U.S. Stocks Drop on Apple Slump as Europe Ministers Meet

Oct. 8 (Bloomberg) -- On today's "Insight & Action," Adam Johnson looks at stocks that outperform. He speaks on Bloomberg Television's "Street Smart." (Source: Bloomberg)

U.S. stocks retreated, following last week’s advance in benchmark indexes, after Apple (AAPL) Inc. paced a decline in technology companies and as European finance ministers met to discuss the region’s government debt crisis.

Apple, the world’s most valuable company, slumped 2.2 percent and dropped below $600 billion in market value. Facebook Inc. (FB), operator of the biggest social networking company, slid 2.4 percent after being downgraded at BTIG LLC. Netflix Inc. (NFLX), the world’s largest video-subscription service, advanced 10 percent after the shares were raised at Morgan Stanley.

The Standard & Poor’s 500 Index slid 0.3 percent to 1,455.88 at 4 p.m. New York time, after climbing 1.4 percent last week. The Dow Jones Industrial Average fell 26.50 points, or 0.2 percent, to 13,583.65. Volume for exchange-listed stocks in the U.S. was 4.1 billion shares, the lowest since July 3.

“We’re back to dealing with the issues in Europe,” Bruce McCain, chief investment strategist at the private-banking unit of KeyCorp (KEY) in Cleveland, said in a phone interview today. His firm oversees $20 billion. “We’re going back to a period where investors become less enthusiastic as they realize the problems of the world have not gone away.”

European finance ministers met in Luxembourg today to discuss Spain’s overhaul effort and closer banking cooperation, while German Chancellor Angela Merkel visits Greece tomorrow for the first time since the crisis erupted. The World Bank said policy makers in Asia’s emerging economies have room to provide more fiscal stimulus as China’s slowdown drags the region’s growth to an estimated 11-year low in 2012.

Earnings Season

Alcoa Inc. (AA) unofficially starts the earnings season with the release of its third-quarter numbers tomorrow. Third-quarter profits and sales for the S&P 500 probably fell in unison for the first time in three years, according to analysts’ estimates compiled by Bloomberg. Per-share earnings may have dropped 1.7 percent on average after they were little changed in the second quarter. Sales may have slipped 0.6 percent, the data show.

Early earnings reports from companies in the S&P 500 are signaling an “ugly” quarter, according to Wells Fargo & Co.’s Gina Martin Adams. Monsanto Co. (MON), the world’s largest seed company, and Nike Inc., the biggest sporting-goods provider, are among the constituents of the U.S. equity benchmark that have reported declining income, according to data compiled by Bloomberg. Analysts project third-quarter earnings will slip 1.7 percent in the first retreat since 2009, the data show.

“While recession in the U.S. is not necessarily imminent, earnings are weakening fairly quickly,” Adams, a Wells Fargo strategist, wrote in a note today. “Formerly strong export and investment sensitive sectors are suffering from economic and policy uncertainty, pressuring index earnings to the brink.”

Biggest Losses

Eight out of 10 groups in the S&P 500 fell as technology companies and telephone providers had the biggest losses.

Apple retreated 2.2 percent to $638.17, dropping 5 percent in three days. The shares have risen 58 percent so far this year, outpacing the 16 percent jump in the S&P 500.

Foxconn Technology Group, the assembler of Apple iPhones, had to stop production for the second time in as many weeks after factory-line workers at one of its plants protested against increased pressure. Apple designs its products in the U.S. and relies on Foxconn to manufacture them in mass and on time. The company sold 5 million iPhone 5 models in its first three days on sale last month.

Facebook lost 2.4 percent to $20.40 after being cut to sell from neutral by BTIG. The company’s 2013 earnings will be “significantly below” analysts’ estimates, said Richard Greenfield, an analyst at BTIG, citing the social-networking site’s struggles to get revenue from mobile users.

‘Increasingly Skeptical’

“We’ve been growing increasingly skeptical of some of their monetization methods,” Greenfield, said in an interview today on “Bloomberg Surveillance” with Tom Keene.

Facebook’s payments business is “collapsing” as companies such as game maker Zynga Inc. (ZNGA) grapple with lower demand, putting more pressure on Facebook to increase advertising sales, Greenfield said. The social-networking company risks annoying its mobile customers by cluttering the service with ads, the analyst said.

Walt Disney Co. (DIS) retreated 1.2 percent to $52.33. The world’s largest entertainment company was downgraded to average from above average at Caris & Co. by equity analyst David Miller. The share-price estimate is $55.

Progress Software Corp. (PRGS) plunged 14 percent to $18.52 after it said Chief Executive Officer Jay Bhatt will step down and withdrew its fourth-quarter revenue forecast, citing concern that sales may slip during the transition.

Green Dot

Green Dot Corp. (GDOT) sank 20 percent to $10.25. The prepaid-card firm that derives most of its revenue from Wal-Mart Stores Inc. fell after the world’s biggest retailer said it would expand sales of a competing product from American Express Co.

Netflix rallied 10 percent to $73.52 after Morgan Stanley upgraded the stock, saying competition from Amazon.com Inc.’s Prime Instant service is “overblown.” The video-subscription service is not under direct pressure from Amazon.com in the U.S., Scott Devitt, a New York-based analyst for Morgan Stanley, wrote in a note today. He boosted his rating for Netflix to overweight, the equivalent of a buy, from equalweight.

Navistar International Corp. (NAV) climbed 7.5 percent to $22.81. The company, which ousted its chief executive officer after a failed engine strategy, agreed to add Mark Rachesky, an associate of investor Carl Icahn and a third to-be-named person to its board, averting Icahn’s threat of a proxy fight.

Iron Ore

Cliffs Natural Resources Inc. (CLF) jumped 5.8 percent to $40.58. The largest U.S. iron-ore producer rose after a jump in prices for the steelmaking raw material. Iron ore for immediate delivery in China rose 6 percent to $110.40 a ton, the biggest gain in a month, according to data from The Steel Index Ltd.

UnitedHealth Group Inc. (UNH) rose 0.8 percent, the most in the Dow, to $57.60. The biggest U.S. health insurance company agreed to pay about $4.9 billion to buy 90 percent of Amil Participacoes SA, a Brazil-based insurer and hospital chain that gives the American company a stake in the world’s second-biggest emerging economy.

As third-quarter earnings season begins, the companies analysts are most bullish about are the ones whose stock prices are farthest below their highs -- banks.

While financial institutions in the S&P 500 climbed 24 percent in 2012 for the biggest rally in nine years, they remain 58 percent below the record of February 2007, according to data compiled by Bloomberg. Signs of a housing recovery prompted Wall Street firms to raise estimates for profit growth to 21 percent for the third quarter and 32 percent in the fourth, the most of 10 S&P 500 industries.

Bulls vs Bears

Bulls say banks will continue to rally as Federal Reserve stimulus boosts earnings and helps companies from BB&T Corp. to KeyCorp and Wells Fargo & Co. rebound from the 84 percent drop during the financial crisis. Bears say gains will be limited to traditional lenders and increased regulation will drag down firms that depend on trading and underwriting for revenue.

“As transactional volume increases for consumer, housing and business credit, there is an opportunity to increase earnings” among regional lenders, said Michael Shaoul, chairman of New York-based Marketfield Asset Management, which oversees $3 billion. Firms outside of the “purer banking model” face too much regulation, he said in an Oct. 3 e-mail.

To contact the reporter on this story: Rita Nazareth in New York at rnazareth@bloomberg.net

To contact the editor responsible for this story: Lynn Thomasson at lthomasson@bloomberg.net

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