US stocks fall after evaluation
U.S. stocks fell after four straight weeks of gains left the Standard & Poor’s 500 Index trading at its most-expensive relative to earnings in more than four years. European equities also dropped, while Treasuries were little changed.
Boeing Co.,3M Co. and Cisco Systems Inc. led declines in the Dow Jones Industrial Average. Eli Lilly & Co. and Best Buy Co. retreated at least 3 percent after Goldman Sachs Group Inc. cut its rating on the shares. Dow Chemical Co. and Nucor Corp. helped lead a gauge of raw-materials producers to the steepest loss among 10 groups, while Halliburton Co. led energy shares higher.
The S&P 500 slipped from a 10-month high, retreating 0.2 percent to 1,008.43 as of 11:45 a.m. in New York. The Dow average declined 16.85 points, or 0.2 percent, to 9,353.22. The Nasdaq Composite Index decreased 0.3 percent to 1,995.18.
“It’s reasonable to think that the market would take a breather after recent weeks,” said Lawrence Creatura, a Rochester, New York-based money manager at Federated Investors Inc., which oversees $407 billion. “It’s not natural for one- way markets to last long. A little pause would be normal and perhaps healthy.”
The S&P 500 climbed 2.3 percent last week, rising above 1,000 for the first time since November, as better-than- estimated employment, manufacturing and home-sales data boosted confidence that the worst of the recession is ending. The measure has jumped 49 percent from a 12-year low on March 9, the steepest surge over the same number of days since the Great Depression, as three quarters of its companies that posted second-quarter earnings beat estimates and the economy improved.
The S&P 500 was valued at 18.6 times the profits of its companies as of the start of trading, the highest ratio since December 2004. The index must rally 55 percent to surpass its all-time high of 1,565.15 set on Oct. 9, 2007. Before November, it had remained above 1,000 for five years.
“There is a gradual period of slow growth beginning in the economy,” said Joseph Keating, chief investment officer of Raleigh, North Carolina-based RBC Bank, a unit of Royal Bank of Canada. “But investors are a little concerned that we’re getting ahead of ourselves.”
Options traders are increasing bets that the S&P 500’s rally won’t survive September, historically the worst month for U.S. equities.
Bearish VIX Bets
Traders are betting the VIX, a gauge of expected stock swings, will increase 13 percent in the next five weeks, according to futures prices compiled by Bloomberg. That’s the biggest spread since August 2008, right before the S&P 500 suffered the steepest two-month plunge in 21 years. The indexes have moved in the opposite direction 81 percent of the time over the past five years, Bloomberg data show.
Mark Mobius said global stocks will drop as much as 30 percent after advancing from multiyear lows and as companies increase share sales. The slide “can happen anytime, probably this year,” Mobius, the executive chairman of Templeton Asset Management Ltd., said in an interview in Kuala Lumpur today. He said he was referring to shares “globally.”
Warren Buffett’s Berkshire Hathaway Inc. is buying corporate debt and securities issued by governments outside the U.S. as the billionaire investor’s spending on stocks falls to the lowest in more than five years, according to an Aug. 7 regulatory filing. Buffett is increasing fixed-income investments after results slumped at operating units including NetJets Inc., the money-losing plane-rental business, and companies in Berkshire’s equity portfolio including Wells Fargo & Co. slashed dividends.
Lilly, Best Buy Slump
Eli Lilly dropped 3 percent to $33.85. Goldman Sachs downgraded the drugmaker to “sell” from “neutral” and added the stock to its “conviction sell” list, saying its “patent cliff” is the largest in the industry.
Best Buy Co. slipped 5.2 percent to $37.70. Goldman Sachs reduced its recommendation on shares of the world’s largest electronics retailer to “neutral” from “buy.”
Timber producers retreated after Barron’s reported prices may decline as much as 50 percent in coming years, according to the weekly newspaper’s Aug. 10 issue. Plum Creek Timber Co. tumbled 5.4 percent to $33.20 for the steepest decline in the S&P 500.
Gold producers retreated with the price of bullion, which fell 1.1 percent to $949.1 an ounce in New York. The contract lost as much as 1.6 percent, the most since July 28.
Freeport, Allied Capital
Freeport-McMoRan Copper & Gold Inc., which operates the world’s biggest gold mine, fell 1.3 percent to $62.58.
Allied Capital Corp. fell 9.6 percent to $3.50, the lowest intraday price since July 22. The buyout and lending firm reported second-quarter profit excluding some items of 10 cents a share, missing the average analyst estimate by 49 percent. The company also said it has defaulted on some debt covenants and it will not pay its dividend for an “extended period of time.”
Freddie Mac, which has been relying on $200 billion in financing pledged by the Treasury to stay afloat since regulators seized the company in September, jumped 69 percent to $1.25 after reporting its first profit in two years. The mortgage-finance company reported second-quarter net income of $768 million and didn’t ask the U.S. Treasury for more aid.
Research In Motion Ltd., the maker of the BlackBerry smartphone, fell after it was downgraded to “neutral” from “buy” by analyst Maynard Um at UBS, who said the shares are expensive. The shares retreated 4.1 percent to $73.94.
McDonald’s Corp., the world’s largest restaurant company, added 1.7 percent to $56.15 after reporting global sales rose 4.3 percent in July, more than some analysts estimated, on demand for hamburgers and McCafe coffees.
Priceline.com Inc., an internet travel agency, advanced 13 percent to $148.48 after it forecast third-quarter profit above analysts’ estimates. The company said third-quarter earnings will be $2.70 to $2.85 a share, on an adjusted basis. The average of 13 analysts’ estimates is $2.57 a share.