U.S. Stock Futures Drop as Buffett Says Economy in ‘Shambles’

By Adria Cimino and Lynn Thomasson

March 2 (Bloomberg) -- U.S. stock futures fell, indicating the Dow Jones Industrial Average will tumble below 7,000 for the first time since 1997, after Warren Buffett said the economy is in “shambles” and American International Group Inc. reported a $61.7 billion loss.

Berkshire Hathaway Inc. retreated 5.7 percent after posting a 9.6 percent decline in book value per share, the worst annual performance since Buffett took control in 1965. General Electric Co. and Caterpillar Inc. slumped more than 2.5 percent before a report that may show manufacturing contracted. Citigroup Inc. and Bank of America Corp. dropped 6 percent on HSBC Holdings Plc’s 12.5 billion pounds ($17.7 billion) rights offering.

“The bear market has only begun,” Robert Prechter, the founder of Gainesville, Georgia-based Elliott Wave International Inc. who is famous for predicting the 1987 stock market crash, said on Bloomberg Radio. “I don’t see the clear weather yet.”

Dow average futures expiring in March decreased 120 points, or 1.7 percent, to 6,932 at 8:32 a.m. in New York. Standard & Poor’s 500 Index futures dropped 2.3 percent to 717.40. The MSCI World Index of 23 developed countries fell 1.9 percent and dropped as low as 735.49, the lowest intraday level since the Iraq War began in March 2003.

U.S. stocks have fallen three straight weeks, sending the S&P 500 to a 12-year low. The index lost 4.5 percent from Feb. 23-27 as the U.S. government rescued Citigroup and drugmakers and insurers fell on President Barack Obama’s health-care plan. The S&P 500 and the Dow average are off to their worst starts to a year, dropping 19 percent and 20 percent, respectively.

‘Real Panic’

Options investors are paying twice this decade’s average to protect against losses in U.S. stocks through 2011, signaling the bear market that already wiped out $10.4 trillion of equity value may last two more years.

“There’s a real panic in the markets, with some people wanting to buy long-term insurance at any price,” said Peter Sorrentino, who helps manage $16 billion, including $130 million in options at Huntington Asset Advisors Inc. in Cincinnati. “People have lost hope.”

Contracts to protect against a decline in the S&P 500 for two years cost $15,160 on the Chicago Board Options Exchange, compared with $6,875 in 2007, according to price-adjusted data compiled by Bloomberg. The current level shows traders expect the benchmark gauge for U.S. equities to fluctuate twice as much in the next two years as it has since 2000.

‘Freefall’

Berkshire Hathaway Class B shares lost 5.7 percent to $2,418.24 in Germany. Fourth-quarter net income fell 96 percent to $117 million on the falling value of holdings including derivative bets. The 9.6 percent drop in Berkshire’s book value last year compares with the 37 percent retreat in the S&P 500, including reinvested dividends, the best relative performance since 2002.

Buffett said the economy will be “in shambles” this year, and perhaps longer, before recovering from the reckless lending that caused the worst “freefall” he ever saw in the financial system.

GE lost 3.2 percent to $8.24. The only company left in the 30-stock Dow average from its founding in 1896 cut its dividend by 68 percent last week to conserve cash. Caterpillar declined 2.5 percent to $24.

The Institute for Supply Management’s factory index fell to 34 in February from 35.6 the prior month, according to the median economist estimate in a Bloomberg survey. A reading of 50 is the dividing line between growth and contraction.

‘Negative Spiral’

“The situation is very difficult and economic data isn’t stabilizing,” said Guillaume Duchesne, Geneva-based equity strategist at Fortis Private Banking, which oversees about $117 billion. “That justifies the negative spiral in the stock market.”

Citigroup fell 6 percent to $1.41, and Bank of America retreated 9.9 percent to $3.56. HSBC plans to raise 12.5 billion pounds in the U.K.’s biggest rights offering as it eliminates 6,100 jobs and closes consumer lending units in the U.S. after subprime losses cut profit.

AIG advanced 14 percent to 48 cents. The insurer deemed too important to fail will get as much as $30 billion in new government capital in a revised bailout after posting a record fourth-quarter loss.

To contact the reporters on this story: Adria Cimino in Paris at acimino1@bloomberg.net; Lynn Thomasson in New York at lthomasson@bloomberg.net.