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U.S. Stocks Fall as Slow Job Creation Threatens Profit Recovery

A trader on the floor of the NYSE
A trader works on the floor of the New York Stock Exchange in New York. Photographer: Jin Lee/Bloomberg

U.S. stocks tumbled, paring a weekly advance for the Standard & Poor’s 500 Index, after weaker-than- forecast growth in company payrolls suggested a rebound in corporate profits may stall.

JPMorgan Chase & Co. and International Business Machines Corp. led the Dow Jones Industrial Average lower after private-sector payroll growth fell short of estimates. EOG Resources Inc. tumbled 3.1 percent following earnings that trailed estimates. Equities pared losses as the Federal Housing Administration said it plans to begin accepting applications for a program to help struggling mortgage borrowers.

The S&P 500 Index fell 0.4 percent to 1,121.64 at 4 p.m. in New York, paring its weekly advance to 1.8 percent. The Dow dropped 21.42 points, or 0.2 percent, to 10,653.56 after earlier tumbling as much as 160 points. Treasury yields slid, sending the two-year rate below 0.5 percent for the first time, on lower expectations for economic growth and inflation.

“As these employment gains are very modest and suggest that the economy is slowing in the second half of this year and into next year, that’s going to slow sales growth, which ultimately will feed back into the bottom line of profit growth,” said Jeffrey Kleintop, chief market strategist at LPL Financial Corp. in Boston, which manages $280 billion. “In the long-term you can’t sustain a profit recovery without hiring.”

Jobs Concern

U.S. index futures erased gains before the open of exchanges as the government said the number of Americans on company payrolls rose by 71,000 in July after a gain of 31,000 in June that was smaller than previously reported. Economists projected a 90,000 rise in private-sector jobs last month, according to the median estimate in a Bloomberg News survey.

Overall employment, including government workers, fell by 131,000 as the Census Bureau cut temporary jobs, and the unemployment rate held at 9.5 percent.

JPMorgan Chase, the second-biggest U.S. bank by assets, declined 2 percent to $40.44. IBM, the world’s biggest computer- services company, dropped 0.8 percent to $130.14.

EOG Resources fell 3.1 percent to $99.26. The oil and natural gas producer reported second-quarter profit excluding some items of 18 cents a share, 31 percent less than the average of 23 analyst estimates in a Bloomberg survey.

Harman International Industries Inc. declined 12 percent to $29.88 for the biggest drop in the S&P 500. The maker of audio systems for homes and vehicles posted fourth-quarter profit excluding some items of 30 cents a share, trailing the average analyst estimate by 6.3 percent, according to Bloomberg data.

Washington Post Tumbles

Washington Post Co. fell 7.6 percent to $377.56, its biggest drop since May 2009. The newspaper publisher said proposed U.S. Department of Education rules could “have a material adverse effect” on its Kaplan unit, which makes up more than 60 percent of earnings.

Activision Blizzard Inc. slid 6.5 percent to $10.99. The largest video-game publisher said sales this quarter will be $725 million, excluding changes in deferred revenue. Analysts estimated sales of $914.5 million on average. The company forecast adjusted earnings of 8 cents a share, below the 12-cent average estimate.

Equities pared losses late in the session as the Federal Housing Administration said it will begin accepting applications Sept. 7 for its program to help borrowers who owe more on their mortgages than their homes are worth. The Short Refinance program encourages lenders to forgive 10 percent or more of the balance of a mortgage so the loans can be refinanced at a lower interest rate. That would remove the troubled loans from the lender’s books and allow borrowers to lower their payments.

Earnings Watch

The S&P 500 advanced this week as companies from Humana Inc. to Allergan Inc. reported profit that topped analyst estimates. Earnings beat the average analyst estimate at more than three-quarters of the S&P 500 companies that have reported second-quarter results so far, helping send the benchmark up as much as 10 percent from its low for the year on July 2.

Kraft Foods Inc. and American International Group Inc. gained today after reporting better-than-expected results. Kraft Foods, the maker of Oreo cookies and Maxwell House coffee, rose 2.4 percent to $30.36. AIG, the insurer rescued by the U.S. in November 2008, gained 2.6 percent to $40.93. Separately, AIG Chief Executive Officer Robert Benmosche said the insurer is in talks with regulators to become independent.

PerkinElmer Inc. rose the most in the S&P 500, climbing 11 percent to $22.29. The provider of equipment for genetic screening and drug research boosted its full-year forecast after second-quarter profit beat analysts’ estimates.

‘Huge Recovery’

“We’ve had a huge recovery in corporate profits mostly due to cost-cutting,” said Brian Lazorishak, senior quantitative analyst at Chase Investment Counsel Corp. in Charlottesville, Virginia, which manages $1.5 billion.“There’s been some revenue growth, but it’s been muted. There needs to be revenue growth for corporate America to improve profits, and we haven’t really seen that.”

The 443 companies in the S&P 500 that have reported second-quarter results earned an aggregate $21.45 a share excluding some items, the highest total since the second quarter of 2007, when index operating profit peaked at $24.06 a share, according to data compiled by Bloomberg and S&P.

Sales per share, forecast by S&P to total $235.54 this quarter, have recovered less than 7 percent from a three-year low of $221.8 a share in the first quarter of 2009, according to data compiled by S&P. The peak, in the second quarter of 2008, was $278.53 a share.

Growth Slowdown

The U.S. economy has expanded for four straight quarters after shrinking for five of the previous six as the collapse of the subprime mortgage industry triggered the worst contraction since the Great Depression. Growth slowed to 2.4 percent in the first quarter from 3.7 percent at the end of 2009, spurring concern the nation is at risk of entering another recession as government stimulus programs expire.

Earlier this week, reports on consumer spending, pending home sales and factory orders in June were all weaker than economists estimated. The Federal Reserve will provide an update on interest rate policy and its assessment of the economy on Aug. 10.

Nobel Prize-winning economist Joseph E. Stiglitz said the U.S. economic recovery is “anemic” and called for a second round of “better-designed” stimulus.

“The recovery is so weak that it is not strong enough to generate new jobs for the new entrants in the labor force, let alone to find jobs for the 15 million Americans who would like a job and can’t get one,” Stiglitz told Bloomberg Television in an interview in Sydney yesterday.

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