U.S. Stocks Erase Gain as Optimism About Fed Plan Fades

U.S. stocks erased gains as optimism about Federal Reserve plans to buy more bonds faded, with investor focus returning to the budget deadlock in Washington.

Berkshire Hathaway Inc. (BRK/A) climbed 2.4 percent after lifting the threshold it will pay for stock, signaling Chief Executive Officer Warren Buffett views the shares as undervalued. DuPont Co. (DD) advanced 1.4 percent as the chemical maker announced a share buyback and said 2012 earnings will be at the high end of forecasts. Eli Lilly & Co. sank 3.2 percent after saying it’s conducting an added study for an experimental Alzheimer’s drug.

The Standard & Poor’s 500 Index rose less than 0.1 percent to 1,428.48 in New York, erasing an earlier rally of as much as 0.8 percent. The Dow Jones Industrial Average slipped 2.99 points, or less than 0.1 percent, to 13,245.45. More than 6.6 billion shares changed hands on U.S. exchanges, or 6.3 percent above the three-month average, according to data compiled by Bloomberg.

“Traders have been poking holes in some of the Fed comments,” Michael James, a managing director of equity trading at Wedbush Securities Inc. in Los Angeles, said in an e-mail. “Nothing hugely ‘negative,’ just reason to be doing some selling with the strength we’ve had in the last couple days. Markets are very thin right now and subject to bigger swings this week.”

Stocks rallied after the central bank said it will buy $45 billion a month of Treasury securities starting in January, in addition to $40 billion a month of mortgage-debt purchases, as part of its effort to stimulate the economy. Asset buying will continue “if the outlook for the labor market does not improve substantially,” the Federal Open Market Committee said today at the conclusion of a two-day meeting in Washington.

Fiscal Cliff

The rally faded as Fed Chairman Ben S. Bernanke said monetary stimulus cannot offset the full effect of the so-called fiscal cliff of automatic tax increases and budget cuts set to go into effect next year.

President Barack Obama is seeking a deal with Republican lawmakers to avoid the fiscal cliff, lowering his demand for tax increases in the budget to $1.4 trillion from $1.6 trillion yesterday. House Speaker John Boehner said today that Obama’s revenue demand can’t pass the House or the Senate. Democrats and Republicans remain divided on taxes and spending, as well as on whether an agreement should include an increase in the debt limit and further programs to boost the economy.

“People finally realized that we still have the fiscal cliff waiting in the wings,” Thomas Garcia, head of equity trading at Santa Fe, New Mexico-based Thornburg Investment Management Inc., said in an e-mail. His firm oversees about $80 billion. What the Fed “said in the minutes should be bullish for equities,” he said.

Election Day

The S&P 500 has erased its losses since Election Day, advancing 0.9 percent so far this month to give the benchmark index a 14 percent rally for 2012. Its average gain for December is 1.5 percent, the highest of any month except July, according to data dating back to 1928 compiled by Bloomberg. The stock market may also get a year-end boost from a so-called Santa Claus rally -- an upswing in the last five days of the year and the first two in January, according to the Stock Trader’s Almanac.

The S&P 500 will surpass its record to reach 1,580 at the end of next year, according to Thomas Lee, chief U.S. equity strategist at JPMorgan Chase & Co. His forecast is 0.9 percent higher than the benchmark equity measure’s all-time high of 1,565.15 and 11 percent above its closing level yesterday. Stocks will rally as investors get clarity on political concerns in the U.S. and Europe, an acceleration in durable goods spending lifts price-earnings multiples and earnings growth picks up, according to New York-based Lee in a note dated today.

Biggest Gains

Phone, financial and energy companies had the biggest gains among 10 industry groups, adding at least 0.4 percent. Technology, consumer staples and material stocks posted the largest losses, falling more than 0.2 percent each.

Berkshire (BRK/B) climbed 2.4 percent to $89.32. The company said it will pay as much as 120 percent of book value, a measure of assets minus liabilities for stock buybacks. The limit was 110 percent. Buffett, 82, and Vice Chairman Charles Munger have been weighing buybacks as the company seeks to deploy part of its $47.8 billion cash hoard. Berkshire last year began a buyback program after shunning repurchases for four decades.

DuPont climbed 1.4 percent to $44.30. The biggest U.S. chemical maker by market value said 2012 earnings will reach the upper end of the company’s forecast and it will spend as much as $1 billion to repurchase shares. Earnings excluding one-time items will approach $3.30 a share this year and increase by the “low- to mid-single digits” for 2013, DuPont said.

Aetna Rises

Aetna Inc. (AET) rose 3.2 percent to $45.91. The third-biggest U.S. health insurer by membership said earnings excluding one- time items in 2013 will be at least $5.40 a share, while revenue will rise about 9 percent to $38.6 billion. The forecasts “should be good enough given low expectations, Chris Rigg, an analyst with Susquehanna Financial Group, wrote in a note. Nasdaq OMX Group Inc. (NDAQ) jumped 3.8 percent to $24.31. The second-largest U.S. equity exchange agreed to buy Thomson Reuters Corp. units that provide investor and public relations and multimedia services for $390 million in cash as it seeks to diversify.

Homebuilders Rally

An S&P index of homebuilders surged 3.5 percent as Mortgage Bankers Association’s index of applications rose 6.2 percent last week and the group’s purchase measure reached the highest level in a year. D.R. Horton Inc. increased 3.5 percent to $19.21 while Lennar Corp. advanced 4 percent to $37.87.

Dolby Laboratories Inc. (DLB) added 2.4 percent to $35. The audio-technology company whose products are used in cinemas, announced a special one-time dividend of $4 a share.

Eli Lilly sank 3.2 percent to $49. The company said it will conduct an additional late-stage study of its experimental Alzheimer’s treatment solanezumab, a move that could push the drug’s introduction back three years to 2016. Lilly said it doesn’t believe it has enough data to gain U.S. marketing clearance for the medicine, based on conversations with the Food and Drug Administration.

To contact the reporters on this story: Inyoung Hwang in New York at ihwang7@bloomberg.net; Lu Wang in New York at lwang8@bloomberg.net

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

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