9/30/09

U.S. stocks fell, trimming the biggest back-to-back quarterly rally for the Standard & Poor’s 500 Index since 1975, as an unexpected drop in business activity spurred concern the economy is struggling to recover.

Walt Disney Co., JPMorgan Chase & Co. and General Electric Co. dropped at least 1.7 percent to lead declines in 21 of the 30 stocks in the Dow Jones Industrial Average after the Institute for Supply Management-Chicago Inc.’s business barometer trailed economists’ estimates. CIT Group Inc., the 101-year-old commercial lender, tumbled 45 percent on concern it will be forced into bankruptcy.

The S&P 500 lost 0.3 percent to 1,057.08 at 4:06 p.m. in New York. The benchmark gauge of U.S. stocks climbed for a seventh straight month in September, its longest streak in almost three years. The Dow average slipped 29.92 points, 0.3 percent, to 9,712.28. Two stocks fell for each that rose on the New York Stock Exchange.

“We’re in the faith part of the economic cycle,” said Ralph Shive, manager of the $1.3 billion Wasatch-1st Source Income Equity Fund, which has beaten 96 percent of competing funds over the past five years. “All of us to some degree are guessing how strong the recovery is or how long it will take. Market prices have anticipated a decent recovery at this point. At some point we need to see earnings turn.”

Benchmark indexes rose in early trading on a Commerce Department report showing the recession abated more than originally estimated in the second quarter. The world’s largest economy shrank at a 0.7 percent annual rate from April through June, the best performance in a year and better than the 1.2 percent decrease estimated by economists in a survey.

ISM-Chicago Shrinks

The ISM-Chicago reading of 46.1, less than the 52 estimated by economists and the 50 level that signifies growth, sent the S&P 500 to its lowest levels of the day in the first hour of trading. Equities then pared losses in the afternoon as a weaker dollar boosted commodities and investors bought shares of companies in the quarter’s best performing industries.

“You’re seeing buyers putting money to work into the end of the quarter,” said Michael James, a managing director at Wedbush Morgan Securities in Los Angeles. “The third quarter has been extremely strong and I don’t think you’re going to see bulls completely walk away from the market knowing the quarter ends today.”

A national ISM manufacturing gauge to be released tomorrow is projected to show improvement for a ninth straight month in September. Other regional gauges rose for the month. The Federal Reserve Bank of Philadelphia’s economic gauge climbed to the highest since June 2007, and the New York Fed’s increased to an almost two-year high.

Two-Quarter Rally

The S&P 500 jumped almost 15 percent in the July-September period to give it a two-quarter advance of 34 percent, the biggest since a 42 percent rally in the first half of 1975. The Dow also rose 15 percent over the past three months and gained 29 percent since the end of March, its steepest two-quarter advance since 1986.

The seven-month rally has pushed the S&P 500 up 56 percent from a 12-year low in March and sent its price-to-earnings valuations this month to the highest levels since 2004.

Former Federal Reserve Chairman Alan Greenspan said he sees the U.S. economy slowing next year as the surge in stocks comes to an end. Greenspan said he expects the economy to grow at a 3 percent to 4 percent annual pace in the next sixth months before slowing down. As a result, unemployment isn’t likely to decline much from last month’s 9.7 percent rate, he said. Even so, he doesn’t expect the economy to relapse into recession next year.

‘Flatten Out’

“The odds are we flatten out,” Greenspan said today in a Bloomberg Television interview, referring to the equity market. “That flattening out will put some sort of dull face on 2010.”

Disney, the largest theme-park operator, fell 1.7 percent to $27.46. JPMorgan, the biggest U.S. bank by market value, slid 2.4 percent to $43.82. GE, the world’s biggest provider of power-generation equipment and services, lost 1.7 percent to $16.42.

CIT slumped 45 percent to $1.21. The lender is planning to start a debt exchange offer that will include a so-called pre- packaged bankruptcy option, a person familiar with the matter said. The company plans to start a voluntary swap “within days,” said the person, who declined to be identified because talks are private. CIT proposed that debt holders vote on a pre- packaged bankruptcy plan in case the exchange fails, the person said.

Darden Restaurants Inc. fell the most in the S&P 500, declining 5.6 percent to $34.13. The owner of the Olive Garden and Red Lobster chains said first-quarter sales dropped 2.3 percent, missing analysts’ estimates.

Moody’s, McGraw-Hill

Moody’s Corp. tumbled 1.7 percent to $20.46. Former compliance executive Scott McCleskey told the House Committee on Oversight and Government Reform that Moody’s executives ignored his warnings that ratings on municipal bonds weren’t updated at regular intervals. Another former employee at the firm, Eric Kolchinsky, said Moody’s violated securities laws by providing “incorrect” ratings.

McGraw-Hill Cos., owner of Standard & Poor’s ratings service, slipped 3.7 percent to $25.14.

Saks Inc. dropped 4.9 percent to $6.82. The luxury retail chain plans to offer as much as $100 million in shares, using the proceeds to reduce debt, according to a regulatory filing.

Ameriprise Financial Inc. gained 12 percent to $36.33 for the biggest gain in the S&P 500. The Minneapolis-based wealth management and insurance firm agreed to buy the Columbia stock and bond funds from Bank of America for as much as $1.2 billion in cash.

Nike Inc. jumped 7.7 percent to $64.70. The world’s largest athletic-shoe maker posted first-quarter profit that exceeded analysts’ estimates as it cut marketing and personnel costs and prices improved.

Jabil Jumps

Jabil Circuit Inc. climbed 9.2 percent to $13.41. The electronic-parts maker forecast first-quarter earnings excluding some items of at least 24 cents a share, topping the average estimate of 16 cents from analysts in a Bloomberg survey.

All 10 of the main industry groups in the S&P 500 advanced in the third quarter, led by a 25 percent rally in financial shares and 21 percent gains in industrial companies and commodity producers.

Gannett Co., the nation’s largest newspaper publisher, posted the steepest advance in the index, more than tripling in the quarter. Hartford Financial Services Group Inc., Wynn Resorts Ltd. and Tenet Healthcare Corp. more than doubled.

European stocks posted their steepest quarterly advance this decade, with the benchmark Dow Jones Stoxx 600 Index gaining 18 percent. The MSCI World Index rose 17 percent, after a 20 percent gain in the second quarter that was the steepest since 1998.

Recovering Economy

The gains came amid speculation the U.S. economy was returning to growth following the worst recession in seven decades. Home prices stabilized, consumer confidence strengthened as job losses abated and the ISM said manufacturing activity ended an 18-month contraction in August.

The performance of the U.S. economy is probably more sluggish than reflected in stock markets, risking a correction in equities, Nobel Prize-winning economist Michael Spence said.

U.S. stock-market investors have “over processed” the stabilization of growth in the world’s largest economy, Spence said in an interview in Kuala Lumpur yesterday. The U.S. economy isn’t likely to experience a “double-dip” slowdown even as that remains a risk, said the professor emeritus of management in the Graduate School of Business at Stanford University.

Alcoa will be the first company in the Dow average to release third-quarter earnings next week, set for Oct. 7.

‘Hard Not to Be Bullish’

Analysts expect profits in the S&P 500 to drop 22 percent on average in the third quarter before rebounding 63 percent in the final three months of the year, according to estimates compiled by Bloomberg.

“Third quarter data is going to show for many companies enough indications that indeed the economy bottomed in July,” said William Greiner, chief investment officer at Scout Investment Advisors in Kansas City, Missouri, which manages $8.5 billion. “It’s hard not to be bullish in the face of what I see as 20 to 25 percent earnings growth rates over the next few quarters.”

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