U.S. Stocks Drop as Reports Show Worsening Manufacturing Slump

By Whitney Kisling

Dec. 15 (Bloomberg) -- U.S. stocks fell, wiping out last week’s gains, after manufacturing showed a worsening economy that analysts said will hurt earnings at companies from JPMorgan Chase & Co. to Apple Inc.

JPMorgan tumbled 7.5 percent on Merrill Lynch & Co.’s prediction that the biggest U.S. bank by assets may post a quarterly loss, while Apple slid 3.6 percent after the maker of iPods was downgraded to “neutral” at Goldman Sachs Group Inc. Ingersoll-Rand Co. and Textron Inc. lost more than 3.1 percent as industrial production decreased for the third time in four months and the New York Federal Reserve’s regional economic index contracted the most on record.

“There’s a lot of uncertainty right now as we start the week,” said John Wilson, co-director of equity strategy at Memphis, Tennessee-based Morgan Keegan, which manages $120 billion. “Right now the concern is the depth and duration of the recession that we’re in.”

The Standard & Poor’s 500 Index slipped 1.3 percent to 868.57 as financial and technology shares were the biggest drags on the gauge. The Dow Jones Industrial Average declined 65.15 points, or 0.8 percent, to 8,564.53. The Russell 2000 Index of small U.S. companies decreased 3.4 percent.

The first simultaneous recessions in the U.S., Europe and Japan since World War II have dragged the S&P 500 down almost 45 percent since its October 2007 record. The benchmark index rose 0.4 percent last week on speculation President-elect Barack Obama’s spending proposals will restore growth and the Bush administration may save General Motors Corp. and Chrysler LLC.

About 1.2 billion shares changed hands on the New York Stock Exchange, 25 percent less than the three-month average.

Apple, JPMorgan Downgraded

Apple slid $3.52 to $94.75 after being cut from “buy” at Goldman Sachs on concern that consumer spending will weaken further. David Bailey reduced his 12-month share-price estimate to $115 from $125.

JPMorgan fell $2.31 to $28.63. The stock was cut to “underperform” from “neutral” at Merrill Lynch, which said “it is increasingly clear that credit costs in the U.S. will get much worse.” Merrill also slashed JPMorgan’s share-price target by 39 percent to $27. Merrill’s Guy Moszkowski is the only analyst tracked by Bloomberg to rate JPMorgan the equivalent of “sell.”

Financial companies in the S&P 500 lost 4 percent as a group, while computer-related shares retreated 1.7 percent.

Morgan Stanley, Goldman Sachs

Morgan Stanley and Goldman Sachs, which report earnings this week, both retreated. The firms, which have each lost more than 69 percent this year, probably will report fourth-quarter losses on shrinking asset values and a decline in fees for businesses such as merger advice, trading and money management, according to the average estimate of analysts surveyed by Bloomberg.

Morgan Stanley declined 1.5 percent to $13.64 after Deutsche Bank AG analyst Michael Mayo said earnings per share will drop 59 percent in 2009 as revenue declines to the same level as 2005.

Goldman Sachs fell 1.9 percent to $66.46. Bank of America Corp. slid 5.5 percent to $14.11, and Wachovia Corp. lost 3.4 percent to $5.11.

Telephone companies in the S&P 500 slid 3.1 percent as a group after AT&T Inc., the biggest U.S. phone company, was downgraded to “neutral” from “buy” at Goldman Sachs, which noted that the economic slowdown led to a drop in its employee pension fund. AT&T shares lost 3.7 percent to $27.13.

Verizon Communications Inc., the second-largest U.S. wireless company, slipped 1.5 percent to $32.30. Sprint Nextel Corp., the nation’s third-biggest wireless company, lost 7.1 percent to $1.82. Qwest Communications International Inc. dropped 12 percent to $2.77.

Manufacturing Slump

Ingersoll-Rand, the maker of Thermo King refrigeration equipment, slid 49 cents to $15.14, while Textron, producer of Cessna planes and Bell helicopters, retreated 76 cents to $14.57.

The Fed Bank of New York’s general economic index fell to minus 25.8, the lowest level since records began in 2001, from minus 25.4 in November. Readings below zero for the Empire State index signal manufacturing businesses are shrinking. U.S. industrial production decreased 0.6 percent in November, the third drop in four months, according to a separate report from the Fed in Washington.

‘Weakness and Concern’

“It comes on top of weak employment data, weak earnings data and expectations that earnings are going to continue to be weak,” said Dean Gulis, part of a group that manages $2.5 billion for Loomis Sayles & Co. in Bloomfield Hills, Michigan. “The general tone of the market is still one of weakness and concern.”

Fed policy makers will announce a decision on interest rates tomorrow. Fed funds futures show traders are pricing in 64 percent odds that the central bank will reduce its benchmark rate by three-quarters of a percentage point to 0.25 percent. The rest of the bets are for a 50 basis-point cut to 0.5 percent.

Construction companies retreated after a survey showed confidence among homebuilders remained at a record low, while Fitch Ratings downgraded nine companies’ credit ratings and said the builders will see more challenges from the housing downturn.

Lennar Corp. was cut one level to non-investment grade, while Centex Corp. and D.R. Horton Inc. were lowered one step deeper into junk-bond territory. Lennar fell 9 percent to $8.80. Centex dropped 7.2 percent to $10.54, and D.R. Horton tumbled 9.8 percent to $7.02.

‘Pressures Will Persist’

“As weak as housing has been, it can deteriorate further,” Fitch said. “Operational and financial pressures will persist and, probably, intensify for the public homebuilders during 2009.”

Developers Diversified Realty Corp. led a decline in real estate companies, dropping 17 percent to $4.70. The owner and manager of more than 700 shopping centers won’t complete the sale of 13 assets this month as expected and said it doesn’t have an agreement with the buyer yet.

The S&P 500 is poised for its worst year since the Great Depression after losses and writedowns at the biggest global financial companies reached almost $1 trillion and earnings at U.S. companies dropped for five straight quarters, matching the longest streak on record.

Companies in the S&P 500 are marking down assets at the fastest rate in six years, leaving operating profits 46 percent higher than net income in the third quarter, a level last seen in 2003 when the previous bull market began. The ballooning gap between net income and operating profit suggests companies are getting rid of their weakest businesses, setting the stage for a recovery in stocks next year.

GM Rallies

General Motors Corp. rallied the most in the Dow as President George W. Bush said deliberations by his administration on whether to use bank bailout money for GM and Chrysler LLC “won’t be a long process” because of the “fragility” of U.S. automakers. The shares, which have declined 84 percent this year, added 3.6 percent to $4.08.

Benchmark indexes also retreated as the list of investors burned by Bernard Madoff’s alleged $50 billion Ponzi scheme grew.

Madoff clients facing losses range from New York Mets owner Fred Wilpon’s Sterling Equities Inc. to hedge funds such as Fairfield Sentry Ltd. The alleged scam has ensnared more than 25 companies around the world, including financial-services firms BNP Paribas SA in Paris and Nomura Holdings Inc. in Tokyo, which said they may lose money because of trading or lending tied to Madoff’s firm.

In all, companies, individuals and foundations have disclosed about $24 billion of investments with Madoff, according to data compiled Bloomberg and media reports.

The MSCI Asia Pacific Index climbed 4.4 percent today as Toyota Motor Corp. rallied 9.8 percent and Hyundai Motor Co. jumped 7.1 percent. Europe’s Dow Jones Stoxx 600 Index fell 0.4 percent.

To contact the reporter on this story: Whitney Kisling in New York at wkisling@bloomberg.net.