February 5, 2008

US stocks retreat as investors lock in profits

US shares retreated on Monday when investors sought to lock in recent profits amid fears that a weak jobs market would lead to mounting losses in the consumer credit sector.

Financial companies and homebuilders were particularly hard hit as traders bet that rising loan delinquencies and falling house prices would hit corporate earnings.

Investors also looked to offload retail stocks after last week's disappointing jobs report persuaded analysts that a recession was more likely.

The S&P 500 closed 1.1 per cent lower at 1,380.82, with the homebuilder sector down 6 per cent and the financial sector losing 2.5 per cent. The Nasdaq Composite fell 1.3 per cent to 2,382.85 and the Dow Jones Industrial Average shed 0.9 per cent to 12,635.16.

Wachovia (NYSE:WB) and Wells Fargo were among the biggest fallers after Merrill Lynch told investors to sell the banking stocks because of their vulnerability to a worsening housing market. The shares lost 8.3 per cent to $35.53 and 6.7 per cent to $31.39, respectively. Washington Mutual (NYSE:WM), the savings and loan company, slumped 12.2 per cent to $19.16.

"Trying to put a valuation on some of these financials is just really difficult when they keep coming out with these horrible earnings numbers," said Thomas Nyheim, vice-president at Christiana Bank & Trust.

Separately, UBS told investors to sell shares in credit card issuers American Express (NYSE:AXP), Capital One Financial (NYSE:COF) and Discover Financial Services, citing expectations of rising credit losses in the consumer finance sector. UBS cut its price target on AmEx from $67 to $45, prompting the stock to fall 3.9 per cent to $47.66. Capital One fell 7.6 per cent to $52.65, and Discover lost 9 per cent to $16.34.

Wall Street analysts fear that job losses could lead to rising delinquencies with problems spreading beyond the subprime mortgage market. As a result US banks are tightening lending amid a reduced tolerance for risk, a Federal Reserve loan officer survey showed on Monday.

Economists received a shock on Friday after the US economy shed jobs for the first time in 4½ years but in spite of the downbeat report equities chalked up their best weekly performance in almost five years, with the S&P financial sector gaining 8.5 per cent for the week. Traders were left wondering, however, if the gain was a temporary fillip or the start of a meaningful move higher.

Among the factors driving the rally were hopes for a rescue of bond insurers which have been threatened with credit downgrades. Ambac Financial andMBIA (NYSE:MBI) fell 13.7 per cent to $11.39 and 5.9 per cent to $15.39, respectively, on Monday after the Financial Times reported that any rescue was unlikely to involve private equity firms as they believed the risks were too great.

Traders also took profits in the technology sector after last week's bounce triggered by Microsoft's $44.6bn bid for Yahoo. The potential mega-merger may come in for close scrutiny after Google (NASDAQ:GOOG) said the takeover could open the way for Microsoft to extend its PC monopoly to the internet.

The drama probably has more acts to unfold with Yahoo insiders seeing an alliance with Google as one of their best options for fighting off Microsoft. Yahoo rose 3.4 per cent to $29.33, but Microsoft slipped 0.9 per cent to $30.19.

Shares in Google closed below $500 for the first time since August, falling 4 per cent to $495.43, after Goldman Sachs removed the online search giant from a conviction "buy" list.

In earnings news, Archer Daniels Midland (NYSE:ADM), 2.9 per cent weaker at $44.20, increased quarterly profits to $473m from $441m, but the agricultural producer's results narrowly missed some analysts' estimates.

Humana (NYSE:HUM), the health in-surer, increased fourth-quarter profits by 57 per cent to $243.2m, beating Wall Street estimates. But the stock fell 3.5 per cent to $78.98.

With more than half of S&P 500 companies having reported for the fourth quarter, corporate earnings are on track for a 20.7 per cent fall in the last three months of 2007, according to Thomson Financial, with financials the source of most of the weakness. Technology and energy earnings continue to hold up, increasing an expected 26 per cent and 19 per cent, respectively. Profits are forecast to grow by less than 2 per cent in the first and second quarters, before rebounding strongly later in the year.

Many analysts see US manufacturers coping well, as exports are helped by a weak dollar. Factory orders rose 2.3 per cent in December, roughly in line with expectations - the biggest increase since July. Last week, US durable goods orders rose more than expected and the ISM manufacturing index expanded.

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