U.S. Stocks Drop on Economic Data, Rising Bank Rates; GE Falls

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 5 percent as bank lending rates climbed to the highest since January in London, while the government said jobless claims increased to a seven-year high and factory orders slumped more than forecast. General Electric Co. lost 9.4 percent after selling $12.2 billion in shares at a discount. Monsanto Co. slid 17 percent, its steepest loss in five years, after Merrill Lynch & Co. said slumping demand will hurt farm companies.

``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 Standard & Poor's 500 Index slid 30.27, or 2.6 percent, to 1,130.79 at 10:42 a.m. in New York. The Dow Jones Industrial Average lost 243.41, or 2.3 percent, to 10,587.66. The Nasdaq Composite Index slipped 2.7 percent to 2,012.75. Fifteen stocks retreated for each that rose on the New York Stock Exchange.

`Flat on the Floor'

The S&P 500 has slumped 23 percent this year as the subprime mortgage crisis brought down banks including Lehman Brothers Holdings Inc. and made borrowing more expensive for companies and consumers. Billionaire Warren Buffett, the world's preeminent stock picker, described the world's largest economy yesterday as being ``flat on the floor'' after a cardiac arrest.

Caterpillar, the biggest maker of earthmoving equipment, lost $2.59 to $54.36. Deere, the largest producer of tractors, declined 8.3 percent to $42.47.

The cost of borrowing in dollars in London for three months rose for a fourth day, signaling that banks haven't started to lend after the U.S. Senate approved a plan to rescue beleaguered financial institutions. The 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.

Alcoa, the largest U.S. aluminum producer, slumped 5.3 percent to $20.14 after Goldman Sachs Group Inc. downgraded the shares to ``neutral'' from ``buy.''

The S&P 500 Industrials Index lost 4.9 percent after the 4 percent drop 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.

GE's Offering

GE, which got a $3 billion investment from Buffett's Berkshire Hathaway Inc. yesterday, dropped $2.30 to $22.20. The Fairfield, Connecticut-based company sold stock today at a 9.2 percent discount to yesterday's closing price as the company seeks to fund its operations.

Producers of agricultural products slumped after Merrill downgraded the fertilizer industry to ``underperform'' and Mosaic Co., the world's largest producer of phosphates, reported weaker-than-estimated earnings. Merrill analysts cut their rating on Monsanto, the world's biggest seed producer, to ``neutral'' from ``buy,'' sending its shares down $17.28 to $80.56.

Mosaic tumbled 20 percent to $54. CF Industries Holdings Inc., a maker of nitrogen and phosphate fertilizers, slumped 14 percent to $79.50. Terra Industries Inc. fell 10 percent to $25.50.

EBay Inc., the largest Internet auction company, was downgraded to ``equal-weight'' from ``overweight'' at Morgan Stanley, which said ``trends deteriorated more than expected'' in the third quarter.

Bailout Plan

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 woo Republican votes in the House, where an earlier version of the bailout plan failed on Sept. 29 and sent the Dow average to a 777-point plunge.

``After the eventual passage, the market focus will also move gradually from the financial sector to the impact on the real economy,'' said Cho Min Keon, a fund manager at Kyobo AXA Investment Managers Co. in Seoul, which manages the equivalent of $578 million in equities.

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.

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