Most U.S. Stocks Retreat on Bond Auction, Consumer Confidence

Oct. 27 (Bloomberg) -- Most U.S. stocks fell for a third day as stronger-than-forecast demand in a Treasury auction and an unexpected drop in consumer confidence spurred concern investors are questioning the strength of the economic recovery.

Alcoa Inc., Walt Disney Co. and Hewlett-Packard Co. lost at least 1.1 percent after the Conference Board’s gauge of sentiment trailed estimates and its measure of employment availability slumped to a 26-year low. International Business Machines Corp. helped lead the market higher earlier after its board approved $5 billion in buyback funds. Treasuries rose following the record $44 billion auction of two-year notes.

More than two stocks retreated for each that gained on the New York Stock Exchange. The Standard & Poor’s 500 Index slipped 0.3 percent to 1,063.41 at 4:03 p.m. in New York. The Dow Jones Industrial Average increased 14.21 points, or 0.1 percent, to 9,882.17 as IBM gained and Exxon Mobil Corp. and Chevron Corp. climbed on a rebound in oil. The Nasdaq Composite slid 1.2 percent as Baidu Inc. and Wynn Resorts Ltd. tumbled 11 percent.

“The Treasury auction took some wind off the stock market,” said Peter Boockvar, an equity strategist at Miller Tabak & Co. in New York. “It reflects some rising risk aversion and belief the Fed will remain on hold because the economy is still looking very iffy. People are concerned about the sustainability of the economic improvement. The market might be heading for a correction phase.”

Consumer-discretionary shares posted the steepest decline in the S&P 500 among 10 groups after the Conference Board’s consumer confidence index unexpectedly fell to 47.7. The S&P 500 has jumped 57 percent from a 12-year low in March amid speculation an economic recovery will restore profit growth.

‘Healthy Consumer’

“For this recovery to have sustainability, we need to see a healthy consumer,” said Keith Wirtz, chief investment officer at Fifth Third Asset Management Inc., which oversees $18.6 billion in Cincinnati. “Any statistic that is consumer-centric will weigh on the market.”

Johnson Controls Inc. led a gauge of carmakers and components companies down 2.9 percent for the biggest decline among 24 industries.

The world’s largest maker of auto seats reported a 16 percent drop in quarterly revenue in its structural controls unit as construction slowed and owners deferred repairs. The company said 2010 earnings will be $1.35 to $1.45 a share. Analysts surveyed by Bloomberg estimate profit of $1.51 a share on average. Johnson Controls fell 4.8 percent to $25.03.

Limited Brands Slide

Limited Brands Inc. led consumer discretionary stocks down 1.7 percent. The owner of the Victoria’s Secret chain said it expects percentage declines in sales at store open at least one year will be “in the negative low-to-mid single digits” this month. The company had expected sales to be “roughly flat.” Limited Brands slumped 8.1 percent to $17.91.

Jeremy Grantham, the chief investment strategist at Boston-based Grantham Mayo Van Otterloo & Co., said stocks will “drop painfully from current levels” in the coming year amid disappointing economic data and profits as margins shrink. The S&P 500 fell 1.2 percent to 1,066.95 yesterday, higher than Grantham’s estimate for its so-called fair value at 860.

Pacific Investment Management Co.’s Bill Gross said the six-month rally in riskier assets is likely at its pinnacle, with U.S. economic growth to lag behind historical averages.

‘Rage, Rage’

“Investors must recognize that if assets appreciate with nominal gross domestic product, a 4-5 percent return is about all they can expect even with abnormally low policy rates,” Gross, a founder and co-chief investment officer of the world’s biggest manager of bond funds, wrote on Pimco’s Web site. “Rage, rage, against this conclusion if you wish, but the six-month rally in risk assets -- while still continuously supported by Fed and Treasury policy makers -- is likely at its pinnacle.”

IBM, the world’s largest computer-services provider, gained as much as 1.7 percent and helped lead the market higher earlier after announcing it will reward its shareholders with a plan to repurchase stock. The shares closed up 0.5 percent at $120.65.

“Buybacks are a sign of strength in corporate balance sheets,” said Michael Levine, a money manager at New York-based OppenheimerFunds Inc., which oversees about $165 billion. “It’s a good sign. Obviously there are exceptions, but in general, corporate cash flows and balance sheets are in good shape.”

Energy shares rose 1.1 percent for the biggest gain in the S&P 500 among 10 industries. Crude oil climbed 1.1 percent to $79.55 a barrel and BP Plc, Europe’s second-largest oil company, posted third-quarter earnings that beat the average analyst estimate.

Energy Producers

Exxon Mobil Corp., the world’s biggest energy company, rallied 2.3 percent to $74.91, while Chevron Corp., the second-biggest U.S. energy company, added 1.5 percent to $76.59.

Cabot Oil & Gas Corp. gained the most in the S&P 500, adding 9.8 percent to $42.05. The independent oil and gas company was upgraded to “overweight” from “neutral” at JPMorgan Chase & Co. after third-quarter profit topped some analysts’ estimates.

Earlier gains in equities also came after home prices climbed for a third consecutive month. The S&P/Case-Shiller home-price index increased 1 percent in August from the prior month on a seasonally adjusted basis. U.S. Senate leaders moved closer to agreement to replace an expiring $8,000 tax credit for first-time homebuyers with a smaller one that expands access to more borrowers, two people familiar with matter said.

American Express Jumps

American Express Co. rallied 3.1 percent to $35.95. Goldman Sachs Group Inc. boosted its 2009 through 2011 earnings estimates for the biggest U.S. credit-card issuer by purchases, citing “improved consumer trends.”

Visa Inc., the world’s largest electronic-payments network, rose 1.5 percent to $73.90 ahead of its fiscal fourth-quarter earnings report. After the close of trading, Visa said it swung to a profit of $514 million, or 69 cents a share, from a year-earlier loss of $356 million. Adjusted income of 74 cents a share topped the average analyst estimate of 72 cents.

Verizon Communications Inc. added 2 percent to $29.20. The second-largest U.S. phone company was raised to “outperform” at Wells Fargo & Co., which said “wireline margins troughed in Q3 and should be a driver of upside going forward.”

Treasuries rose, sending the current yield on the two-year note down nine basis points, or 0.09 percentage point, to 0.93 percent. The dollar and yen strengthened against most major counterparts after the drop in consumer confidence reduced demand for higher yields in other countries.

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.