U.S. Stocks Retreat, Led by Industrial Companies; GE Declines

By Eric Martin

Oct. 1 (Bloomberg) -- U.S. stocks fell as a report showed manufacturing contracted more than forecast and analysts cut earnings estimates on industrial companies, overshadowing Warren Buffett's $3 billion investment in General Electric Co.

Ingersoll-Rand Co. and Parker Hannifin Corp. slid more than 3.6 percent on Citigroup Inc. analysts' prediction that credit losses will delay spending on equipment. GE dropped as much as 9.8 percent as Deutsche Bank AG said profit will be hurt by ``deterioration'' at its financial unit, then trimmed losses on plans to raise $15 billion from Buffett and others. Benchmark indexes pared their declines as Bank of America Corp. and Citigroup climbed more than 8 percent on speculation Congress will approve the $700 billion financial-rescue plan.

``The cards are on the table and a recession is coming,'' Henry Herrmann, chief executive officer of Waddell & Reed Financial Inc. in Overland Park, Kansas, which manages $70 billion, told Bloomberg Television.

The Standard & Poor's 500 Index retreated 5.3 points, or 0.5 percent, to 1,161.06, extending its biggest monthly drop in six years. The Dow Jones Industrial Average slipped 19.59, or 0.2 percent, to 10,831.07. The Nasdaq Composite Index fell 22.48, or 1.1 percent, to 2,069.4. Almost two stocks declined for each that rose on the New York Stock Exchange.

The S&P 500 pared a morning decline of as much as 2.2 percent after the Senate set a vote for tonight on the bank bailout. The index fell to its low of the day earlier on the Institute for Supply Management's report showing its manufacturing gauge for September slid to 43.5, below the 49.5 reading forecast by economists in a Bloomberg survey and the threshold for growth at 50.

Industrials Tumble

The benchmark index for U.S. equities jumped the most in six years yesterday as expectations grew that lawmakers will salvage the proposal to buy bad loans from banks. Even with yesterday's advance, the S&P 500 had its worst month since 2002 in September, declining 9.1 percent, and tumbled 8.9 percent for the third quarter.

Ingersoll-Rand, the maker of Thermo King and Hussmann refrigeration equipment, dropped $1.71, or 5.5 percent, to $29.46. Parker Hannifin, the world's largest maker of hydraulic equipment, lost $1.91, or 3.6 percent, to $51.09. Citigroup cut the companies to ``hold'' from ``buy,'' citing a business slowdown.

`Sell on Strength'

``More important than the bailout plan will be next year's economy,'' Marc Faber, managing director of Marc Faber Ltd. and publisher of the Gloom, Boom & Doom Report, said in a Bloomberg Television interview. ``I would rather sell on strength.''

GE lost $1, or 3.9 percent, to $24.50, leading industrial companies in the S&P 500 to a decline of 2.6 percent, the biggest retreat among 10 groups. Deutsche Bank analysts cut their 2008 earnings estimate 9 percent to $2 a share and their 2009 profit projection to $1.95 a share. The worsening in conditions at GE Capital is ``driven by tighter credit markets, asset shrinkage and debt pay-down,'' analyst Nigel Coe wrote in a research note. ``We also eased back our industrial assumptions,'' Coe said.

Credit default swaps, contracts to protect against a default by GE Capital, which has a AAA rating, jumped to a record.

``We see no reason for the defaults widening,'' GE said in a statement. The company said its commercial-paper funding ``has gone smoothly'' and ``we have over-funded every day.''

Life insurers fell on concern declines in stocks and bonds will cause increased investment losses. MetLife Inc. dropped 14 percent to $48.15. Hartford Financial Services Group Inc. slipped 7 percent to $38.11. Principal Financial Group Inc. retreated 13 percent to $37.64. Phoenix Cos. slumped 18 percent to $7.59.

`Real Opportunities'

Berkshire Hathaway Inc. climbed 4.9 percent to $137,000 after GE said Buffett's company will buy a $3 billion stake in preferred shares that pay an annual dividend of 10 percent and can be purchased back by the company at a 10 percent premium after three years.

``If you're an entity with cash available, and not cash you have to borrow, there are some real opportunities in this market,'' said Mark Freeman, a money manager at Westwood Management Corp. in Dallas, which oversees $8 billion. ``However the number of participants that have that ability is fairly limited. There's no shortage of sellers and very few buyers.''

SLM Corp., the biggest U.S. student lender, fell the most in the S&P 500, losing $3.99, or 32 percent, to $8.35. The cost to protect against the company's default reached a record yesterday as short-term corporate borrowing rates soared amid the worst financial crisis since the Great Depression.

IBM, Ford Slump

International Business Machines Corp. fell $6.83, or 5.8 percent, to $110.13, the steepest decline in the Dow average. Sanford C. Bernstein analysts said the increased risk of customers failing to pay their bills could hurt profit at the world's second-largest software maker.

Ford Motor Co. dropped 65 cents, or 13 percent, to $4.55. Ford and Honda Motor Co.'s U.S. sales of cars and trucks tumbled in September as tighter credit scared off consumers. The second- largest U.S. automaker also said second-half profit at its European unit will decline on sagging demand for new vehicles and rising raw-material costs.

Peabody Energy Corp. tumbled 8.8 percent to $41.05. Cabot Oil & Gas slid $2.31 to $33.83 as the S&P 500 Energy Index tumbled 1.7 percent. Crude for November delivery fell $2.11, or 2.1 percent, to $98.53 a barrel. Prices are down 33 percent from the record $147.27 a barrel reached on July 11.

Banks Climb

Citigroup climbed $2.49, or 12 percent, to $23 and Bank of America added $3.13, or 8.9 percent, to $38.13. The S&P 500 Financials Index climbed 2.2 percent after a 13 percent rally yesterday.

The Senate is expected to pass the bailout bill, with most Democrats and Republicans behind it. There's also increased optimism the House will go along, as pressure mounts on lawmakers to help restore confidence in the banking system.

The Senate version of a financial-rescue bill temporarily raises Federal Deposit Insurance Corp. coverage for bank deposits to $250,000 per account from $100,000, according to a text of the measure posted on the Web site of the Senate Banking Committee. Banks will not be required to pay additional premiums for the coverage, which expires in 2009.

European Central Bank President Jean-Claude Trichet said in a Bloomberg Television interview that U.S. lawmakers must pass a rescue package ``for the sake of global finance.'' He added that a pan-European approach to the banking crisis is unlikely, saying ``we are not a fully-fledged federation with a federal budget.''

Europe's Dow Jones Stoxx 600 Index gained 0.7 percent, while the MSCI Asia Pacific Index added 1.8 percent. The yield on the two-year Treasury note fell 14 basis points, or 0.14 percentage point, to 1.82 percent.

Crunch Fallout

The paralysis in credit markets is changing how U.S. companies do business as banks pull back on loans or make them prohibitively expensive. Some companies are closing plants and stores, postponing takeovers and grabbing any available credit in a fight for survival.

Carmike Cinemas Inc., the third-largest U.S. theater chain by screens, suspended its dividend, while Duke Energy Corp., owner of utilities in five U.S. states, tapped $1 billion from a credit agreement and RC2 Corp., the maker of infant and preschool products, canceled an acquisition.

National City Corp. gained the most in the S&P 500, rising $1.14, or 65 percent, to $2.89 on speculation Ohio's biggest bank may be acquired. Huntington Bancshares Inc. rose $1.81, or 23 percent, to $9.80. Sovereign Bancorp Inc., the second-largest U.S. savings and loan, increased 22 percent to $4.82. First Horizon National Corp., Tennessee's biggest bank, rose 20 percent to $11.24.

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