U.S. Stocks Drop as Recession Concern Outweighs Rate Reductions

By Lynn Thomasson
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Oct. 8 (Bloomberg) -- U.S. stocks fell for a sixth day after Treasury Secretary Henry Paulson said more banks may collapse and unprecedented global interest-rate cuts failed to convince investors the economy will avoid a recession.

Bank of America Corp. slumped 7 percent after selling shares at a discount to shore up capital. Alcoa Inc., the largest U.S. aluminum producer, slid 12 percent as a reduction in manufacturing caused by the credit crisis left the company with earnings that trailed analyst estimates. Russia, Indonesia, Ukraine and Romania shut their exchanges and Brazil's benchmark index fell to the lowest level in two years in the worst week for emerging markets in at least two decades.

``The uncomfortable reality is that this mess is going to take more time than anyone wants to come to grips with,'' said Matthew Kaufler, a fund manager at Rochester, New York-based Clover Capital Management Inc., which oversees $2.6 billion. ``For the first time in couple of decades, we have the prospect of a consumer recession.''

The S&P 500 swung between gains and losses at least 20 times today, ending down 11.29 points, or 1.1 percent, at 984.94, its lowest since August 2003. The Dow Jones Industrial Average tumbled 189.01, or 2 percent, to 9,258.1. The Nasdaq Composite Index decreased 0.8 percent to 1,740.33. Five stocks fell for every two that rose on the New York Stock Exchange.

The S&P 500's six-day losing streak is its longest since 2002. Its year-to-date slump of 32.9 percent is the worst since 1974 and its second-biggest drop ever compared with previous returns through Oct. 8, according to Harrison, New York-based research firm Bespoke Investment Group LLC.

Option Prices Jump

The Chicago Board Options Exchange's Volatility Index climbed 7.2 percent to a record 57.53. Stocks swung throughout the day, with the Dow twice falling more than 200 points before recoveries lifted it above 9,600. The 30-stock average tumbled 341 points in the last half hour of trading, erasing its second 150-point surge of the afternoon.

U.S. bonds fell after the government sold $66 billion in debt to ease ``severe dislocations'' prompted by shortages of government securities.

European stocks retreated, sending the Dow Jones Stoxx 600 Index to its worst three-day drop since October 1987. The dollar weakened against the euro.

Bank of America dropped 7 percent to $22.10. The bank that's buying Merrill Lynch & Co. sold 455 million shares for $22 each, 8 percent less than yesterday's closing price of $23.77. The shares fell 26 percent in New York Stock Exchange composite trading Oct. 7, the biggest drop in at least 28 years, after the bank slashed its dividend in half to shore up capital.

Alcoa Slumps

Alcoa fell $2 to $14.71 for the steepest decline in the Dow. The aluminum producer's third-quarter profit fell by more than half and the company cut its forecast for demand growth because of the slumping economy. Alcoa also suspended a share-repurchase program because of the worsening credit crisis.

Stocks rose in early trading after the world's largest central banks cut borrowing costs in a coordinated effort after the credit crunch spread from the U.S., pushing up lending costs and forcing governments in Europe and the U.S. to bail out banks.

The Federal Reserve reduced its benchmark interest rate by 0.5 percentage point to 1.5 percent this morning. The European Central Bank lowered its key lending rate by half a point to 3.75 percent and said it will start lending banks unlimited cash in its weekly auctions at the new benchmark.

The Fed will probably cut its target for overnight lending between banks by another half percentage point at its Oct. 29 meeting, Goldman Sachs Group Inc. chief economist Jim O'Neil said. ECB President Jean-Claude Trichet said he can't rule out further reductions.

`More Symbolic Than Anything'

``It's more symbolic than anything else,'' Peter Sorrentino, a money manager at Huntington Asset Advisors in Cincinnati, which oversees $16.5 billion, said of today's rate cuts. ``It's the availability of credit, not the price of credit that's the problem.''

The S&P 500 Financials Index climbed as much as 3.9 percent today before resuming its slide after Treasury Secretary Paulson said some banks may fail even after Congress passed a $700 billion package to shore up financial firms. He said U.S. policy makers are prepared to do more if necessary to stem the worst financial crisis since the Great Depression.

``Patience is also needed because the turmoil will not end quickly and significant challenges remain ahead,'' Paulson said at a press conference in Washington. ``Neither passage of this new law nor the implementation of these initiatives will bring an immediate end to current difficulties.''

MetLife Plunges

MetLife Inc. plunged 27 percent to $27 for the second- steepest drop among S&P 500 companies. The biggest U.S. insurer said it will raise capital and cut jobs after third-quarter profit slid 48 percent.

The 84-company S&P 500 Financials Index ended down 3 percent at its lowest level since April 1997. The world's major banks may need $675 billion in fresh capital over the next several years to recover from a credit crisis that shows few signs of abating, the International Monetary Fund said yesterday.

A group of retailers in the S&P 500 slipped 0.9 percent. J.C. Penney Co., Kohl's Corp. and Nordstrom Inc. forecast third- quarter profit that may trail analysts' estimates after September sales fell because of consumer concerns that the Wall Street meltdown will cost them their jobs and savings.

J.C. Penney lost 4.6 percent to $27.25, the lowest since 2004. Nordstrom slid 1.5 percent to $21.57.

`Only Halfway Through'

``The big concern is that we're going into recession,'' said Jeffrey de Graaf, a senior managing director at ISI Group Inc. in New York. ``The first part is the unwind of the previous boom, the second is the recession that follows. We're in the camp that we're only halfway through this.''

Monsanto Co., the world's largest seed producer, climbed 9.8 percent to $81.44 and pushed the S&P 500 Materials Index up 2.6 percent for the biggest gain among 10 industries. Chief Financial Officer Terry Crews said farmers haven't been affected by the global credit crisis and predicted higher profit next year on rising sales of weedkiller and gene-modified seeds.

Bank of New York Mellon Corp. gained 7.9 percent to $24.45. The world's largest custodian of financial assets agreed to buy JPMorgan Trust Bank Ltd. in Japan following the bank's deal to purchase JPMorgan Chase & Co.'s global corporate trust business in 2006.

Bank of America and Alcoa this week kicked off an earnings season that is expected to mark the fifth straight quarter of declining profits for S&P 500 companies. Earnings at S&P 500 companies probably dropped on average of 5.6 percent in the third quarter, according to analysts' estimates compiled by Bloomberg.

Profits Decline

Financial companies are forecast to lead the decline in profits with a 64 percent decrease, followed by an 11 percent slide in earnings at retailers, hoteliers, restaurant chains and other so-called consumer discretionary companies.

The S&P 500's 37 percent drop from its record a year ago has left it valued at less than 19 times the reported earnings of its companies. Europe's Dow Jones Stoxx 600 Index, which has lost 38 percent this year, was valued at 9.5 times the reported earnings of its companies, the cheapest since Bloomberg began compiling the data in January 2002. The MSCI World Index was valued at 12 times profit yesterday, the cheapest since at least 1995.

Investors are fleeing emerging markets on concern decreased credit availability and slower economic growth will push commodity prices lower, crippling the driver of developing economies. The benchmark MSCI Emerging Markets Index slumped 7.4 percent today and is down 22 percent over the past six days.

Ukraine's exchange was closed for the day before trading began, and Romania suspended its main bourse after a 9.5 percent slide. Russia's Micex Index dropped 14 percent before trading was halted, having already slumped 20 percent this week. Indonesia's suspension, the first in eight years, followed a 10 percent slide in the Jakarta Composite Index, the biggest decline since the 1998 Asian financial crisis. Brazil's Bovespa index slumped for a fifth day.

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