U.S. Stocks Fall on Earnings Reports, Fed's Focus on Inflation
By Allen Wan
Oct. 11 (Bloomberg) -- U.S. stocks fell for the first time in three days after Alcoa Inc. began the quarterly earnings season by missing analysts' estimates and the Federal Reserve damped speculation that interest rates will drop anytime soon.
Alcoa, the first member of the Dow Jones Industrial Average to report, dropped along with Monsanto Co., the world's largest maker of genetically modified seeds, whose profit also trailed forecasts.
``The question you have to ask yourself is whether profits are sustainable,'' said Rudolph-Riad Younes, who helps manage $40 billion as head of international equities at Julius Baer Investment Management in New York. ``I tend to believe earnings will revert back to the historical average. If that's the case, it's going to be bad for stocks.''
Stocks slid after minutes of the Fed's latest policy meeting showed officials foresaw a ``substantial risk'' that inflation may not slow as expected. Prices reached the day's low after a plane crashed into an apartment building in New York, though the losses were recouped within minutes.
The Standard & Poor's 500 Index lost 3.47, or 0.3 percent, to 1349.95. Exxon Mobil Corp. and other energy companies were the worst performers among the S&P 500's 10 industry groups as oil fell to the lowest this year.
North Korea
The Dow industrials dropped 15.04, or 0.1 percent, to 11,852.13. The Nasdaq Composite Index fell 7.16, or 0.3 percent, to 2308.27.
Lingering concern about North Korea's nuclear test earlier this week also weighed on investors minds. President George W. Bush said today North Korea must face ``serious repercussions'' for its actions.
Fed officials raised concern inflation may not recede and noted they must ensure it slows, according to minutes issued today. Officials left the benchmark rate unchanged at 5.25 percent for a second time on Sept. 20.
In a speech today, Fed Bank of Richmond President Jeffrey Lacker said the central bank must be ``quite vigilant'' to make sure inflation slows.
``Investors are concerned about the Fed going from a position of possibly cutting rates to now raising rates, a couple of disappointing earnings reports and North Korea,'' said Anita Clemons, who manages $1.4 billion at New Covenant Trust Co. in Jeffersonville, Indiana.
Oil Tumbles
Crude for November delivery fell 1.6 percent to $57.59 a barrel in New York. Earlier, futures touched $57.48, the lowest since Dec. 27.
Alcoa lost $1.44, or 5.1 percent, to $26.85 for the biggest decline in the Dow average. Net income was 61 cents a share, less than the 77 cents estimated by analysts in a Thomson Financial survey. Unplanned shutdowns hurt production, the company said.
JPMorgan cut Alcoa's 2006 earnings-per-share estimate to $2.92 from $3.32 and the 2007 estimate to $2.50 from $3.25.
Monsanto fell $2.46 to $43.95. The company's loss widened to 27 cents a share in the fourth quarter. Analysts expected a loss of 21 cents. Monsanto also forecast per-share profit of as much as $1.57 in 2007, compared with the Thomson estimate of $1.63.
Exxon lost 67 cents to $66.53. Energy shares tumbled 1.3 percent among S&P 500 groups.
Legg Mason
Money manager Legg Mason Inc. had its biggest drop ever after earnings fell short of estimates. Second-quarter net income was 96 cents to $1.02 a share, less than the $1.16 expected by analysts in a survey by Thomson. Merrill Lynch & Co. also cut its recommendation on the stock to ``sell'' from ``buy.'' The shares plunged $18.16, or 17 percent, to $87.15 for the top decline in the S&P 500.
Gannett Co. fell $1.49 to $56.23. The biggest U.S. newspaper publisher said third-quarter profit declined 12 percent because of stock option expenses and a drop in classified advertising sales. Sales gained 2.7 percent to $1.91 billion, less than the $1.94 billion estimate from a Thomson survey.
Average quarterly profit growth among S&P 500 companies is 7.6 percent since 1947, according to Thomson. Analysts are reducing profit estimates for U.S. companies this year and next.
Thomson estimates S&P 500 earnings growth may fall to 11.5 percent in the fourth quarter, down from a June 30 projection of 14 percent, and to 9.5 percent in the first quarter of 2007.
Trading
About two stocks fell for every one that rose on the New York Stock Exchange. Some 1.6 billion shares changed hands on the Big Board, 3 percent more than the three-month daily average.
General Motors Corp. rose 23 cents to $32.13. The world's biggest automaker is close to an agreement to provide financial aid to Delphi Corp., a bankrupt auto-parts maker, and avert a strike that would cripple GM's production, people with knowledge of negotiations with Delphi creditors said.
Shares of online brokerages retreated after Bank of America Corp. said it is offering free online stock trades to customers with accounts of at least $25,000.
E*Trade Financial Corp., the fourth-largest online brokerage, fell $2.15 to $22.31. Its 8.8 percent drop was the second-biggest decline in the S&P 500.
Charles Schwab Corp., the biggest discount brokerage by assets, slid 84 cents to $17.22. TD Ameritrade Holding Corp., the third-largest online brokerage, declined $2.28 to $16.82.
Stock Options
The market was also held back by a widening scandal over stock options that has caused more than 30 executives or directors to lose their jobs.
Cnet Networks Inc. declined 76 cents to $9.14. The publisher of online technology news and reviews said Chief Executive Officer Shelby Bonnie stepped down after the company found that some stock options grants were back-dated.
McAfee Inc., the maker of anti-virus software, also replaced its top two executives and will take a charge of as much as $150 million to restate 10 years of earnings after a probe into stock- option backdating. The stock rose 85 cents to $26.64.
Among other technology companies, Rambus Inc. jumped $1.85 to $19.13 after the designer of high-speed computer components said that Toshiba Corp., the world's second-biggest flash memory maker, licensed its technology.
S&P 500 shares, called Spiders, fell 16 cents to $135.11. Nasdaq-100 tracking shares, known by their QQQQ symbol, slipped 8 cents to $41.54.
S&P 500 futures expiring in December declined 1.60 to 1359.10 on the Chicago Mercantile Exchange. Nasdaq-100 Index futures gained 2.75 to 1706.50.
The Russell 2000 Index, a benchmark for companies with a median market value of $611 million, slid 0.6 percent to 741.71. The Dow Jones Wilshire 5000 Total Market Index, the broadest measure of U.S. shares, sank 0.3 percent to 13,484.89. Based on its decline, the value of stocks decreased by $50.4 billion.
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