U.S. Stocks Fall After Service Industries Unexpectedly Shrink

U.S. stocks tumbled the most in three weeks after service industries fell to the lowest levels since 2001, reinforcing speculation the economy has tipped into a recession.

Exxon Mobil Corp., General Electric Co. and AT&T Inc. led declines in New York trading, and all 10 industry groups in the Standard & Poor's 500 Index retreated, after the Institute for Supply Management's index unexpectedly contracted in January. Goldman Sachs Group Inc. posted its biggest drop in two months on Oppenheimer & Co. analyst Meredith Whitney's downgrade of the largest securities firm.

As the recession unfolds, then profits will disappoint, Stuart Schweitzer, who helps oversee $420 billion as the global markets strategist at JPMorgan Private Bank, said in a Bloomberg Television interview from New York. It's already under way.

The S&P 500 lost 27.26, or 2 percent, to 1,353.56 at 11:20 a.m. in New York. The Dow Jones Industrial Average decreased 238.02, or 1.9 percent, to 12,397.14. The Nasdaq Composite Index slipped 40.03, or 1.7 percent, to 2,342.82. Shares also retreated in Asia and Europe.

About six stocks fell for every one that rose on the New York Stock Exchange after the ISM's non-manufacturing index, which reflects almost 90 percent of the economy, slumped to 41.9 from 54.4 the prior month. A reading of 50 is the dividing line between growth and contraction.

GE, the second-largest U.S. company by market value, lost 65 cents to $34.72. AT&T, the nation's biggest phone company, declined $1.25 to $36.91.

Energy Shares Slump

Crude oil for March delivery fell 1.7 percent to $88.47 a barrel in New York after the ISM report bolstered speculation fuel demand will slow in the U.S., the world's biggest energy consumer. Gold and copper prices also declined, dragging down shares of mining companies.

Exxon Mobil Corp., the biggest U.S. energy company, lost $2.20 to $83.24. Chevron Corp., the second-largest, declined $1.78 to $80.24. Freeport-McMoRan Copper & Gold Inc. retreated $3.85 to $87.33. Newmont Mining Corp. fell 30 cents to $50.61.

Goldman dropped $8.44, or 4.2 percent, to $192.36. The firm was cut to perform from outperform by Oppenheimer's Whitney. The stock's valuation will not be sustainable in a year when Goldman Sachs will probably deliver results that will not be substantially better than its peers, Whitney wrote in a note dated Feb. 4.

Citigroup Inc., the biggest U.S. bank by assets, lost $1.11 to $28.11. Merrill Lynch & Co., the nation's third-largest securities firm, slid $2.49 to $55.24. The S&P 500 Financials Index retreated 3.3 percent, the biggest decline since Jan. 17.

Ratings Watch

Banks and brokerages also retreated after Fitch Ratings said collateralized debt obligations may be downgraded as many as five levels. The biggest cuts will be to AAA rated CDOs that are based on credit-default swaps and aren't actively managed, according to ratings guidelines proposed by Fitch today. CDOs that package high-yield assets may be cut as many as three levels for the portions first in line for losses.

National Semiconductor Corp. fell $1.31 to $17.71. The maker of chips for devices such as Apple Inc.'s iPhone said revenue this quarter will be as much as $455 million. That's below the $484 million average estimate of analysts in a Bloomberg survey. The company on Dec. 6 forecast sales of $474 million to $495 million.

Texas Instruments Inc., the biggest maker of mobile-phone chips, dropped $1.22 to $29.94. Intel Corp., the world's largest chipmaker, lost 73 cents to $20.35.

Fed Bets

Traders boosted bets on Federal Reserve interest-rate cuts after the ISM report. Fed funds futures indicate a 100 percent chance policy makers will lower the target for overnight loans between banks by 0.5 percentage point to 2.5 percent by a March 18 policy meeting. That compares with 68 percent odds yesterday.

General Motors Corp. slipped 46 cents to $27.11. GMAC LLC, the lending company that General Motors sold to a hedge fund manager, lost $724 million in the fourth quarter because home buyers didn't keep up with their mortgage payments. A group led by Cerberus Capital Management bought a 51 percent stake in GMAC in 2006.

NYSE Euronext slipped $7.44 to $75.29. The owner of securities exchanges on both sides of the Atlantic said fourth- quarter earnings more than tripled on record equity trading and new listings. Excluding merger costs and one-time charges, profit was in line with the average estimate of 12 analysts surveyed by Bloomberg.

New iPhone

Apple Inc. gained 19 cents to $131.84 after unveiling higher-priced models of its iPhone mobile handset and iPod media player with double the memory of previous versions.

KB Home climbed 55 cents to $26.71 after Bank of America Corp. raised its recommendation on the Los Angeles-based homebuilder to buy from neutral.

Significantly better affordability drives demand, analysts including Michael R. Wood wrote in a note to clients dated Feb. 4. While we do not expect a spike in demand immediately, we expect that it will gradually improve over 2008.

Seagate Technology increased 66 cents to $21.40. The world's largest maker of hard-disk drives raised its quarterly dividend by 20 percent and announced plans to buy back as much as $2.5 billion of stock over the next two years.

Whirlpool Corp. added $8.52 to $90.11. The world's largest appliance maker posted fourth-quarter profit that topped analysts' estimates on an increase in overseas sales and reduced costs following its acquisition of Maytag Corp.