U.S. Stocks Retreat on Drop in Home Sales, Cut in Fed Programs

By Rita Nazareth

Sept. 24 (Bloomberg) -- U.S. stocks fell for a second day as sales of existing homes unexpectedly slumped and the Federal Reserve said it will cut the size of two programs meant to bolster credit markets. Oil tumbled to a one-month low as the dollar strengthened, while Treasuries rose.

Alcoa Inc.,General Electric Co. and Caterpillar Inc. dropped at least 2.4 percent after the National Association of Realtors said purchases declined 2.7 percent last month. D.R. Horton Inc. fell 4.2 percent to lead declines in homebuilders. Bank of America Corp. and Citigroup Inc. retreated after the Fed said it will shrink emergency programs that auction loans to commercial banks and Treasuries to bond dealers.

“The housing data disappointed and investors will be looking for signs that the Fed will pull back a bit on the stimulus,” said Mark Bronzo, a money manager at Security Global Investors, which oversees $21 billion in Irvington, New York. “The stock market is tired and we may see a sell-off going to the end of the quarter.”

The Standard & Poor’s 500 Index lost 1 percent to 1,050.78 at 4:04 p.m. in New York, trimming its 2009 gain to 16 percent. The Dow slipped 41.11 points, or 0.4 percent, to 9,707.44.

Benchmark indexes rose in early trading after an unexpected decrease in jobless claims bolstered speculation that the economy is emerging from the worst recession in seven decades.

The S&P 500 yesterday dropped from its highest level since October. A 57 percent rally from March 9 through yesterday left the measure valued at about 20 times the reported earnings of its companies, the most expensive level since 2004, according to weekly data compiled by Bloomberg.

‘Reason to Sell’

“Things are not as bad as they were but it will obviously take a fair amount of time to have the economy growing,” said Richard Sichel, chief investment officer at Philadelphia Trust Co. in Philadelphia, which manages $1.3 billion. “Obviously when you have such a dramatic move in stocks, any disappointing economic number could be a reason to sell.”

The Fed signaled yesterday that the U.S. economy’s return to growth is insufficient to withdraw stimulus as officials seek to reduce the highest unemployment rate in a quarter century. While the economy has “picked up,” the central bank’s planned asset purchases will help ensure a “gradual return to higher levels of resource utilization,” the Fed’s Open Market Committee said.

‘Continued Improvement’

The Fed today cited “continued improvements” in financial markets for shrinking its liquidity programs. The Term Auction Facility will sell $50 billion in 70-day funds next month, down from $75 billion in 84-day funds in September, with the auctions’ size and maturity decreasing more in November and December, the Fed said. The Term Securities Lending Facility will shrink to $50 billion, and then $25 billion, from $75 billion.

A gauge of 79 banks, insurers and investment firms in the S&P 500 helped lead the index lower, falling 1.8 percent. The S&P 500 Financials Index has rallied 143 percent from a 17-year low on March 6 amid growing speculation that the worst of the credit crisis is over.

Bank of America fell 3 percent to $16.98, while Citigroup declined 2 percent to $4.43.

Deutsche Bank AG Chief Executive Officer Josef Ackermann said plans by world leaders to overhaul financial regulation will curb banks’ profitability.

‘Political Will’

“The political will is clear: the banking sector will be given tighter boundaries and the profitability of the financial industry as a whole will be lower,” Ackermann wrote in a column in Switzerland’s Neue Zuercher Zeitung. Banks will be required to hold more, and “higher-quality” capital, while governments may set defined leverage ratios for banks, he added.

U.S. President Barack Obama and his counterparts from G-20 nations meet today warning that the recovery is still too weak to start reversing lifelines to banks and the broader economy.

A gauge of 12 homebuilders fell 2.2 percent and real-estate companies had the biggest decline in the S&P 500 among 24 industries, dropping 3.6 percent. Sales of existing homes decreased in August by 2.7 percent to a 5.1 million annual rate, still the second-highest level in the last 23 months, the National Association of Realtors said. The median price dropped 12.5 percent from August 2008.

D.R. Horton fell 4.2 percent to $11.93, while Lennar Corp. declined 4.5 percent to $14.82.

Bed Bath & Beyond, Electronic Arts

Bed Bath & Beyond Inc. dropped 3.3 percent to $37.75. The largest U.S. home-furnishings retailer said full-year profit will be $1.79 a share. Analysts predict annual profit of $1.80.

Electronic Arts Inc. fell 2.7 percent to $19.29, following a 7.1 percent rally yesterday. Microsoft Corp., responding to market speculation, said it isn’t seeking to buy the video-game publisher.

“There’s no truth” to the speculation, David Dennis, a Microsoft spokesman, said late yesterday. “We have no plans to purchase EA.”

Producers of raw-materials fell 2 percent for the steepest decline among 10 groups and energy shares lost 1.3 percent.

Gold fell the most in two months as the dollar rallied, reducing demand for the precious metal as an alternative investment. Copper prices tumbled to a one-month low. Crude oil for November delivery fell $3.06, or 4.4 percent, to $65.91 a barrel at the 2:30 p.m. close of floor trading on the New York Mercantile Exchange. Futures touched $65.60, the lowest level since Aug. 17.

Dollar Strengthens

Freeport-McMoRan Copper & Gold Inc., the world’s biggest publicly traded copper producer, fell 4.2 percent to $68.10. AK Steel Corp. tumbled 7 percent to $21.23. Chevron Corp., the second-largest U.S. oil company, lost 0.9 percent to $70.71, and Occidental Petroleum Corp. dropped 2.4 percent to $74.49.

The dollar gained 0.5 percent to $1.4656 per euro after declining to $1.4844 yesterday, the weakest level since Sept. 22, 2008. Treasuries gained for a third day. The 10-year note yield fell three basis points to 3.38 percent. The yield touched 3.361 percent, the lowest level since Sept. 14.

Bed Bath & Beyond Inc. lost 3.3 percent to $37.75. The largest U.S. home-furnishings retailer forecast full year profit of $1.79 a share, shy of analysts’ prediction of $1.80.

“We’ve certainly come very fast, very far,” Barry Ritholtz, chief executive officer and director of equity research at FusionIQ, told Bloomberg Radio. “The issue is -- are we going to see a rollover in six months or a consolidation or more gains? We suspect that we’re going to see some consolidation.”

McDonald’s Corp. was the biggest gainer on the Dow, rising 1 percent to $56.12. EVA Dimensions upgraded the world’s largest restaurant company to “buy” from “hold.”

Red Hat, Cintas Jump

Red Hat Inc. jumped 12 percent to $27.95 for the largest advance in the S&P 500. The biggest seller of the Linux operating system reported second-quarter sales and profit that beat analysts’ estimates as subscription revenue rose.

Cintas Corp. rose 6.5 percent to $30.20. The largest U.S. supplier of uniforms reported first-quarter profit of 43 cents a share, beating the average analyst estimate by 9.4 percent.

Morgan Stanley strategist Jason Todd today raised his year- end forecast for the S&P 500 to 1,050 from a previous estimate of 900. That’s still 1 percent below yesterday’s closing price.

“The current rally is typical of what follows major bear markets and is not, in our view, the start of a new multi-year bull market,” New York-based Todd wrote in a report to clients.

To contact the reporter on this story: Rita Nazareth in New York at rnazareth@bloomberg.net.