Thursday, March 6, 2008

U.S. Stocks Drop, Led by Banks, as Foreclosures Reach Record

U.S. Stocks Drop, Led by Banks, as Foreclosures Reach Record

By Michael Patterson

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U.S. stocks fell to a six-week low, led by banks, after home foreclosures climbed to a record and loan defaults by Thornburg Mortgage Inc. and a Carlyle Group bond fund spurred concern that credit losses are deepening.

Citigroup Inc., JPMorgan Chase & Co. and Merrill Lynch & Co. led financial shares to the lowest since May 2003 on speculation the defaults will add to declines in mortgage-backed securities. J.C. Penney Co. and Gap Inc. fell on February sales that trailed estimates. European shares extended their retreat after the European Central Bank kept interest rates at a six- year high to curb inflation. Asian stocks rose.

The Standard & Poor's 500 Index slid 15.98 points, or 1.2 percent, to 1,317.72 at 11:57 a.m. in New York as 91 of 92 financial shares retreated. The Dow Jones Industrial Average lost 115.19, or 0.9 percent, to 12,139.8. The Nasdaq Composite Index decreased 15.77, or 0.7 percent, to 2,257.04.

``It's a tough environment,'' Paul Rasplicka, who manages $4 billion at AIM Investments, said in a Bloomberg Television interview in New York. ``Lending terms are tighter. The willingness to extend credit is less. It's making it very tough for business.''

Financial shares in the S&P 500 fell for the sixth straight day, the longest losing streak of the year. The group has lost 17 percent this year after the collapse of the subprime mortgage market caused writedowns and credit losses to climb to $181 billion worldwide. All 10 industryNew York Stock Exchange. groups in the S&P 500 retreated today as six stocks fell for every one that rose on the

Banks Slump

Citigroup, the biggest U.S. bank by assets, fell 75 cents to $21.40. Bank of America, the second-largest, dropped 83 cents to $36.72.

Merrill Lynch declined $2.90 to $46.42, the lowest since June 2003. Merrill and four of its Wall Street rivals had their first-quarter profit estimates cut by Keefe, Bruyette & Woods Inc. analyst Lauren Smith for the second time in less than a month.

More than a dozen analysts have lowered first-quarter profit estimates for the biggest U.S. securities firms in the last two weeks on expectations of more writedowns related to the collapse of the subprime mortgage market.

Goldman Sachs Group Inc., the biggest U.S. securities firm, lost $4.54 to $160.43. Bear Stearns Cos. retreated $3.77 to $72.01. Lehman Brothers Holdings Inc. fell $1.86 to $46.20. Morgan Stanley dropped $1.48 to $39.99.

Thornburg's Default

Thornburg Mortgage lost $2.05, or 60 percent, to $1.35. JPMorgan, the third-biggest U.S. bank by assets, sent a letter dated Feb. 28 after Thornburg failed to meet a $28 million margin call, the Santa Fe, New Mexico-based company said in a regulatory filing yesterday. That triggered defaults on other financing agreements and the amounts involved are ``material,'' the company said.

RBC Capital Markets said in a research note today that ``bankruptcy is now a more likely outcome'' for Thornburg.

Fannie Mae, the largest source of money for U.S. home loans, declined 90 cents to $23.37. Freddie Mac, the second biggest, lost $1.43 cents to $20.21.

Washington Mutual Inc. dropped 98 cents to $11.82. Standard & Poor's lowered its credit rating on the largest U.S. savings and loan and said another cut is possible.

U.S. mortgage foreclosures rose to an all-time high at the end of 2007 as borrowers with adjustable-rate loans walked away from properties before their payments rose, the Mortgage Bankers Association said. The share of all home loans with payments more than 30 days late, including prime and fixed-rate loans, rose to a seasonally adjusted 5.82 percent, the highest since 1985, the group said.

Credit Costs

The extra yield investors demand to own agency mortgage- backed securities widened for a sixth straight day, staying at 22-year highs, as concern grew that the Federal Reserve may be unable to prevent the credit slump from deepening.

The difference in yields, or spread, on the Bloomberg index for Fannie Mae's current-coupon, 30-year fixed-rate mortgage bonds and 10-year government notes widened about 6 basis points, to 222 basis points, the highest since 1986 and 88 basis points higher than Jan. 15. The spread helps determine the interest rate homeowners pay on new prime mortgages of $417,000 or less. A basis point is 0.01 percentage point.

UBS AG's U.S.-traded shares dropped 99 cents to $29.84. Europe's biggest bank by assets ``likely'' sold its 25 billion francs ($24 billion) prime Alt-A portfolio in a ``fire sale,'' JPMorgan said as it lifted its ``credit-crisis'' writedown estimate for the bank to 18.5 billion francs.

Carlyle Default

Carlyle Capital Corp., Carlyle Group's publicly traded mortgage bond fund, said it missed four of seven margin calls yesterday totaling more than $37 million. The fund, which raised $300 million in July and used loans to buy about $22 billion of AAA-rated mortgage securities issued by Fannie Mae and Freddie Mac, expects to get at least one more notice of default related to the margin calls.

``Leverage is coming off across the system,'' said David Baker, the Boston-based chief investment officer at North American Management, which oversees $1.1 billion. ``It's going to be a painful exercise and I don't think the equity market has full appreciation of what it's going to mean and how it's going to be unwound.''

Ambac Financial Group Inc., the bond insurer that announced plans yesterday to raise $1.5 billion by selling common shares and equity units to salvage its AAA credit rating, dropped 85 cents to $7.85. JPMorgan analysts said the shares may fall in the ``near term'' and the company may need more capital to avoid a downgrade.

J.C. Penney, Gap

J.C. Penney, the third-largest department-store chain, tumbled $3.20 to $44.91. Same-store sales last month dropped 6.7 percent, worse than the average estimate for a 2.4 percent decline compiled by Retail Metrics LLC, a consulting firm.

Gap, the largest U.S. clothing retailer, lost 95 cents to $19.57. Sales fell 6 percent, almost twice the average estimate for a 3.1 percent decrease.

Saks Inc., the U.S. luxury retailer targeted for a possible takeover by Icelandic investment company Baugur Group HF, dropped $1.57 to $13.67. Bank of America Corp. lowered its recommendation on the company to ``neutral'' from ``buy,'' saying ``slowing momentum makes it a less attractive takeover target'' in a report today.

Intel Corp. retreated 14 cents to $20.06. The world's biggest maker of semiconductors said it expects flash-memory prices to fall about twice as fast this quarter as predicted, prompting the company to consider slowing its expansion into the market.

Wal-Mart Stores Inc. gained 67 cents to $50.22. The world's largest retailer said February sales increased 2.6 percent, exceeding its forecast, after price cuts spurred demand for groceries and medicines.

Oracle Upgrade

Oracle Corp., the third-largest software maker, climbed 64 cents to $19.44. Merrill Lynch analysts advised clients to buy the shares, writing in a research note that the company likely had a ``strong'' fiscal third quarter and its acquisition of software maker BEA Systems Inc. will boost earnings next year.

The number of Americans filing first-time claims for unemployment benefits declined more than forecast last week to a six-week low. Initial jobless claims decreased by 24,000 to 351,000 in the week that ended March 1, the lowest level since the week of Jan. 19, the Labor Department said. Total benefit rolls rose for a third straight week, to the highest since September 2005.

U.S. stocks gained the most in a week yesterday as a rally in commodity producers overshadowed speculation that Ambac's plan to raise $1.5 billion will fail to salvage the bond insurer.

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