By Eric Martin
Dec. 23 (Bloomberg) -- U.S. stocks fell for a second day as concern grew that emergency loans won’t save the auto industry, while home prices plunged and the government confirmed the economy shrank the most since 2001 last quarter.
General Motors Corp., which received $9.4 billion in aid from the Treasury last week, and Ford Motor Co. slid 15 percent as their debt was cut deeper into junk. Textron Inc., the maker of Bell helicopters, tumbled the most in seven years after saying profit will trail forecasts. Bank of America Corp. and Citigroup Inc. lost more than 3.4 percent as the collapse in house prices spurred concern mortgage defaults will increase.
“The money that we saw committed last week just addresses the short-term situation,” Walter “Bucky” Hellwig, who manages $30 billion at Morgan Asset Management in Birmingham, Alabama, said of the automakers. “The whole consumer mindset is in a process of change as layoffs increase and unemployment ticks higher.”
The Standard & Poor’s 500 Index fell 1 percent to 863.16, extending the 2008 slump to 41 percent. All 10 of the index’s main industry groups declined, led by financials. The Dow Jones Industrial Average retreated 100.28 points, or 1.2 percent, to 8,419.49. The Russell 2000 Index slipped 1.4 percent.
The two-day decline in the S&P 500 erased gains from the gauge’s first back-to-back weekly advance since September. About 7.6 billion shares changed hands on all U.S. exchanges, 27 percent fewer than the three-month daily average as trading slowed ahead of the Christmas holiday.
Christmas-Week Gains
The U.S. stock market historically performs better during the Christmas week, according to Bespoke Investment Group LLC. The Dow average has risen an average 0.7 percent during the holiday season, compared with a 0.1 percent advance for all 4- day periods, data since 1900 from the Harrison, New York-based research firm show.
GM lost 52 cents to $3 as S&P cut its debt rating further below investment status, while Ford slid 40 cents to $2.19 as Moody’s Investors Service lowered its credit grade. The downgrades reflect unease over effects on debt holders of the $13.4 billion U.S. aid plan for GM and Chrysler LLC.
Textron Inc. dropped 20 percent to $12.20. The company, which also makes Cessna aircraft, said it will eliminate 2,200 jobs and exit all finance businesses except those that directly serve its manufacturing units. Profit this quarter will be hurt by losses at the financial unit, the company said.
Credit Concerns
Legg Mason Inc. dropped 4.9 percent to $19.36. The money manager had its issuer default rating lowered one level to A- by Fitch Ratings because slumping investment performance and rising costs to support money funds have reduced its profits.
Liz Claiborne Inc. tumbled 23 percent to $2.28. The maker of Kate Spade handbags had its credit rating cut to BB- by S&P.
The U.S. economy shrank in the third quarter at a 0.5 percent annual pace, matching economists’ forecasts, as the now year-old recession began to intensify. Consumer spending fell the most in almost three decades.
“This is a normal business cycle, a little bit deeper than average, but we will have an upside,” John Carey, who runs the $4.62 billion Pioneer Fund that’s beaten 72 percent of its peers in the past five years, told Bloomberg Television from Boston. “When we do, investors will be rewarded for their patience.”
Housing Slump
Sales of new homes in the U.S. fell in November to a 17- year low as credit dried up and consumer confidence sank, the Commerce Department said. A separate report from the National Association of Realtors said the median resale price of single- family houses dropped 13 percent last month, the most since records began in 1968 and likely the largest since the 1930s.
The S&P 500 is poised for its worst year since the Great Depression after the collapse of the subprime mortgage markets sent the world’s largest economy into a recession and spurred $1 trillion in global credit losses at financial firms.
The pensions of S&P 500 companies are likely to report “broad losses,” according to Howard Silverblatt, an analyst at S&P. They are currently underfunded by a record $257 billion, compared with a $63.4 billion surplus a year earlier.
Red Hat Inc. gained 8.5 percent to $12.99. The world’s biggest seller of Linux software forecast fourth-quarter profit that exceeded analysts’ estimates. The company is capitalizing on the recession by touting its software as a way to trim costs.
The Chicago Board Options Exchange Volatility Index added 1 percent to 45.02. The VIX, as it’s known, measures the cost of insurance against declines in the S&P 500. Yesterday’s close of 44.56 was the lowest since Oct. 1 and 45 percent less than the record set on Nov. 20.
Dividend Watch
Corporate dividends may need to be increased to draw investors back to stocks, according to Citigroup Inc.’s Tobias Levkovich.
“A shift in equity markets may be in the making with dividends once again becoming an important factor in stock market returns after a 20-year focus almost exclusively on capital appreciation,” Levkovich, Citigroup’s chief U.S. stock strategist, wrote in a report dated yesterday.
Covidien Ltd. fell 4.7 percent to $35.42. The supplier of health-care products said it will change its country of incorporation to Ireland from Bermuda. Investors who track stock benchmarks such as the S&P 500 may sell 65 million shares as a result, JPMorgan Chase & Co. said.
Prologis gained the most in the S&P 500, climbing 10 percent to $10.10. The world’s largest warehouse owner agreed to sell operations in China and property fund interests in Japan to the Government of Singapore Investment Corp. for $1.3 billion to cut debt. The shares, down 84 percent this year, were upgraded to “neutral” from “underperform” at Merrill Lynch & Co.
CIT Group Inc., the commercial lender that ran short of cash this year, added 8 cents, or 1.9 percent, to $4.26 after winning preliminary approval for a $2.3 billion infusion from the government. CIT said the Federal Reserve would allow the New York-based firm to become a bank holding company, making it eligible for funds from the Treasury’s Troubled Asset Relief Program.
To contact the reporter on this story: Eric Martin in New York at emartin21@bloomberg.net.
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