U.S. Stocks Drop on GE, Bank of America Results, Consumer Data
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By Daniel Hauck and Sapna Maheshwari
Oct. 16 (Bloomberg) -- U.S. stocks fell, pulling benchmark indexes down from a one-year high, as General Electric Co. and Bank of America Corp. reported disappointing results and a gauge of consumer confidence trailed economists’ estimates. The dollar rose for the first time in five days and Treasuries gained.
GE, the world’s biggest maker of jet engines, slumped 4.2 percent after reporting $1.9 billion less revenue than analysts forecast. Bank of America retreated 4.6 percent following its $1 billion loss. Google Inc. rose 3.8 percent as Chief Executive Officer Eric Schmidt said the worst of the recession has passed and the company is now more focused on acquisitions.
The Standard & Poor’s 500 Index slipped 0.8 percent to 1,087.68 at 4:04 p.m. in New York, trimming a second straight weekly advance. The Dow Jones Industrial Average fell 67.03 points, or 0.7 percent, to 9,995.91. The dollar strengthened 0.3 percent against the euro.
“The market is evaluating each bellwether as it comes through and showing its elation or disappointment,” said Philip Orlando, who helps oversee $400 billion as chief equity market strategist at Federated Investors Inc. in New York. “Today, you had disappointing earnings from GE and Bank of America and the market responded accordingly.”
The S&P 500 climbed 1.5 percent this week as better-than- estimated results at JPMorgan Chase & Co. and Intel Corp. spurred optimism that earnings are recovering from the longest slump since the Great Depression. The Dow climbed above 10,000 for the first time in a year on Oct. 14.
VIX Losing Streak
The VIX, the benchmark index for U.S. stock options, has fallen for 10 straight days, its longest streak of declines since May 2005, as investors pay less for protection against declines in equities. The VIX closed today at 21.43, its lowest level in 13 months.
S&P 500 futures rose after the stock market closed yesterday following better-than-estimated earnings from Google. So far, 80.4 percent of companies in the index that released third-quarter earnings beat consensus analyst estimates. That compares with 72.3 percent during the entire April-through-June period, which matched the highest proportion in Bloomberg data going back to 1993.
Eight of 10 industry groups in the S&P 500 turned lower today, led by a 2.6 percent drop in financial shares. Equities extended declines after the Reuters/University of Michigan preliminary index of consumer sentiment decreased to 69.4 from 73.5 in September, which was the highest in more than a year. Measures of expectations and current conditions both fell.
‘Question Mark’
“Because the consumer is such a question mark, the places in this recovery we think are the best opportunities for growth are sectors that are more leveraged to the business end of the economy,” said Boston-based David Joy, chief market strategist at RiverSource Investments LLC, which oversees $135 billion. He said that includes technology, industrial, materials and energy companies.
GE slumped 4.2 percent to $16.08. Third-quarter profit declined 45 percent as the company scaled back real estate and consumer lending and sold fewer medical machines, leading to a steeper drop in sales than analysts projected. Revenue decreased 20 percent to $37.8 billion.
Bank of America slipped 4.6 percent to $17.26. The lender’s $1 billion third-quarter loss, or 26 cents per diluted share, compared with a profit of $1.18 billion, or 15 cents, a year earlier.
“All the investment-banking businesses are very strong, but credit problems continue to persist, which is basically the reading you’re getting from the whole economy,” said Carmine Grigoli, chief investment strategist at Mizuho Securities USA Inc. in New York.
‘Cautious and Underweight’
Financial shares have surged 144 percent since the S&P 500’s 12-year low on March 9, compared with the index’s overall gain of 61 percent.
“We would be cautious and underweight the financial sector, including the banks,” Bob Doll, vice chairman and chief investment officer of equities at BlackRock Inc., said in an interview with Bloomberg Television. “A slow-growth economy with low nominal growth means some people are not going to be able to pay their bills, and therefore we’re going to have some more bad credits down the line.” BlackRock oversees $1.37 trillion.
International Business Machines Corp. dropped 5 percent to $121.64, its sharpest decline since February. The world’s largest computer-services company said new contract signings declined last quarter, a sign that customers aren’t yet ready to increase spending as the economy begins to recover.
AMD, Micron Tumble
Advanced Micro Devices Inc. fell 7.3 percent to $5.74 after the chipmaker predicted that sales will be “up modestly” in the fourth quarter, a forecast that fell short of some analysts’ estimates. Micron Technology Inc., the biggest U.S. producer of computer memory-chips, declined the most in the S&P 500, losing 8.1 percent to $7.95.
Google gained 3.8 percent to $549.85. The company reported profit and sales that beat analysts’ estimates after the recovering economy boosted demand for online ads and e-commerce.
“We believe revenue from YouTube, DoubleClick and so forth is still mostly domestic, so the fact that international generated four-fifths of Google’s revenue growth implies core search remains the growth engine,” wrote analysts from Goldman Sachs in a note.
Dollar Rebound
The Dollar Index, used to track the currency against six major U.S. trading partners, rose from a 14-month low. The gauge added 0.2 percent to 75.640 as some investors bet that the currency’s four-day decline was overstated given signs of a U.S. economic recovery. The dollar advanced against 15 of the 16 most-traded currencies tracked by Bloomberg.
“Extreme dollar negative sentiment is not justified by relative economic trends, and this week’s generally positive U.S. data mix reaffirms that view,” analysts at Wells Fargo & Co. wrote in a note.
The yield on 10-year Treasuries fell 0.05 percentage point, or five basis points, to 3.41 percent and 30-year yields dropped for the first time in three days as investors sought higher returns amid signs the economy is recovering without an acceleration in inflation.
The Federal Reserve said output at U.S. factories, mines and utilities rose in September more than three times as much as economists predicted. The 0.7 percent increase exceeded every forecast in a Bloomberg News survey and followed gains of 1.2 percent in August and 0.9 percent in July.
‘Reality Check’
“Monthly production is growing more than estimates, but the estimates are so incredibly low that it shouldn’t come as any surprise,” said Wayne Wilbanks, chief investment officer at Wilbanks, Smith & Thomas in Norfolk, Virginia, which manages $1.3 billion. “We’re getting a reality check on what this economy is, and that’s a very weak recovery.”
MGIC Investment Corp. dropped 12 percent to $6.42. The largest U.S. mortgage insurer posted its ninth straight quarterly loss after a record number of homeowners failed to meet mortgage payments.
Genworth Financial Inc., the life insurer and mortgage guarantor, lost 6.4 percent to $11.23.
Discover Financial Services, the credit-card company that took $1.3 billion from the Treasury’s bank rescue fund, lost 6.3 percent after it was cut to “sell” from “hold” by EVA Dimensions.
Harris Corp. advanced 7.2 percent to $39.88 for the second- biggest gain in the S&P 500. The maker of military radios was awarded a $419 million contract for the U.S. Army for multiband radio systems. The initial delivery order under the contract is valued at $165 million, Harris said.
Estée Lauder, ICE
Estée Lauder Cos. rose 5.1 percent to $41.11. The maker of Clinique and Bobbi Brown cosmetics said first-quarter earnings will be significantly higher than previously forecast because of better-than-anticipated sales.
Intercontinental Exchange Inc. gained the most in the S&P 500, adding 7.7 percent to $105.84. The owner of the largest credit-default swap clearinghouse and CME Group Inc. were upgraded to “outperform” from “market perform” at Keefe, Bruyette & Woods Inc.
An analyst at Quantitative Analysis Service said the rally in U.S. stocks will last for another six to nine months, while a strategist at AMP Capital Markets said the S&P 500 may be due for a “stiff” slump as it approaches a resistance level.
Technical Analysis
QAS’s gauge of demand for stocks has risen every month since March. While it’s still negative, indicating demand for stocks falls short of supply, it may turn positive next month, the firm’s senior vice president, Kenneth Tower, said. The so- called demand-supply differential began to fall about three months before the S&P 500 started plunging as much as 57 percent from a record in October 2007.
The S&P 500’s rebound from its March low brought it close to 1,121.4, which represents the 50 percent retracement level that so-called Fibonacci analysts identify as a key resistance point, said Nader Naeimi, a strategist at AMP, which holds assets worth $75 billion. The index is also diverging from measures of price and breadth momentum, pointing to a deeper “correction” than those that have occurred since the rally began, the strategist said. A correction is usually defined as a drop of at least 10 percent from a peak.
