U.S. Stock Futures Drop as Europe Woos China

By Rita Nazareth - Oct 31, 2011 8:15 PM GMT+0700

U.S. stock futures fell, indicating the Standard & Poor’s 500 Index will trim its biggest monthly rally since 1974, on concern European leaders will struggle to raise funds to contain the region’s debt crisis.

Morgan Stanley and Citigroup Inc. dropped more than 2.7 percent, following declines in European lenders. Alcoa Inc. and Ford Motor Co. slumped at least 1.3 percent to pace losses in companies most-tied to economic growth. Yahoo! Inc. decreased 3.4 percent as the company is said to be leaning toward selling its Asian assets and redistributing the proceeds to shareholders, rather than selling itself to a group of buyers.

S&P 500 futures expiring in December dropped 1.2 percent to 1,265.70 as of 9:14 a.m. New York time. The benchmark gauge of American equities rose 14 percent in October and was poised to snap a five-month drop. Dow Jones Industrial Average futures retreated 121 points, or 1 percent, to 12,047 today.

“We’re not out of the woods yet,” Jeffrey Saut, chief investment strategist at Raymond James & Associates in St. Petersburg, Florida, said in a telephone interview. His firm manages $300 billion. “Europe did get a rescue that buys them more time, but they are not anywhere near a resolution to their crisis. In addition, we’ve been on a buying stampede. The market was due for a pullback.”

Stocks rose last week after European leaders agreed to expand the region’s bailout fund and American economic growth accelerated. Earlier this month, the index came within 1 percent of extending a drop from its peak in April to 20 percent, the common definition of a bear market. Since then, it has risen 17 percent.

Role of ‘Savior’

China can’t play the role of “savior,” the official Xinhua news agency said yesterday, as investors awaited the country’s response to Europe’s request for money to boost its bailout fund. Japanese Finance Minister Jun Azumi said today the government took unilateral steps to weaken the yen. Group of 20 leaders will gather Nov. 3-4 in Cannes, France, while central bankers from Australia, the U.S. and Europe will hold interest- rate policy meetings this week.

“Investors are waiting for confirmation of help from emerging countries, notably China, regarding the bailout plan,” said Arnaud Scarpaci, a fund manager at Agilis Gestion SA in Paris, which oversees about $110 million. “There are also some who are locking in profits after last week’s gain.”

Wilbur Ross said European banks will need new capital before they can sell assets to meet requirements, the Financial Times said, citing an interview with the billionaire chairman of private-equity firm WL Ross & Co.

European Banks

European stocks slumped, led by financial companies. American banks also retreated. Morgan Stanley fell 3.1 percent to $18.72. Citigroup declined 2.8 percent to $33.22.

Companies which are most-tied to economic growth fell. Alcoa, the largest U.S. aluminum producer, dropped 2.4 percent to $11.29. Ford erased 1.3 percent to $11.84.

Yahoo decreased 3.4 percent to $16. The Asian asset sale is emerging as the most likely option for Yahoo and would let the Internet company eventually pay a special dividend or buy back shares, according to five people familiar with the situation, who declined to be identified because the talks are private. Dana Lengkeek, a spokeswoman for Yahoo, declined to comment.

Chevron Corp. erased 1.6 percent to $107.90 after being cut to “neutral” from “buy” at Bank of America Corp., which cited valuation concern. SanDisk Corp., the biggest maker of flash-memory cards, lost 2.6 percent to $52. Sterne Agee & Leach Inc. cut its recommendation for the shares to “neutral” from “buy.”

80% Long

Barton Biggs, co-founder of Traxis Partners LP, said his hedge fund’s net long position rose to about 80 percent from 65 percent earlier this month and that the U.S. stock market rally will continue. Biggs said he favors technology stocks, as well as large cap industrial companies, such as Caterpillar Inc. and General Electric Co.

“I’m pretty bullish,” Biggs said today in an interview with Betty Liu on Bloomberg TV’s “In the Loop” program. “I think this rally is about positioning and will continue for a while.”

American companies are beating Wall Street profit estimates for the 11th straight quarter, enough to revive a bull market that analysts say will eclipse any rally in the past 12 years. Price targets for companies in the index from more than 10,000 estimates suggest the S&P 500 will advance 13 percent to 1,447.93 in a year.

Higher Earnings

Companies from Google Inc. to Peabody Energy Corp. are delivering higher earnings at a time when Bill Gross, the co- chief investment officer of Pacific Investment Management Co., is warning that Europe’s debt crisis will spur a recession. While more than $6.3 trillion has been erased from global equities since May, analyst forecasts imply the benchmark measure will post its biggest rally since the 1990s technology bubble, when the gain since March 2009 is included.

“This is looking like it’s going to be a really decent quarter,” Warren Koontz, head of U.S. large-cap value stocks at Loomis Sayles & Co. in Boston, which manages about $150 billion, said in an Oct. 25 interview. “Valuations are very, very low relative to history, and you don’t have to make heroic assumptions on multiples to get reasonable returns.”

The S&P 500 traded at 11.7 times reported income on Oct. 3, within 14 percent of its price-earnings ratio at the bottom of the financial crisis in March 2009, Bloomberg data show. The index gained 3.8 percent last week.

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