U.S. Stocks Drop on Earnings Concern; Bank of America Retreats

By Michael Patterson

April 21 (Bloomberg) -- U.S. stocks fell for the first time in five days after worsening credit losses at Bank of America Corp. and National City Corp. undermined confidence that banks are overcoming the subprime mortgage market's collapse.

Bank of America, the second-largest U.S. bank by assets, retreated after bad loans caused first-quarter profit to trail analysts' estimates. National City tumbled to a 17-year low as Ohio's biggest lender was forced to cut its dividend and sell stock at a 40 percent discount to last week's closing price. Schlumberger Ltd., the world's largest oilfield-services company, led a rally in energy shares that limited the market's decline, after oil rose to a record above $117 a barrel.

About 1.12 billion shares changed hands on the NYSE, the lowest level of the year. The Standard & Poor's 500 Index lost 2.17 points, or 0.2 percent, to 1,388.16. The Dow Jones Industrial Average, which fell as much as 98 points earlier, retreated 24.34, or 0.2 percent, to 12,825.02. The Nasdaq Composite Index added 5.07, or 0.2 percent, to 2,408.04 as Apple Inc. climbed 4.4 percent after Citigroup Inc. raised its earnings projection.

``We're going to see continued sluggishness by the banks and a good deal more write-offs,'' Kevin Caron, a Florham Park, New Jersey-based market strategist at Stifel Nicolaus & Co., which oversees about $50 billion, said in an interview on Bloomberg Television. ``Earnings estimates are still too high.''

Earnings Slump

The profit reports from Bank of America and National City increased concern that Wall Street executives may be too optimistic about credit-market conditions. JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon, Goldman Sachs Group Inc. CEO Lloyd Blankfein, Lehman Brothers Holdings Inc.'s Richard Fuld and Morgan Stanley CEO John Mack all said this month that the worst of the credit crisis may have passed.

``Every quarter they predict the worst is behind us,'' Whitney Tilson, founder of New York-based hedge fund manager T2 Partners LLC, which oversees about $100 million, said in a Bloomberg Television interview. ``Every quarter they've been wrong. I think they are again.''

Today's decline in the S&P 500 followed a 4.3 percent gain last week that was spurred by better-than-expected earnings at Google Inc., JPMorgan and Intel Corp. Excluding the financial industry, first-quarter profits at S&P 500 companies have increased 5.2 percent from a year earlier, according to Bloomberg data.

Bank of America dropped 95 cents to $37.61. Earnings plunged 77 percent as the bank set aside $6.01 billion for bad loans. The first-quarter results included $1.31 billion in trading losses and $2.72 billion in costs for uncollectible debt.

`Much Worse'

``The first quarter was much worse than our expectations three months ago,'' Chief Executive Officer Kenneth Lewis said on a conference call. ``It's too early to strike up the band and say that happy days are here again.''

National City fell $2.30, or 28 percent, to $6.03 for the biggest drop in the S&P 500. The lender said a group of investors led by Corsair Capital LLC will buy shares for $5 each, about 40 percent less than the closing price on April 18. National City plans to slash its dividend to 1 cent from 21 cents, the second cut this year. The company posted a first-quarter net loss of 27 cents a share.

Other regional banks also declined. First Horizon National Corp., based in Memphis, Tennessee, lost $1.23 to $11.83. Cleveland-based KeyCorp dropped $1.51 to $23.17. Sovereign Bancorp Inc., based in Philadelphia, retreated 86 cents to $8.43.

Citigroup Falls

Citigroup Inc. fell 8 cents to $25.03. Oppenheimer & Co. analyst Meredith Whitney said the biggest U.S. bank by assets may cut or eliminate its dividend as losses escalate this year. Separately, the lender plans to sell $6 billion of hybrid securities to bolster its balance sheet, according to a person who declined to be named because terms aren't set.

Wells Fargo retreated $1.13 to $29.27. Whitney cut her recommendation on the shares to ``underperform'' from ``market perform,'' saying the stock's price-to-earnings ratio may fall. She reduced her 2008 per-share earnings estimate to $1.20 from $2.15.

Banks, brokerages and insurance companies have led the S&P 500's 11 percent decline from an October record as the deterioration in housing that sparked $290 billion in credit losses and asset writedowns pushes the economy to the brink of a recession. Financial companies in the S&P 500 that reported first-quarter results had an average profit decline of 84 percent from a year earlier, the biggest drop among 10 industries, according to data compiled by Bloomberg.

Rebound From Lows

Still, financial shares in the S&P 500 have rallied 11 percent as a group from an almost five-year low on March 17, buoyed by the lowest interbank borrowing rates in three years, new lending facilities from the Federal Reserve and at least $163 billion of fresh capital since July.

Analysts have cut their projections for first-quarter earnings at S&P 500 companies every week since Jan. 4. They now predict a 13.7 percent drop in the period, compared with an increase of 4.7 percent at the start of the year, according to Bloomberg data. Analysts have reduced their expectations for 2008 earnings growth to 9.5 percent from 15 percent in January.

Shares valued at $42.5 billion changed hands on the NYSE today. That's about 0.32 percent of the $13.1 trillion market value of all shares listed on the New York-based exchange, according to Bloomberg data. The S&P 500 swung by just 10.98 points during today's trading, compared with the 21.48 average of the past year. The number of shares traded on the NYSE was below the three-month daily average for a 14th straight day.

No `Strong Conviction'

``We're still not seeing a tremendous amount of volume,'' Paul Kandel, a New York-based senior portfolio manager at Sentinel Asset Management, which oversees $5 billion, said in an interview on Bloomberg Radio. ``No one has strong conviction to be buying names or selling names.''

Caterpillar lost $1.95 to $83.33. The shares were reduced to ``market perform'' from ``outperform'' at Wachovia Corp., while Credit Suisse Group lowered its rating to ``neutral'' from ``outperform.''

Sears Holdings Corp. declined $7.24 to $97.48. The retailer being reorganized by hedge-fund investor Edward Lampert said Bank of America wouldn't renew a $1 billion letter of credit under existing terms. Losing the credit probably won't affect Sears's access to cash, the company said.

Lilly, Mattel

Eli Lilly & Co. fell $2.48 to $49.59. The world's biggest maker of psychiatric drugs trailed analysts' earnings estimates after booking higher charges than the company predicted for abandoning inhaled insulin.

Mattel Inc. dropped $1.78 to $20. The world's largest toymaker posted its first quarterly loss in almost three years on higher manufacturing costs in China. Analysts had expected a profit.

Hasbro Inc., the second-largest toymaker, posted an unexpected increase in first-quarter profit on sales of Transformers action figures and Littlest Pet Shop dolls. The shares added $3.10, or 9.8 percent, to $34.65 for the top gain in the S&P 500.

Apple added $7.12 to $168.16 after Citigroup analysts raised their fiscal second-quarter profit estimate, citing ``solid'' sales of Macintosh computers. Apple reports earnings April 23.

Schlumberger gained $5.06 to $106.91, helping boost the S&P 500 Energy Index by 0.9 percent. The oilfield contractor was raised to ``overweight'' from ``equal-weight'' at Morgan Stanley, which also increased its share-price estimate to $135 from $125.

Energy Rally

Exxon Mobil Corp., the biggest U.S. fuel producer, gained 26 cents to $94.26, while ConocoPhillips, the third-largest, added 45 cents to $84.34, after rebel attacks in Nigeria reduced crude oil output and pushed prices above $117 a barrel in New York.

``Energy companies are going to have a pretty easy time beating estimates because of the strength in the underlying commodity,'' said Wayne Wicker, chief investment officer at Vantagepoint Funds, which oversees about $33 billion in Washington. ``Analysts are probably too low on their outlook for the price of oil.''

Quest Diagnostics Inc. rose $3.50, or 7.7 percent, to $49.12 for the second-biggest gain in the S&P 500. The maker of diagnostic tests reported first-quarter earnings that topped analysts' estimates.

The Russell 2000 Index, a benchmark for companies with a median market value 96 percent smaller than the S&P 500's, dropped 0.4 percent to 718. The Dow Jones Wilshire 5000 Index, the broadest measure of U.S. shares, fell 0.2 percent to 13,995.43. Based on its decline, the value of stocks dropped by $27.3 billion.

To contact the reporter on this story: Michael Patterson in New York at mpatterson10@bloomberg.net.

Last Updated: April 21, 2008 17:02 EDT

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