. The most widely owned S&P 500 options expiring this week were October 1,150 puts.

The S&P 500's 18 percent retreat from that strike price through yesterday rewarded buyers of those contracts, which increased almost sixfold in value this month. Even after yesterday's 4.3 percent surge, the index had slumped 22 percent in three weeks through yesterday.

`Buying Opportunities'

The S&P 500 has slumped 40 percent from its record last October, while the Dow has lost 38 percent from its peak the same month.

``Bear markets create great buying opportunities,'' William Latimer, who helps oversee $9.5 billion as director of research at O'Shaughnessy Asset Management Inc. in Stamford, Connecticut, said in a Bloomberg Television interview. ``We don't run screaming from stores when we see sale signs in the window, we go looking for something to buy and that's exactly what investors need to be doing here.''

Stocks rose earlier after Buffett, the world's second- richest person, recommended buying U.S. shares.

``I've been buying American stocks,'' Buffett wrote in a New York Times column. ``A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread.''

Recession Picks

JPMorgan recommended 16 companies, including Monsanto Co. and Merck & Co., that may outperform the U.S. stock market during the ``global recession'' it expects to unfold during the next two years. Monsanto, the world's biggest seed producer, added $1.75, or 2.2 percent, to $80. Merck gained 31 cents to $28.50. An index of the 16 companies added 1.2 percent.

Google rallied $19.52, or 5.5 percent, to $372.54. The company reported third-quarter profit, excluding some items, of $4.92 a share as customers continued to buy Web ads even as the economy slows. That beat the $4.75 average analyst estimate in a Bloomberg survey.

Gilead Sciences Inc. rose $1.64, or 4 percent, to $43.03. Third-quarter profit for the largest U.S. maker of AIDS medications topped analysts' estimates by 3 cents on rising demand for its combination drugs.

The S&P 500 fell in 11 of the past 13 trading days as the earnings outlook for companies in the index deteriorated. Profits fell 33 percent on average for the 69 companies that reported third-quarter results since Oct. 7, according to Bloomberg data.

Wall Street analysts forecast a 7.5 percent drop in earnings in the third quarter in a Bloomberg survey last week and widened their estimates to a decrease of 11 percent today.

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