U.S. Stocks Drop as Fed Announces Bond Purchase Plan, Sees Economic Risks

By Rita Nazareth - Sep 22, 2011 4:43 AM GMT+0700

U.S. stocks slumped, giving the Standard & Poor’s 500 Index its biggest decline in a month, as the Federal Reserve announced plans to buy $400 billion of long- term debt and cited risks to the economic outlook.

Caterpillar Inc. and Dow Chemical Co. fell more than 5.1 percent, pacing losses among companies most-tied to the economy. Financial shares in the S&P 500 slid 4.9 percent as a group, to a two-year low, as Moody’s Investors Service cut its ratings on Bank of America Corp., Citigroup Inc. and Wells Fargo & Co. The Dow Jones Transportation Average slid 5.3 percent as railroad shares tumbled after two coal companies cut their forecasts.

The S&P 500 fell 2.9 percent to 1,166.76 at 4 p.m. New York time. The benchmark gauge for American equities has dropped 4.1 percent in three days. The Dow Jones Industrial Average lost 283.82 points, or 2.5 percent, to 11,124.84 today.

“The markets apparently were hoping for a large, magic pill for an anemic economy that feels like it’s catching the flu,” Barton Biggs, managing partner and co-founder of hedge fund Traxis Partners LP in New York, said in an e-mail. The firm has $1.4 billion in assets.

The S&P 500 had tumbled as much as 18 percent from a three- year high at the end of April amid concern the economic recovery was weakening. The index has rebounded 4.2 percent after sinking to an 11-month low on Aug. 8.

Treasury 30-year bonds surged, pushing the yields below 3 percent for the first time since 2009, after the Fed said it will purchase longer-term debt and sell shorter maturities to sustain the economic recovery, confirming market speculation that the central bank was planning an “Operation Twist” similar to one of the central bank’s programs in the 1960s.

‘Significant Downside Risks’

“There are significant downside risks to the economic outlook, including strains in global financial markets,” the Fed statement said.

Fed Chairman Ben Bernanke said in an Aug. 26 speech that the central bank still has tools to stimulate the economy without signaling he will use them. He echoed comments of dissenting members of the Federal Open Market Committee who said then that U.S. economic data aren’t pointing to a recession.

“Markets took note of the Fed’s downward revision of the economic outlook and upgrading of downside financial risks,” Mohamed A. El-Erian, the chief executive officer at Pacific Investment Management Co. in Newport Beach, California, wrote in an e-mail. Pimco is the world’s largest bond-fund manager. “They recognize that while Fed purchases can influence Treasury and mortgage valuations, it is limited in its ability to deliver economic outcomes.”

Caterpillar, Dow Chemical

The Morgan Stanley Cyclical Index of companies most-tied to economic growth lost 4.2 percent. Caterpillar declined 5.1 percent to $79.36. Dow Chemical lost 6.3 percent to $25.54.

The KBW Bank Index (BKX) declined 5.5 percent. Bank of America fell 7.5 percent to $6.38. Wells Fargo lost 3.9 percent to $23.71, and Citigroup slipped 5.2 percent to $25.52.

Bank of America and Wells Fargo had their long-term credit ratings downgraded by Moody’s, which cited a decreasing probability that the U.S. would support the lenders in an emergency. Citigroup’s short-term credit rating was cut.

Goldman Sachs Group Inc. (GS), the fifth-biggest U.S. bank by assets, closed below $100 for the first time since March 2009. The shares dropped 4.6 percent to $97.86. Morgan Stanley, the sixth-biggest U.S. bank by assets, sustained the biggest decline in the S&P 500 Financials Index as the stock fell 8.6 percent to $13.82.

European Banks

Banks also fell following declines in European lenders. The European debt crisis has generated as much as 300 billion euros ($410 billion) in credit risk for European banks, the International Monetary Fund said, calling for capital injections to reassure investors and support lending.

Coal companies tumbled, pacing losses in railroad shares. Walter Energy Inc. (WLT) reduced its second-half sales forecast, citing delays at mines in British Columbia and Alberta. Alpha Natural Resources Inc. (ANR) pared its outlook for full-year production because of a drop in Asia demand and lower-than- expected output at some mines.

“That’s a point of evidence that the global economy is slowing down,” Peter Tuz, who helps manage $1 billion as president of Chase Investment Counsel Corp. in Charlottesville, Virginia, said in a telephone interview. “One of the real strengths of the market of the last few years has been the upward push of commodities driven by global demand.”

Walter Energy slumped 12 percent to $66.25. Alpha decreased 17 percent to $22.30. CSX Corp. (CSX), the biggest eastern U.S. railroad, slumped 8.1 percent to $18.59.

Hewlett-Packard Rallies

Hewlett-Packard Co. (HPQ) rallied 6.7 percent, the only gain in the Dow, to $23.98. The company’s board plans to meet to consider whether to oust Leo Apotheker as chief executive officer after less than 11 months on the job, two people familiar with the matter said.

Under a scenario being considered, Hewlett-Packard’s directors may appoint former EBay Inc. CEO Meg Whitman as his successor, possibly on an interim basis, said one of the people, who asked not to be named because the plans aren’t public.

Oracle Corp. (ORCL) rose 4.2 percent to $29.54. The software maker reported profit that topped analysts’ estimates, boosted by increased spending on database programs and applications that help run businesses.

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

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net