U.S. stocks tumbled, capping the biggest weekly drop since January, as criminal investigators took aim at Goldman Sachs Group Inc. and technology shares slid after MEMC Electronic Materials Inc. posted a loss.
Goldman Sachs sank 9.4 percent to the lowest since July as people familiar with the matter said federal prosecutors are exploring whether to bring a criminal fraud case. Barclays Plc plummeted in U.S. trading after investment banking at the U.K.’s third-largest bank missed estimates. MEMC, which makes silicon wafers, sank 19 percent. Transocean Ltd. tumbled 7.9 percent as the White House banned new offshore drilling until the Gulf of Mexico oil spill is investigated.
The Standard & Poor’s 500 Index retreated 1.7 percent to 1,186.69 at 4 p.m. in New York, extending its weekly retreat to 2.5 percent. The Dow Jones Industrial Average plunged 158.71 points, or 1.4 percent, to 11,008.61 and lost 1.8 percent over the past five days, snapping an eight-week streak of gains, which was its longest rally since 2004.
The word criminal “sounds bad, gets everybody’s attention and is responsible for taking down financial companies,” said Jeffrey Davis, who oversees $5 billion as chief investment officer at Lee Munder Capital Group in Boston. “There’s concern that the government could accidently hurt or kill companies, either Goldman or others. In Europe, there’s Barclays and it doesn’t surprise me that European businesses are feeling more pressures than the U.S. right now.”
The Goldman Sachs-led slump in financial shares overshadowed rallies in Sunoco Inc., D.R. Horton Inc. and others on better-than-estimated earnings and further evidence the U.S. recovery is holding firm. The economy grew at a 3.2 percent annual rate last quarter, compared with 3.3 percent forecast in a Bloomberg survey and 5.6 percent gain in the fourth quarter. Consumer spending rose 3.6 percent, the most in three years.
“The thing that is really important here is the personal consumption number,” said Mike Ryan, the New York-based head of wealth management research for the Americas at UBS Financial Services Inc., which oversees about $663 billion. “This is going to be driven by a pick-up in private demand. From now on, it will be important to see a consumer re-engagement given that the government won’t provide the same lift that we’ve had in 2009.”
Return to Growth
The S&P 500 has surged 75 percent from a 12-year low in March 2009 as earnings returned to growth following a record nine-quarter slump and the Federal Reserve kept its benchmark interest rate at a record low to safeguard the recovery from recession.
Goldman Sachs tumbled 9.4 percent to $145.20 to extend its April decline to 15 percent, its worst month since October 2008. Bank of America Corp. cut its recommendation to “neutral” from “buy,” citing media reports indicating federal prosecutors are investigating the firm. Bank of America also slashed its price estimate on the shares to $160 from $220, according to a report dated today.
Prosecutors in New York are investigating transactions by Goldman Sachs after the Securities and Exchange Commission sued the firm two weeks ago on accusations of misleading investors in collateralized debt obligations. The federal review, which lawyers say is common in such a high-profile case, is being done by the U.S. attorney in Manhattan, said the people, who weren’t authorized to comment and spoke on condition of anonymity.
U.S. shares of Barclays Plc slumped 8.6 percent to $20.42. First-quarter investment banking revenue dropped more than estimated. Revenue at the Barclays Capital unit slumped 26 percent to 3.8 billion pounds ($5.8 billion) for the three months to March 31, missing the 4.9 billion-pound estimate of analyst Mark Phin at Keefe, Bruyette & Woods Ltd.
Financial shares in the S&P 500 slumped 2.5 percent for the biggest loss among 10 groups, nine of which fell. JPMorgan Chase & Co. slid 3.2 percent to $42.58 and Bank of America retreated 2.6 percent to $17.83.
MEMC plunged 19 percent to $12.97 for the biggest decline in the S&P 500 and the stock’s largest drop since July 2008. The maker of silicon wafers for solar modules and semiconductors reported a first-quarter loss as prices for both products declined and administrative expenses doubled. Analysts had forecast a profit.
Transocean, Halliburton Co. and McMoRan Exploration Co. plunged after President Barack Obama’s chief strategist David Axelrod told ABC’s “Good Morning America” that no new offshore drilling will be allowed until this month’s Gulf of Mexico oil spill is investigated.
Transocean, whose Deepwater Horizon rig caught fire and sank last week, tumbled 7.9 percent to $72.32. Halliburton, the second-largest oilfield contractor and a service provider on the Deepwater Horizon, declined 3 percent to $30.65. McMoRan, a New Orleans-based oil and gas producer that’s drilling in the Gulf, dropped 8.6 percent to $11.94.
McAfee Inc. slumped 12 percent to $34.75. The second- biggest maker of security software reported first quarter profit that missed analysts’ estimates after some customers put off large purchases of programs designed to protect computers from malicious software. The company’s rating was cut to “market perform” from outperform” at Wells Fargo Securities by equity analyst Philip Rueppel.
Nasdaq OMX Group Inc. sank 3.9 percent to $21. The securities exchange operator missed the average analyst earnings estimate as U.S. stock trading slowed. Excluding some items, first-quarter profit at Nasdaq was 43 cents a share, missing the 46-cent average estimate of 22 analysts surveyed by Bloomberg.
Massey Energy Tumbles
Massey Energy Co. dropped 11 percent to $36.63. The coal producer is being probed by the Federal Bureau of Investigation with regard to the explosion at one of the company’s mines in West Virginia, NPR reported on its website, citing people familiar with the investigation.
Sunoco had the biggest gain in the S&P 500, surging 4.3 percent to $32.78. The oil refiner reported profit of 14 cents a share after the market close yesterday, beating the average analyst estimate in a Bloomberg survey for a loss of 14 cents.
D.R. Horton surged 3.2 percent to $14.69. The second- largest U.S. homebuilder by revenue reported its second straight quarterly profit as buyers purchased property in time to beat the deadline for federal tax credits. Net income was $11.4 million, or 4 cents a share, for the fiscal second quarter ended March 31, compared with a loss of $108.6 million, or 34 cents, a year earlier. Analysts in a Bloomberg survey forecast that D.R. Horton would break even.
Discovery Communications Inc. rose 3.3 percent to $38.73. The owner of the Discovery Channel and Animal Planet cable channels increased its revenue forecast to as much as $3.78 billion from as much as $3.75 billion. The company also reported first-quarter profit of 39 cents a share, beating the 34-cent average analyst estimate compiled by Bloomberg.
Profit at companies in the S&P 500 surged 176 percent during the final three months of 2009, the most in Bloomberg data going back to 1998, and analysts estimate a 47 percent increase for the first quarter of 2010. Earnings estimates for companies in the index rose 10 percent on average in April, the largest monthly increase since at least 2006.
Income for the first three months of this year is beating estimates at nearly the fastest rate ever, with 77.9 percent of the companies that have reported topping projections. That compares with 79.5 percent in the third quarter and 72.3 percent in the period before that.
Barton Biggs, who recommended buying U.S. stocks last year when benchmark indexes sank to the lowest levels since the 1990s, said he anticipates total profit from S&P 500 companies of $88 to $90 a share this year, and $100 in 2011.
His 2010 forecast compares with the average projection of $78.43 from 12 strategists surveyed by Bloomberg News.
“The earnings are really coming in strong in the U.S.,” Biggs, who runs New York-based hedge fund Traxis Partners LP, said in an interview with Bloomberg Television. “I’m still very positive. “We’re going to have a pretty decent market.”
To contact the reporter on this story: Rita Nazareth in New York at firstname.lastname@example.org.