Sunday, July 31, 2011

U.S. Stocks Slump as S&P 500 Posts Biggest Drop Since July 2010

U.S. stocks fell five straight days, driving the Standard & Poor’s 500 Index to its biggest weekly loss in a year, as lawmakers’ failure to agree on raising the federal government’s debt limit brought the nation to the brink of default.

All 10 groups in the S&P 500 tumbled at least 2.1 percent. United Parcel Service Inc. (UPS), the largest package-delivery company, dropped 6.7 percent after saying the third quarter will be “fairly slow.” 3M Co. (MMM) lost 8.6 percent, the most in the Dow Jones Industrial Average, after missing forecasts for profit margins and sales. Sprint Nextel Corp. (S) plunged 18 percent as the wireless-network operator trailed estimates.

The S&P 500 declined 3.9 percent to 1,292.28, the biggest weekly drop since the period ended July 2, 2010. The Dow retreated 537.92 points, or 4.2 percent, to 12,143.24. The Chicago Board Options Exchange Volatility Index, which measures the cost of using options as insurance against S&P 500 losses, soared 44 percent, the most since May 2010, to 25.25.

“Markets don’t like uncertainty, and that’s been the key word,” John Canally, who helps oversee $330.1 billion as an investment strategist at LPL Financial Corp., said in a telephone interview from Boston. “The market’s comfortable with the idea that there’s no default, but what the market doesn’t know is the path to getting there.”

Debate, Earnings
The S&P 500 posted a third straight monthly loss, the longest streak since 2008, amid speculation Republicans in the U.S. House would fail to reach a compromise with the Senate, controlled by Democrats, and President Barack Obama to boost the nation’s ability to borrow by an Aug. 2 deadline. That concern helped overshadow a second-quarter earnings reporting season in which 78 percent of S&P 500 companies have exceeded analysts’ income projections.

Treasuries rallied yesterday, driving 10- and 30-year yields to the lowest levels this year, on speculation lawmakers will break the deadlock and avoid defaulting on the nation’s $9.34 trillion of marketable debt outstanding.

After markets closed yesterday, the Republican-controlled House passed Speaker John Boehner’s plan to cut spending and raise the debt limit. Within hours, the Senate rejected it as Democrats pressed for passage of their own alternative.

“This whole debacle is leading to lower growth, higher unemployment and more erosion of the U.S. in the standing of the global economy,” Pacific Investment Management Co.’s Mohamed El-Erian said during a July 27 radio interview on “Bloomberg Surveillance” with Tom Keene. El-Erian is chief executive and co-chief investment officer at Pimco, the world’s biggest manager of bond funds, in Newport Beach, California.

Missing Forecasts
Stocks also fell this week after government reports showed orders for durable goods unexpectedly decreased and the U.S. economy grew less than forecast in the second quarter.

The Morgan Stanley Cyclical Index of stocks most-tied to economic growth decreased 5.6 percent, the most in a week since July 2010. The Dow Jones Transportation Average had the biggest loss since August, falling 4.5 percent.

UPS slumped 6.7 percent to $69.22. The company, considered a bellwether of the economy, said that Asian growth outside of China was slower than expected and the U.S. will continue to be “extremely sluggish.” Second-quarter net income rose 26 percent in an “uneven economic environment,” UPS said.

3M had the biggest decline since December 2008, falling 8.6 percent to $87.14. The company projected full-year earnings that trailed analysts’ estimates after lower demand for LCD televisions curbed sales in its display and graphics business, its third-biggest unit.

Losing Customers
Sprint sank 18 percent to $4.23. The carrier lost 101,000 customers on monthly contracts after dropping 114,000 in the previous three-month period. That started a new losing streak following a fourth-quarter gain in the lucrative users that was the first increase in more than four years.

S&P placed the U.S. AAA rating on “CreditWatch” on July 14, saying there’s a 50 percent chance it would be cut within 90 days even if an agreement is reached by the Aug. 2 deadline. S&P said it needs to see a “credible solution to the rising U.S. government debt burden.”

“My definition of AAA has always been a credit so good that we don’t bother talking about it,” Michael Shaoul, who oversees $1 billion as chairman of New York-based Marketfield Asset Management LLC, said in a telephone interview. “Once you’re talking about it, it’s not really AAA anymore.”

He added: “Even if the U.S. is downgraded, I don’t think it would have any major effect on anything right now.”

REITs Plunge
Real estate investment trusts that buy mortgage debt tumbled yesterday, adding to their biggest weekly loss in more than a year, on concern the markets that finance them will be roiled if the U.S. government defaults on its debt.

A Bloomberg index of shares of 32 mortgage REITs, such as Annaly Capital Management Inc. (NLY) and Invesco Mortgage Capital Inc. (IVR), dropped up to 8.5 percent yesterday, the most since May 6, 2010. For the week, the measure slumped 6.5 percent.

Quarterly reports scheduled for next week include Pfizer Inc., the biggest drugmaker; MasterCard Inc., the second-largest bank-card network; and Archer Daniels Midland Co., the world’s largest grain processor. Time Warner Inc., owner of the Warner Bros. studios, and CVS Caremark Corp., the largest U.S. provider of prescription drugs, are also due.

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