January 31, 2008

US stocks retreat as US growth slows

Wall Street stocks retreated on Wednesday after economic growth rose far less than expected at the end of last year, renewing fears the US economy is entering a recession.

While there was some good news from the US private sector jobs market, stocks lacked real momentum ahead of the Federal Reserve Open Market Committee's decision on interest rates, due later in the afternoon.

At midday the S&P 500 was down 0.3 per cent at 1,358.07, the Nasdaq Composite fell 0.2 per cent to 2,352.57 while the Dow Jones Industrial Average slipped 0.3 per cent to 12,447.30.

Equities drifted after a report showed the economy slowed sharply to a 0.6 per cent growth rate in the last three months of 2007, only half the rate forecast by economists and down from 4.9 per cent in the previous quarter. For all of 2007, the economy expanded at its slowest pace since 2002, growing just 2.2 per cent.

The news was a blow for those equity investors who have tentatively become more optimistic in recent days about growth prospects for US companies.

"The new leg down in housing, along with the continuation of the retrenching trend by the US consumer, is weighing on growth," said TJ Marta, strategist at RBC Capital Markets. "The Fed has a growth problem and a financial crisis to deal with."

However, a snapshot of private sector employment painted a contrasting picture, as a projection of hiring in January by ADP showed a rise of 130,000 jobs.

Although ADP numbers can be volatile, economists now expect the closely watched January employment report, due on Friday, to show a gain of 65,000, up from 18,000 in December.

"There are two possible interpretations of the job situation," said Mr Marta. "Either we are going to experience a 'joblessness' stall in growth, just as we experienced a jobless recovery, or the economy remains somewhat insulated from the continuing credit crisis - at least for now."

Financial stocks came under pressure after UBS, the Swiss bank, took $14bn in writedowns for the fourth quarter, $4bn more than previously advised. The writedown included a $2bn hit which analysts speculated was linked to troubled monoline bond insurers.

Oppenheimer analyst Meredith Whitney said banks may have to write down up to $70bn if bond insurers lose their AAA credit ratings, with losses concentrated at Citigroup, Merrill Lynch and UBS.

"This is significant, as many investors are of the belief that the fourth quarter was a 'kitchen sink' for all outstanding capital hits this credit cycle," Ms Whitney said. "When it becomes clear [as we think it will] that more charges are on the horizon, we believe the market will take another turn for the worse."

Citi fell 2 per cent to $27.35 while Merrill gave up only 1.1 per cent to $56.86 after its chief executive, John Thain, said the bank's net exposure to monoline insurers was $3.5bn.

Earnings news was led by Yahoo, which reported a 23 per cent decline in fourth quarter profit and gave a cautious outlook for 2008. The shares slumped 8.6 per per cent to $19.03 after several analysts downgraded the stock.

The recent rebound in US homebuilder stocks came to an end after Centex, the number four US firm, saw its fiscal third-quarter loss widen to $975.2m, much worse than analysts had feared. The shares fell 6.6 per cent to $27.10. Pulte Homes, down 6.3 per cent at $13.91, was due with its earnings late on Wednesday.

Merck, 4.6 per cent weaker at $45.80, fell to a $1.63bn loss after it took a big charge to cover litigation costs.

Also declaring a big charge was United Parcel Services, which took a $6.1bn pension-related hit. However, adjusted net income of $1.2bn came in line with expectations and the shares climbed 0.9 per cent to $71.58.

Boeing was the best performing Dow component after it increased fourth quarter earnings by 4 per cent and raised its 2008 profit outlook, helping the shares to gain 3.1 per cent to $83.50.

Kellogg's saw quarterly earnings slip from $182m to $176m, in part due to higher energy and materials costs. The breakfast cereal maker's results were in line with expectations and the shares rose 0.3 per cent to $49.75.

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