U.S. Stocks Fall on Buffett, World Bank Warning About Economy

March 9 (Bloomberg) -- U.S. stocks fell, extending the worst weekly slump in the Standard & Poor’s 500 Index since November, after Warren Buffett said the economy “has fallen off a cliff” and the World Bank predicted a global contraction.

Hewlett-Packard Co., DuPont Co. and Verizon Communications Inc. slumped 4 percent or more. Merck & Co. sank 7.7 percent, dragging down the Dow Jones Industrial Average, after agreeing to buy Schering-Plough Corp. for $41.1 billion. Aflac Inc., the largest provider of supplemental insurance, dropped 15 percent after UBS AG recommended selling the shares.

The S&P 500 fell 1 percent to 676.53, the lowest level since September 1996. The index, which decreased as much as 1.5 percent and climbed 1.7 percent, swung between gains and losses at least 25 times. The Dow average retreated 79.89 points, or 1.2 percent, to 6,547.05.

“Uncertainty reigns,” said David Sowerby, who helps oversee about $100 billion at Loomis Sayles & Co. in Bloomfield Hills, Michigan. “What’s the floor on the S&P? It’s never ending.”

The S&P 500 is likely to drop to 600 or lower this year as the global recession intensifies, Nouriel Roubini, the New York University professor who predicted the financial crisis, said in an interview today. Merrill Lynch & Co. economist David Rosenberg also forecast the index slumping to that level, saying it will probably bottom in October.

$61.7 Billion Loss

U.S. stocks last week posted the biggest decline in three months after American International Group Inc. reported a $61.7 billion loss and concern increased that General Electric Co. will be stripped of its top credit rating. General Motors Corp. sank 36 percent, the most since October, after its auditor said the automaker may not survive.

Hewlett-Packard, the personal-computer maker, slipped 5.1 percent to $25.53. Chemical maker DuPont fell 4.3 percent to $16.14, while telephone company Verizon slumped 4 percent to $26.18.

Aflac lost 15 percent to $11.49 after UBS reduced its recommendation to “sell” from “neutral,” saying the shares are expensive relative to other life insurance companies.

Merck lost 7.7 percent, the most in the Dow average, to $20.99. Buying Schering-Plough would make Merck the second- biggest U.S. drugmaker and give it full rights to cholesterol pills Zetia and Vytorin and experimental treatments for blood clots, asthma and schizophrenia. Schering-Plough surged 14 percent to $20.13.

More Takeovers?

The deal may spur other industry takeovers, said David Moskowitz, an analyst with Caris & Co. Pfizer Inc. offered to buy Wyeth in January for $68 billion. Genentech Inc., the biggest U.S. maker of cancer drugs, is nearing a deal to sell itself to majority owner Roche Holding AG for $46.7 billion, the Wall Street Journal reported today.

Genentech added 2 percent to $92.63. Roche rose 3.4 percent to $28.63.

Buffett, whose Berkshire Hathaway Inc. posted its worst results ever in 2008, told CNBC today that the economy “has fallen off a cliff” and that efforts to stimulate recovery may lead to inflation higher than the 1970s.

The global economy is likely to shrink for the first time since World War II and trade will decline by the most in 80 years, the World Bank said yesterday. Its assessment is more pessimistic than an International Monetary Fund report in January predicting 0.5 percent global growth this year.

“We’re going to continue to see very volatile markets,” said Ron Rimkus, a money manager for Raleigh-based BB&T Asset Management, which oversees $17 billion. “There’s nothing good going on in terms of the economy.”

Father of Value Investing

Benjamin Graham, the father of value investing and mentor of Buffett, would find most U.S. stocks expensive even after the S&P 500 dropped 56 percent in 17 months.

Graham measured equities against a decade of profits to smooth out distortions, a method that shows the S&P 500 trading at 13.2 times earnings, according to data compiled by Yale University Professor Robert Shiller. At the bottom of the three worst recessions since 1929, the average ratio fell below 10. To reach that level, the S&P 500 would sink another 27 percent.

Investors who valued companies based on earnings or forecasts covering just one year have been burned as equities kept dropping. The S&P 500 fetched 16.2 times its companies’ 12- month profits on Jan. 7, the lowest since at least 1998, according to data compiled by Bloomberg. The index has since declined as much as 25 percent to a 12-year low.

17-Year Low

The S&P 500 Financials Index rose 2.5 percent, rebounding from the lowest closing level in almost 17 years. The 84 percent plunge in the measure from its February 2007 high has surpassed the crash in technology shares after March 2000.

Bank of America Corp. added 19 percent, the biggest gain in the Dow average, to $3.75 after a person familiar with the matter said it will sell $8.5 billion in debt backed by the Federal Deposit Insurance Corp.

“It’s a good sign that a large financial institution which is really critical to lending is going ahead with plans to sell debt,” said Liam Dalton, who oversees about $1.1 billion as the New York-based chief executive officer of Axiom Capital Management. “It reminds investors that if we can get some normal functioning in the credit market, we can get some stability of the real economy and overall market.”

Bank of America will be an “earnings powerhouse” once the economy recovers, Barron’s said in an article published March 7.

GE Bond Sale

General Electric Co. climbed for a second day, rising 5 percent to $7.41. Its finance arm hired five banks to manage a bond sale under the U.S. government’s Temporary Liquidity Guarantee Program.

Wells Fargo & Co. increased 16 percent to $9.97, the steepest advance in almost two weeks. Buffett told CNBC that business at the fourth-largest U.S. bank in three years looks “better than ever.” Buffett’s Berkshire Hathaway Inc. owns 6.9 percent of the bank’s stock.

Stem-cell companies surged after President Barack Obama lifted restrictions on federal funding for embryonic research and called on Congress to provide more money to make the U.S. a leader in the field. Geron Corp. rose the most since January, surging 17 percent to $4.51. StemCells Inc. climbed 43 percent, the most since January 2005, to $1.98.

Futures Plummet, Ugly Day On Street Expected

Ken Sweet
FOXBusiness
U.S. stock futures are pointing toward an ugly open in stock markets for Friday's trading session after Asian and European markets broadly sold off overnight on worldwide earnings and recession fears.

The Dow Jones Industrial Average futures were down 550 points, or 6.27%, to 8224 as of 8:45 a.m. here in New York. The S&P 500 futures were down 60 points, or 6.56%, to 855.20 while the Nasdaq 100 futures dropped 83.50 points, or 6.66%, to 1170. They have not moved from those levels since 5:00 this morning.

All the futures of the major indices have hit "limit down" - where market regulations will not allow traders to sell the futures off more. They can trade above those levels, but cannot trade below those levels. It's similar to the New York Stock Exchange's circuit breakers, which were put into place to keep panic selling from destroying the stock market. In a piece of ominous trivia, today's trading session marks the 79th anniversary of the 1929 stock market crash.

With fair value calculated into the futures, the Dow is expected to fall about 450 points at the 9:30 a.m. open, but with limit down affecting futures, the opening will most likely be considerably worse.

“We’re all going to hold our breath and see what happens when they ring the opening bell,” NYSE trader Ben Willis of VDM Institutional Brokerage told FOX Business.

The prices on all categories of bonds - from short-term Treasury bills to 30-year Treasury bonds - were all sharply higher this morning as investors piled in to the safety of U.S. government-backed bonds.

As has been the issue in several trading sessions, U.S. is taking their trading cues from Asia and Europe. In Tokyo, the Nikkei dropped 811.90 points, or 9.6%, to 7649.08. Hong Kong's market plummeted 1142.11 points, or 8.3%, to 12618.38. South Korea's Kospi fell 10.6%.

In the first hours of trading in Europe, London's market was down 8.3%, Germany's market fell a little more than 9% while France's market slipped a little less than 9%.

Japanese markets partially reacted to a profit warning from Sony (SNE: 21.46, -1.92, -8.21%), which came after the Japanese markets closed on Thursday, where the company said it would see a 50% drop in profit because of a strengthening Japanese Yen and the almost-imminent global economic slowdown. Sony shares fell more than 10% in U.S. based trading yesterday.

Japan's economy is heavily dependent on a weak Yen to fuel their economy, which makes their exports cheaper on the global market. Because Japan's financial system is not in as dire straits as the rest of the world, the Yen has reached levels against the Dollar and European currencies not seen in years.

In the U.K., the government said that the nation's gross domestic product fell 0.5% in the third quarter. That's the first major economic power that has reported a contraction in their economy as a result of the credit crunch and subprime mortgage mess.

Economists interviewed by Thomson Reuters expected the U.K. GDP to fall 0.2%. According to Dow Jones, the U.K's economic contraction is the biggest since the fourth quarter of 1990. All segments of the nation's economy shrank this quarter.

The euro fell to a two-year low of $1.2525 overnight while the euro fell to a six-year low against the Japanese Yen to 117.20. The British Pound fell 6% to $1.5272 against the U.S. Dollar. A 6% move in any currency is nearly unheard of historically.

In the U.S., if it even matters at this point, traders will be reacting to Microsoft's (MSFT: 22.32, +0.79, +3.66%) earnings, which came out after the closing bell Thursday. The Dow member reported a profit of $4.37 billion, or 48 cents a share, up from 46 cents a share a year earlier.

Analysts were looking for one cent more out of Microsoft's earnings this quarter, according to Thomson Reuters.

The only economic report out today is the important existing home sales monthly update at 10 a.m. Economists are looking for 4.95 million contracts for September. Existing home sales have become a one of the more important reports each month because Wall Street and government officials have said that the U.S. economy will not recover until home sales recover.

In the commodity markets, oil was down $4.42 to $63.45 a barrel after the Organization of Petroleum Exporting Nations, commonly known as OPEC, said it would cut production by 1.5 million barrels a day effective immediately. The announcement did nothing to step losses in the commodity.

Gold was down $22.20 to $692.50 as traders pulled out of all markets, including solid assets.