U.S. Stocks Drop on Credit Concern; JPMorgan, Citigroup Retreat

U.S. stocks dropped for the first time in three days, led by financial companies, on concern banks will be saddled with more credit-market losses and the Federal Reserve won't cut interest rates enough to stimulate growth.

JPMorgan Chase & Co. and Citigroup Inc. led banks lower after an analyst said Fortis, Belgium's biggest financial services company, faces additional writedowns from mortgage- backed securities. Speculation that subprime-infected investment losses are worsening helped erase a morning rally fueled by better-than-expected earnings at Microsoft Corp. and Caterpillar Inc.

The Standard & Poor's 500 Index and Dow Jones Industrial Average still posted their first weekly gains of 2008 as a government stimulus plan and the Fed's surprise 0.75 percentage- point rate cut helped the market rebound from its worst-ever start to a year. The S&P 500 decreased 21.46, or 1.6 percent, to 1,330.61. The Dow Jones Industrial Average lost 171.44, or 1.4 percent, to 12,207.17. The Nasdaq Composite Index slumped 34.72, or 1.5 percent, to 2,326.2.

There's going to be more issues with regard to writedowns, said Peter Sorrentino, who helps oversee $12 billion as senior portfolio manager at Huntington Asset Management in Cincinnati. We've got more classes of debt securities that are going to become questionable as this consumer malaise drags on for a while.

Today's declines capped a week in which the market's benchmark gauge of volatility reached a five-year high and the Dow posted its biggest intraday swing since 2002. The S&P 500 added 0.4 percent this week, trimming its 2008 loss to 9.4 percent. The Dow gained 0.9 percent in the week and is down 8 percent this year.

'Blowing Up'

Financial companies in the S&P 500 lost 2.5 percent as a group today for the biggest drop among 10 industries. Yesterday's announcement of a $7.2 billion loss by Societe General SA on unauthorized trades spurred speculation that institutions face more losses after banks wrote down $133 billion stemming from last year's collapse of the U.S. subprime mortgage industry.

I've heard like three different rumors about a hedge fund blowing up, said Thomas Garcia, head of trading at Thornburg Investment Management, which oversees $53 billion in Santa Fe, New Mexico. We also have the Fed meeting on Tuesday and nobody really knows what they're going to do.

Fed Watch

Futures contracts show a 78 percent chance that the Federal Reserve will cut its benchmark interest rate by 0.5 percentage point to 3 percent when policy makers hold their next scheduled meeting on Jan. 30-31. The rest of the bets are for a quarter- point reduction.

JPMorgan, the third-biggest U.S. bank by assets, slipped $1.32 to $43.64. Citigroup, the largest, declined 69 cents to $26.64. Fortis should revise its outlook to take into account writedowns on its super senior subprime collateralized debt obligations, Jaap Meijer, a London-based analyst at Dresdner Kleinwort, wrote in a research note.

Freddie Mac slipped $2.42, or 7.6 percent, to $29.58. Fannie Mae tumbled $2.39, or 7 percent, to $31.80. Senate Banking Committee Chairman Christopher Dodd pledged to speed legislation creating a tougher regulator for the two biggest providers of money for home loans. The declines were the two steepest in the S&P 500.

Financial companies are expected to drag S&P 500 members to their worst earnings season since 2001. Analysts estimate the index's average profit fell 18 percent in the fourth quarter from a year ago, according to projections compiled by Bloomberg today. Financial earnings are forecast to fall 100 percent.

The Fed lowered its target for the overnight lending rate between banks by 0.75 percentage point on Jan. 22 after an unscheduled meeting, its first emergency action since 2001 and the biggest single reduction since it began using the rate as the principal tool of monetary policy in 1990.

'Sell Strength'

A big part of the market wants to sell strength until we get more Fed ease and some stimulus, said Brian Rauscher, director of portfolio strategy at Brown Brothers Harriman & Co. in New York. The firm oversees $44 billion in client assets.

European banks have tumbled this week on concern they may report more writedowns linked to U.S. subprime mortgages. In addition to Societe Generale's loss from bets placed secretly by a trader, the French bank also took 2.05 billion euros in writedowns related to credit markets. Citigroup today downgraded the shares to sell' from buy.

WestLB AG, Germany's third-biggest state-owned lender, and Bayerische Landesbank, the second-largest, also announced plans to assign lower values to their investments this week.

Schering-Plough Corp. and Merck & Co. dropped today after the U.S. Food and Drug Administration said it will take about six months to review new information about their cholesterol medications. Schering-Plough fell $1.15, or 5.7 percent, to $19.02. Merck lost $1.77, or 3.6 percent, to $47.79.

Microsoft, Caterpillar

Microsoft fell 31 cents to $32.94 after rising as much as 5.3 percent. The world's biggest software company said profit in the year ending June 30 will be $1.85 to $1.88 a share, on sales of $59.9 billion to $60.5 billion. Analysts on average estimated earnings of $1.81 and sales of $59.4 billion. Microsoft boosted its profit projections for the fiscal year ending June 30.

Caterpillar advanced 68 cents to $65.93. The company said sales in Europe and Asia lifted earnings, offsetting a U.S. slowdown in construction and mining demand. Profit increased to $975 million, or $1.50 a share, from $1.32 a year earlier, and exceeded the average analyst estimate by 1 cent.

Honeywell

Honeywell International Inc. added $2.05 to $58.25. The biggest maker of aircraft controls said fourth-quarter earnings rose 18 percent on demand for airplane parts, thermostats and security systems. Net income climbed to $689 million from $585 million, the company said last night.

More than two stocks dropped for every one that rose on the New York Stock Exchange. Some 1.9 billion shares changed hands, 17 percent more than the three-month daily average.

The Russell 2000 Index, a benchmark for companies with a median market value of $521.3 million, dropped 0.6 percent to 688.6. The Dow Jones Wilshire 5000 Index, the broadest measure of U.S. shares, fell 1.4 percent to 13,423.62. Based on its decline, the value of stocks decreased by $231 billion.

U.S. stocks yesterday posted their biggest two-day rally since November after Xerox Corp. and Lockheed Martin Corp. reported profit that topped analysts' estimates and lawmakers agreed on a plan to pay tax rebates to families.