U.S. Stocks, Oil Retreat as Dollar, Treasury Bonds Advance

April 7th, 2009

By Rita Nazareth

April 7 (Bloomberg) -- U.S. stocks slid for a second day after investors from George Soros to Marc Faber predicted the rebound in equities will falter as the market braces for a seventh straight quarter of declining earnings. The dollar rose against most currencies, oil fell and Treasuries gained.

General Motors Corp. plunged 12 percent and Caterpillar Inc. dropped 5.9 percent. Applied Materials Inc. retreated 8.7 percent after a contract for solar equipment was slashed by $1.65 billion. Archer Daniels Midland Co. sank 11 percent after Citigroup advised selling the shares, while Exxon Mobil Corp. and ConocoPhillips lost at least 1.9 percent as Barclays Plc cut its earnings estimates for the energy industry.

The Standard & Poor’s 500 Index decreased 2.4 percent to 815.55. The Dow Jones Industrial Average tumbled 186.29 points, or 2.3 percent, to 7,789.56. Both measures have surged at least 19 percent since sinking to the lowest levels in a dozen years on March 9. Almost eight stocks fell for each that rose on the New York Stock Exchange.

“It’s a bear-market rally because we have not yet turned the economy around,” Soros said in an interview with Bloomberg Television, referring to the rebound in stocks since March 9. “This isn’t a financial crisis like all the other financial crises that we have experienced in our lifetime.”

European shares slumped for a third day and Asia’s regional benchmark snapped a four-day winning streak. Alcoa Inc., the first Dow average company to post results for the January-to- March period, kicked off the earnings season by reporting a wider-than-estimated loss.

Earnings Watch

For S&P 500 companies, profits probably fell 37 percent on average in the first quarter, according to estimates from more than 1,700 securities analysts compiled by Bloomberg. The stretch of seven straight declines in earnings is the longest since at least the Great Depression, data compiled by S&P and Bloomberg show.

General Motors dropped 12 percent to $2. The largest U.S. automaker is speeding up preparations for a possible bankruptcy filing even as directors scout for deeper savings this week to avoid that outcome, people familiar with the plans said.

Faber, the investor who recommended buying U.S. stocks before the steepest rally in more than 70 years, said the S&P 500 Index may decline to about 750 and rebound after July.

“The first quarter will be a reality check for investors, and they will be focusing on guidance,” said Charles Dautresme, a strategist at Axa Investment Managers, which oversees $651 billion in Paris. “We’ll decline from this bear-market rally, but have established a floor on March 9 and that’s positive.”

Applied Materials, ADM

AT&T Inc. and Verizon Communications Inc. lost 2.5 percent and 2.6 percent respectively, leading telecommunication companies in the S&P 500 to the biggest decline among 10 industry groups. Qwest Communications International Inc. fell 2 percent to $3.87 after the provider of local-phone service in 14 U.S. states said first-quarter sales were “modestly lower” than analysts forecast.

Applied Materials slipped 8.7 percent to $10.55. The maker of semiconductor wafer-fabrication equipment said a $1.9 billion solar-power contract was cut to $250 million.

Archer Daniels Midland tumbled 11 percent to $25.66. The world’s largest grain processor was cut to “sell” from “hold” at Citigroup, which said slowing agricultural demand and overcapacity are hurting sales and margins.

Energy Slump

Exxon Mobil, the world’s largest oil company, and ConocoPhillips, the second-biggest U.S. oil refiner, retreated 1.9 percent and 3.6 percent respectively as crude prices fell and Barclays cut its 2009 and 2010 earnings estimates for the industry, citing lower natural gas prices and refining margins. The bank’s analysts said that first-quarter results are likely to be disappointing.

Oil dropped for a third day on speculation that a report tomorrow will show U.S. supplies increased as the recession crimps fuel demand. Crude for May delivery declined $1.90, or 3.7 percent, to $49.15 a barrel in New York. Oil has risen 10 percent this year and is down 67 percent from a record in July.

Caterpillar lost 5.9 percent to $29.45 after Bank of America Corp. said the world’s largest construction-equipment maker will post a wider first-quarter loss than earlier expected as manufacturing operations reach a low.

U.S. earnings may drop 31 percent in the second quarter and 18 percent in the next before gaining 76 percent in the last three months of the year, analysts predict. Banks are projected to account for all of the rebound in the final three months of the year. Without financial companies, the gain turns into a 4.5 percent decline, the data show.

‘Waiting to Hear’

“We need to get through the earnings season,” said Mark Bronzo, a money manager at Security Global Investors, which oversees $21 billion in Irvington, New York. “Investors are waiting to hear what these companies have to say before they make a decision if that rally can continue.”

Bespoke Investment Group LLC, a Harrison, N.Y., research group, looked at all earnings seasons going back to the fourth quarter of 2001 and found that investors who bought the S&P 500 on the first day of the season and sold on the last day would have lost an average 0.9 percent in each period. The average change during the off-season was a gain of 0.3 percent.

Investors should “underweight” U.S. shares as a rally is likely to end and other markets are cheaper, Citigroup said in a quarterly report.

‘Twilight Zone’

“While absolute valuations still look cheap, relative valuations are not attractive” for the U.S., strategists led by London-based Robert Buckland wrote in a report titled “Welcome to the Twilight Zone” dated yesterday. “The year may be marked by powerful rallies and meaningful pullbacks as was evident in the 1930s and 1970s.”

Buckland raised Japanese shares to “neutral” from “underweight,” saying the weakening yen, a forthcoming stimulus package that may total 10 trillion yen ($99 billion) and improving fundamentals should aid market performance.

The MSCI World Index of 23 developed nations has rallied 21 percent since March 9, when it dropped to the lowest since 1995. The U.S. Treasury introduced a plan last month to rid banks of toxic assets and central banks from the U.S. to Switzerland and Japan have stepped up purchases of government and corporate debt to unfreeze credit markets, helping to lift sentiment.

Valuation Watch

U.S. equities are expensive based on both estimated earnings and price to book in comparison with global stocks while dividend yields are also lower, Citigroup said. Shares in the S&P 500 trade at 1.8 times book value, according to Bloomberg data, versus 1.35 for stocks in the MSCI World.

Treasuries rose today, sending yields down, on speculation lower-than-forecast corporate profits will spur demand for the relative safety of government debt.

The yield on the 10-year note fell two basis points, or 0.02 percentage point, to 2.90 percent. The two-year note yield fell three basis points to 0.91 percent.

Textron Inc. had the biggest gain in the S&P 500 after Mario Gabelli, chief executive officer of Gamco Investors Inc., told CNBC that the maker of Cessna aircraft and Bell helicopters has “wonderful assets,” adding up to speculation that it will be acquired. Textron gained 9.2 percent to $9.02 and has more than doubled over the past month.

Lincoln National Corp. climbed 8.2 percent to $6.89. The Philadelphia-based life insurer said it considers selling assets to build capital as it pays down $700 million in maturing debt.

Thirty-five companies defaulted in March, the highest number in a single month since the Great Depression, according to Moody’s Investors Service.

The rate at which speculative-grade corporate borrowers worldwide failed to meet their obligations rose to 7 percent from 4.1 percent at the end of last year, Moody’s said in a report today. So far this year, 79 companies rated by Moody’s have defaulted, the New York-based ratings firm said.


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