U.S. Stocks Decline as Europe Bond Risk Climbs

By Rita Nazareth - Nov 24, 2011 4:41 AM GMT+0700

U.S. stocks slumped, sending the Standard & Poor’s 500 Index down for a sixth straight day, as the cost of insuring European government debt against default rose to a record on concern the region’s crisis is worsening.

About nine stocks fell for each that rose on U.S. exchanges. Alcoa Inc. (AA) and Halliburton Co. (HAL) tumbled at least 4.1 percent as data indicated China manufacturing will shrink, sparking concern about slower demand for commodities. Bank of America (BAC) Corp. dropped 4.3 percent to the lowest since March 2009. Groupon Inc., the largest Internet daily-deal site, plunged 16 percent to below its initial public offering price.

The S&P 500 slid 2.2 percent to 1,161.79 at 4 p.m. New York time, the lowest since Oct. 7. It lost 7.6 percent in six days, the most since Aug. 10. The Dow Jones Industrial Average fell 236.17 points, or 2.1 percent, to 11,257.55. About 6.9 billion shares changed hands on U.S. exchanges, 16 percent below the three-month average, ahead of Thanksgiving. The market will close tomorrow and trading will end at 1 p.m. on Nov. 25.

“It’s the unknown in capital letters,” David Sowerby, a Bloomfield Hills, Michigan-based portfolio manager at Loomis Sayles & Co., which oversees $150 billion, said in a telephone interview. “It’s about Europe’s likely recession, the unknown of what’s the contagion, slower China. That’s winning a tug-of- war against U.S. stock valuations.”

About $1 trillion was erased from U.S. market value since Nov. 15 amid concern that Europe’s debt crisis will hamper the global economy. The S&P 500 is trading for 12.2 times reported earnings, compared with its average since 1954 (SPX) of 16.4 times, according to data compiled by Bloomberg.

Engulfing Germany

The crisis that began more than two years ago now risks engulfing Germany. The Markit iTraxx SovX Western Europe Index of credit-default swaps on 15 governments rose to an all-time high today as Germany failed to find buyers for 35 percent of the bonds offered at an auction. German Finance Minister Wolfgang Schaeuble said market turbulence sparked by the euro region’s sovereign-debt crisis will last for “a few months.”

“They are running out of time in Europe,” David Joy, the Boston-based chief market strategist at Ameriprise Financial Inc., said in a telephone interview. His firm oversees $600 billion. “There’s real pressure in the bond markets. The best remedy is growth, and the tone of the economic data, at least internationally, is toward more weakening.”

European services and manufacturing output shrank for a third month, while a preliminary gauge indicated China’s manufacturing contracted by the most since March 2009. Americans pulled back on spending in October and manufacturers received fewer orders for durable goods.

Commodity, Financial

All 10 groups (SPXL1) in the S&P 500 fell as commodity and financial shares had the biggest declines. The Morgan Stanley Cyclical Index of companies most-dependent on economic growth lost 2.7 percent, while the Dow Jones Transportation Average sank 2.4 percent. The KBW Bank Index (BKX) retreated 3.4 percent.

A gauge of financial stocks in the S&P 500 fell for a third straight day. Goldman Sachs Group Inc. (GS) sank 1.7 percent to $87.89, the lowest level since March 2009. American International Group Inc. (AIG) dropped 4.3 percent to $20.10.

Bank of America declined 4.3 percent, the most in the Dow, to $5.14, while Citigroup Inc. (C) decreased 3.9 percent to $23.51. Both are among lenders that may have to temper plans to raise dividends and buy back stock next year as the Federal Reserve toughens capital tests for the biggest U.S. banks.

The Fed imposed a tougher capital test on the 31 largest U.S. banks yesterday, releasing the criteria for measuring their wherewithal if the U.S. economy sours and major trading partners default on their debt.

‘Underweight’

Commodity shares in the S&P 500 fell at least 2.7 percent. JPMorgan Chase & Co. downgraded commodities to “underweight,” citing policy failures in the U.S. and Europe. Alcoa sank 4.1 percent to $8.88. Halliburton dropped 4.5 percent to $32.20. U.S. Steel Corp. erased 7.6 percent to $22.41.

Groupon tumbled 16 percent to $16.96. The stock was dragged down on concern that profit margins will be squeezed by surging marketing costs and competition from rivals such as LivingSocial.com, backed by Amazon.com Inc. Signs that Europe’s credit crisis may be worsening also fueled speculation that Groupon’s international operations will suffer.

Walgreen Co. (WAG) rose 4.4 percent, the most in the S&P 500, to $32.09, on speculation it resolved a dispute with Express Scripts Inc. that could preserve more than $5 billion in annual drug sales for the retailer. Walgreen’s contract to provide prescriptions for Express Scripts’ customers expires at the end of the year.

‘Another Hack Attack’

Jefferies Group Inc. (JEF) jumped 4.5 percent to $10.51. Egan- Jones Ratings Co.’s analysis of Jefferies, including estimates of tumbling revenue, was “flat out wrong by a country mile,” Chris Kotowski, an Oppenheimer & Co. analyst, said in a report entitled “Another Hack Attack.”

Egan-Jones said yesterday Jefferies should raise $1 billion in equity and reduce leverage as MF Global Holdings Ltd.’s bankruptcy increases scrutiny of its balance sheet. Without “major deleveraging,” Egan-Jones said it may cut Jefferies’s credit grade. “We stand by our analysis,” Sean Egan, president and founding principal at Egan-Jones, said today in an e-mail.

Deere & Co. (DE) rallied 3.9 percent to $74.72. The largest farm-equipment maker reported fiscal fourth-quarter profit and forecast 2012 earnings that topped analysts’ estimates as U.S. farmers flush with cash buy more tractors and combines.

Optimism about U.S. stocks among newsletter writers remained at the highest since July, a bearish signal to analysts who track investor sentiment as a contrarian indicator of equity performance. The share of bullish publications among those tracked by Investors Intelligence was at 47.4 percent yesterday, unchanged from a week earlier.

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