U.S. Stocks Decline as Financial, Consumer Companies Retreat

U.S. stocks dropped, extending the longest slump for the Dow Jones Industrial Average since the financial crisis of 2008, on concern the economic rebound is slowing after companies added fewer jobs than estimated and factory orders slumped.

General Electric Co., Bank of America Corp., and DuPont Co. lost at least 1.8 percent to lead the Dow to a seventh straight decline. Equity Residential, the largest publicly traded U.S. apartment landlord, slumped 2.5 percent after a downgrade from Citigroup Inc. Ford Motor Co. retreated 3.3 percent, paring gains from a rise yesterday.

The S&P 500 slipped 0.7 percent to 1,020.58 at 2:56 p.m. in New York, poised for its lowest close since September 2009. The Dow decreased 64.74 points, or 0.7 percent, to 9,667.79.

“The word that jumps into my mind about the sentiment of the market is ‘guarded,’” said Hugh Johnson, who oversees $1.85 billion as chairman of Albany, New York-based Johnson Illington. “Many of us believe the stock market is undervalued or cheap based on a reasonable estimate for earnings. But the market is sending a message, and the message is that our estimates for the economy and earnings may be way too optimistic.”

The S&P 500 has fallen 5.2 percent this week as slowing growth in manufacturing, an unexpected jump in jobless claims and a slump in home sales fueled concern the economic recovery was faltering. Today’s 83,000 increase in private payrolls trailed the median estimate in a Bloomberg News survey for 110,000. Factory orders fell 1.4 percent in May, a separate report showed, almost three times as much as forecast.

Jobless Rate Falls

Total payrolls fell by 125,000 last month as the government cut 225,000 temporary workers conducting the 2010 census, the Labor Department said. Economists projected a drop of 130,000, according to the median forecast in a Bloomberg News survey. The jobless rate fell to 9.5 percent from 9.7 percent as the labor force shrank.

Jan Hatzius, chief U.S. economist at Goldman Sachs Group Inc., said the “guts” of the jobs report signaled weakness, including declines in the length of the average workweek and lower hourly earnings.

“The report confirms that the labor market has not yet reached the self-sustaining recovery stage, at a time when forward-looking indicators of economic activity are slackening,” Hatzius wrote in a note to clients.

September futures on the S&P 500 swung in the seconds before the data were released. The contracts traded as low as 1,023.70 at 8:29:44 a.m. New York time, or 16 seconds before the jobs report came out, before jumping to 1,030 during the same second, data compiled by Bloomberg. They settled back to 1,025.40 as of 8:29:45 a.m., the data show. Once the report was released, the securities swung between 1,017.70 and 1,032.70, compared with 1,021.80 at yesterday’s close.

Valuation Watch

The S&P 500 tumbled 12 percent in the second quarter to the cheapest valuation in more than a year on concern a sovereign- debt crisis in Europe and China’s moves to slow the world’s largest emerging economy will dent global growth. The equity index slid 5.4 percent in June after losing 8.2 percent in May, the biggest two-month loss since the start of 2009, data compiled by Bloomberg show.

The gauge closed yesterday at 12.6 times projected profits for its companies, according to Bloomberg data, its cheapest valuation since March 2009, when the gauge began an 80 percent rally.

Price/Earnings Measures

The index traded at yesterday’s close with a PEG ratio, or its price-earnings multiple using 2009 profit divided by forecast annual income growth through 2012, of 0.78, according to data compiled by Bloomberg. The indicator was a favored tool of Fidelity Investments fund manager Peter Lynch, who said stocks trading with a PEG less of than 1 were undervalued.

Profits for companies in the S&P 500 are forecast to rise 32 percent to a combined $81.71 a share in 2010, according to estimates from more than 2,000 analysts tracked by Bloomberg.

Forecasts for the U.S. economy to expand 3.2 percent this year and 2.9 percent in 2011 incorporate estimates that the jobless rate will be at 9.6 percent by the end of 2010 and 9.1 percent a year later.

“Earnings will be fine this quarter, I don’t think we’ll see any significantly lowered guidance,” said Barry Knapp, chief U.S. equity strategist at Barclays Capital Inc. “Earnings at the back half of the year look too high, though they’re not wildly optimistic. 2011 looks wildly optimistic particularly given the path for GDP. There will be a point in time later in the year where the market will deal with significantly lowered earnings expectations, though not this quarter.”

Ford, Equity Residential

Ford dropped 3.3 percent to $10.22, leading the S&P 500 Automobiles & Components Index down 2.2 percent for the biggest loss of 24 groups in the S&P 500. Ford and General Motors Co. yesterday reported June sales that fell short of analyst estimates as consumers concerned about unemployment and the economy avoided large purchases. Ford shares rose 4.9 percent yesterday.

Equity Residential slumped 2.6 percent to $40.57, helping lead real-estate companies in the S&P 500 down 2.4 percent. The shares were cut to “sell” from “hold” at Citigroup, which said residential and self-storage real-estate stocks are expensive compared with growth prospects.

Airlines slumped, with Continental Airlines Inc. retreating 9.8 percent to $19.99. The Houston based-airline had its second- quarter earnings-per-share estimate reduced by Solebury Research LLC analyst James Higgins after the company yesterday said June revenue from each seat flown a mile increased 22 percent, falling short of Higgins’s 27 percent estimate.

Airlines Slump

Delta Air Lines Inc. fell 7.6 percent to $10.83 and US Airways Group Inc. lost 5.9 percent to $8.14. The carriers won’t pursue a swap of slots in New York and Washington, the companies said today in a U.S. Transportation Department filing, and will challenge in federal court a U.S. requirement that they give rivals more access to flights at LaGuardia Airport in New York and Ronald Reagan Washington National Airport.

Morgan Stanley fell 1.3 percent to $22.79. The owner of the world’s largest brokerage sold its Russian mortgage unit City Mortgage Bank to Orient Express Bank, the U.S. lender said in a statement today.

Frontier Communications Corp. fell 6.8 percent to $7.17 for the biggest drop in the S&P 500. The phone company serving rural U.S. markets said it completed the acquisition of Verizon Communications Inc.’s local wireline business in 14 states. Verizon, which said its shareholders are receiving Frontier stock after its spinoff, had the biggest gain in the Dow Jones Industrial Average, climbing 2.1 percent to $26.84.

Blockbuster Tumbles

Blockbuster Inc. tumbled 21 percent to 18 cents, after sinking to 15 cents earlier, the lowest intraday price since March 2009. The money-losing video-rental chain said the New York Stock Exchange informed the company it will begin the process of delisting its common stock. Shareholders rejected a proposal for a reverse split of the shares needed to boost the price and comply with the exchange’s listing requirements.

Sanofi-Aventis SA, France’s biggest drugmaker, is preparing a major acquisition in the U.S., people with knowledge of the situation said. Health-care companies Allergan Inc., Biogen Idec Inc. and Genzyme Corp. gained on speculation they may be the object of Sanofi’s interest.

Allergan Inc., which sells the Botox wrinkle smoother, jumped the most in S&P 500, climbing 6.5 percent to $61.87. Biogen Idec Inc., the world’s largest maker of multiple- sclerosis treatments, advanced 5.3 percent to $49.20. Genzyme Corp., the world’s largest maker of drugs for rare genetic diseases, added 5.8 percent to $52.76.

Consumer Stocks

Consumer discretionary stocks in the S&P 500 slid 1.4 percent as a group. International Game Technology dropped 3.5 percent to $15.41. The maker of computerized casino gaming systems had its 2011 earnings and share-price estimate cut at Morgan Joseph & Co., which said the company’s 2011 profit will be below expectations.

“Many of the numbers, in particular for consumer discretionary stocks, look too high,” said Russ Koesterich, the San Francisco-based head of investment strategy for scientific active equities at BlackRock Inc., which manages $3.36 trillion in assets for the world’s largest asset manager. “The earnings numbers for 2010 are aggressive unless you believe there’s a V- shaped recovery. Clearly we’re not in a V-shaped recovery.”

To contact the reporter on this story: Kelly Bit in New York at kbit@bloomberg.net.

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