Business

Thursday July 2, 2009

Signs point to rally in S&P 500 fizzling


NEW YORK: Drops of more than 20% in regional banks and homebuilders and the failure of transportation companies to erase their annual losses may be signs the rally in the Standard & Poor’s 500 Index is about to fizzle.

Smaller lenders in the gauge lost 23% since climbing to a four-month peak on May 8, while builders tumbled 26% from May 4, when they reached the highest level since October. Concern that mortgage rates, credit losses and foreclosures are increasing spurred retreats in the companies forecast to be among the biggest beneficiaries of US$12.8 trillion in government stimulus spending.

Slumps in bank stocks foreshadowed previous declines in the S&P 500 as investors focused on real-estate losses that froze lending. Regional banks’ 51% plunge over 28 days starting Dec 8 came a month before the S&P 500 began a 28% slump to a 12-year low of 676.53. The lenders’ all-time high in February 2007 occurred seven months before the S&P 500’s record.

“If housing and credit led us into all this, they will have to stabilise,” said Mark Demos, a Minneapolis-based money manager at Fifth Third Asset Management, which oversees US$18.7bil. “There’s a growing concern that they’re not out of the woods. Less bad does not equal good.”

Speculation that government spending will end the first global recession since World War II helped push up the S&P 500 by 15% since March 31, the biggest quarterly increase since 1998. Financial shares gained the most among the S&P 500’s 10 industry groups, rising 35%.

Stocks began to decline three weeks ago as economic reports spurred speculation the US economy is not recovering fast enough to justify the S&P 500’s 36% advance since March 9. The Federal Reserve said in its June 10 Beige Book business survey that “stringent” loan conditions persist even amid signs the recession is moderating.

“This has been a government-induced rally,” said Jordan Irving, who helps manage more than US$110bil at Delaware Investments in Philadelphia. “We need to see some real positives coming from internal demand, as opposed to government-related demand, and it’s just not there.”

Borrowing costs climbed in the past month, with the average rate on a 30-year fixed mortgage reaching a six-month high of 5.59% on June 11, according to McLean, Virginia-based Freddie Mac. The rate was 5.42% when last reported on June 25. The increase spurred the Mortgage Bankers Association to cut its forecast for mortgage originations in the United States by 27% on June 22 as fewer people refinance their home.

Marshall & Ilsley Corp, Wisconsin’s largest bank, tumbled 52% since May 11, wiping out three-fourths of its rally from March 5. Citigroup Inc analysts on June 11 predicted loan losses will remain high even after the Milwaukee-based lender raised capital by selling shares.

DR Horton Inc, based in Fort Worth, Texas, is down 31% since May 4, the steepest decline among rivals in the S&P 500 since then. The largest US homebuilder posted a worse-than-estimated quarterly loss on May 4.

“The average regional bank out there is going to see increasing net charge-offs and loan-loss provisions, and people may say, ‘Gee, do I really want to be in banks?’ ” said Barry Knapp, head of US equity strategy at Barclays Plc in New York. “That could definitely be a catalyst for a sell-off.”

Lagging transportation stocks are another bad omen for the rally, according to strategists at Bank of America Corp and Raymond James Financial Inc, who say gains in airlines, truckers and railroads usually precede economic rebounds. — Reuters

The Dow Jones Transportation Average has fallen 8.6% this year, led by a 62% drop in Fort Worth, Texas-based American Airlines parent AMR Corp. The 2009 decline exceeds the 3.8% retreat in the Dow Jones Industrial Average of 30 companies that are “leaders in their industries,” according to Dow Jones & Co, a unit of News Corp.

Adherents of a century-old stock-picking strategy called “Dow Theory” say the averages must exceed their Jan 6 intraday highs of 3,737.01 and 9,088.06, respectively, to send a buy signal for stocks, according to Bank of America’s Mary Ann Bartels. The measures are more than 7% below those levels.

“For cyclicals in general, it’s hard to imagine that they’re going to have very good earnings in the second quarter,” said E. William Stone, who oversees US$100bil as chief investment strategist at PNC Wealth Management in Philadelphia. Because the economy probably shrank for the fourth straight period, “you’re flying against the wind.” — Reuters

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