By Rita Nazareth - Dec 29, 2011 4:50 AM GMT+0700
U.S. stocks declined, halting a five-day advance in the Standard & Poor’s 500 Index, as the European Central Bank’s balance sheet increased to a record after a surge of bank lending to stem the region’s debt crisis.
Alcoa Inc. (AA) and Chevron Corp. (CVX) dropped at least 1.8 percent as the euro tumbled to the lowest level since January against the U.S. dollar, curbing demand for commodities. The Morgan Stanley (MS) Cyclical Index sank 1.9 percent as Caterpillar (CAT) Inc. and Ford Motor Co. (F) slid more than 2.3 percent. Bank of America Corp. (BAC) slumped 3.6 percent, extending yesterday’s decline.
The S&P 500 retreated 1.3 percent to 1,249.64 at 4 p.m. New York time. The benchmark gauge erased its 2011 gain and fell below its average price of the past 200 days. (SPX) The Dow Jones Industrial Average slid 139.94 points, or 1.1 percent, to 12,151.41 today. The Russell 2000 Index of small companies dropped 2.1 percent. About 4.4 billion shares changed hands on U.S. exchanges, or 42 percent below the three-month average.
“The economy is not benefiting from the ECB lending to banks,” Timothy Ghriskey, who oversees $2 billion as chief investment officer of Solaris Group LLC in Bedford Hills, New York, said in a telephone interview. “With Europe likely to lapse into a recession, banks are reluctant to actually lend.”
Equities slumped as the ECB’s balance sheet soared to a record 2.73 trillion euros ($3.55 trillion). The ECB last week awarded 523 banks three-year loans totaling a record 489 billion euros to encourage lending. So far, banks are parking the money back at the ECB. Overnight deposits at the central bank increased to an all-time high of 452 billion euros yesterday.
Strategists’ Forecast
With two more trading days left in 2011, the S&P 500 would need to rise 2.6 percent to reach the year-end forecast of Wall Street strategists. Their mean estimate of 1,282 is lower than the 1,371 predicted in January, according to data compiled by Bloomberg. Today’s decline sent the S&P 500 down 0.6 percent for the year. Still, a 10.5 percent rally since the end of September put the gauge on pace for the best fourth-quarter since 2003.
Earlier today, stock-futures rose as Italy sold 9 billion euros ($11.8 billion) of six-month Treasury bills and borrowing costs fell from the previous auction. A bigger test of the ECB’s lending on demand for European bonds comes tomorrow when Italy sells as much as 8.5 billion euros of longer-maturity debt.
“I hope tomorrow’s auction will also be successful because that could be a positive for the markets,” Brian Jacobsen, who helps oversee about $209 billion as chief portfolio strategist at Wells Fargo Advantage Funds in Menomonee Falls, Wisconsin, said in a telephone interview. “It’s going to be critical for people to see whether or not there’s enough investor interest in the Italian debt to stave off any further crisis.”
Economic Concern
Companies most dependent on the economy led (SPXL1) the losses in the S&P 500 as concern grew that Europe’s crisis would hamper global growth. The Dow Jones Transportation Average, a proxy for the economy, erased 1.6 percent. Caterpillar, the world’s largest construction and mining-equipment maker, dropped 2.4 percent to $89.37. Ford retreated 2.7 percent to $10.52.
Gauges of commodity shares had the biggest declines among 10 groups in the S&P 500, falling at least 1.8 percent. Metal prices sank as gold futures retreated for a fifth day, the longest slump since 2009. Oil declined for the first time in seven days, in part because of reduced concern that Iran will block the Strait of Hormuz.
Alcoa, the largest U.S. aluminum producer, retreated 3.1 percent to $8.52. Chevron fell 1.9 percent to $105.96. Freeport- McMoRan Copper & Gold Inc., the world’s largest publicly traded copper miner, dropped 4.1 percent to $36.31.
Banks Tumble
The KBW Bank Index (BKX) declined 1.8 percent as all of its 24 stocks fell. Bank of America lost 3.6 percent, the most in the Dow, to $5.29. Citigroup Inc. (C) erased 2.9 percent to $26.13.
Molycorp Inc. (MCP) slumped 14 percent, the biggest decline in the Russell 1000 Index, to $24.04. The price estimate for the owner of the largest rare-earth deposit outside China was cut to $39 a share from $57 by JPMorgan Chase & Co., which cited pressure on rare earth prices.
Mead Johnson Nutrition Co. (MJN) lost 1.6 percent to $67.98. U.S. regulators have spent today and yesterday inspecting a Mead Johnson factory as part of an investigation into whether a Missouri child’s death this month was due to tainted infant formula. The leading maker of child formula had its biggest gain in five months yesterday after announcing that its tests had shown the batch of formula used by the infant was not contaminated with the bacteria blamed for the death.
Traders pushed bearish options on Pharmasset Inc. to the highest level in the Russell 1000 Index, locking in gains before Gilead Sciences Inc. (GILD)’s $10.8 billion offer for the drugmaker is scheduled to close.
Implied Volatility
Implied volatility for 30-day puts to sell Pharmasset shares are 60.41 points higher than the level for calls, compared with the 18-month average of 8.12, according to data compiled by Bloomberg. The price measurement known as skew (VRUS) is 10 times higher for Pharmasset than it is for the average Russell 1000 company, the data show.
Pharmasset shares closed at $123.02 last week, the lowest price since Gilead bid for the Princeton, New Jersey-based company in November to gain its experimental hepatitis C treatment. MKM Partners LP and Tullett Prebon Plc say that while there’s about a 90 percent chance the deal will succeed, investors are buying options in case the transaction fails.
“The deal not closing is a low-probability event, but a high-impact one,” Walter Todd, who oversees $925 million including Gilead shares as chief investment officer at Greenwood Capital in Greenwood, South Carolina, said yesterday in a phone interview. “The downside if the deal falls apart is pretty significant for Pharmasset. People want to pay up for protection.”
To contact the reporter on this story: Rita Nazareth in Sao Paulo at rnazareth@bloomberg.net
To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net
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