[R-G] Wall Street drops sharply

[Anthony Fenton]

Wall Street drops sharply on AmEx earnings
By Chris Bryant in New York
Published: January 11 2008 14:12 | Last updated: January 11 2008 20:26
http://www.ft.com/cms/s/0/203440a0-bfc8-11dc-8052-0000779fd2ac.html
Wall Street stocks fell sharply on Friday after a cautious earnings  
outlook at American Express added to worries that US consumer  
spending is headed for a sharp slowdown.

The sell-off capped another difficult week for equities. Stocks  
floundered after Goldman Sachs said the US would fall into recession  
in 2008 and weak retail sales drained confidence.

Although Ben Bernanke, the Federal Reserve chairman, tried to assure  
the market he was prepared to keep cutting rates to stave off a  
slowdown, stocks struggled to find a footing amid concerns that rate  
cuts may not be enough.

Bank of America’s agreed takeover of Countrywide Financial, the  
troubled mortgage lender, helped financial stocks avoid the worst of  
the selling on Friday but the deal did little to stem broader market  
losses.

Investors scrambled to find relative safety this week in  
pharmaceuticals, healthcare and consumer staples, considered more  
resistant to a recession. Telecoms and technology stocks were sold.

By mid-afternoon in New York the S&P 500 was down 1.2 per cent at  
1,404.16 to trade 0.5 per cent lower for the week. The Dow Jones  
Industrial Average was on pace for a 1.5 per cent decline this week  
to 12,621.10 while the Nasdaq Composite lost 2.2 per cent to 2,448.42.

The S&P and Dow fell back into “correction” territory on Friday  
– a decline of more than 10 per cent from a recent market peak. The  
Nasdaq has fallen 14.4 per cent from its October high.

“It’s becoming very moot as to whether we are in a recession.  
Companies are telling you, the bond market is telling you and  
consumers are telling you – it’s baked in,” said Quincy Krosby,  
chief investment strategist at The Hartford.

Financial companies were volatile after Bank of America agreed to buy  
Countrywide Financial for $4bn in stock. Countrywide moved the market  
all week amid rumours – which it denied – that it might seek  
bankruptcy protection.

Traders were relieved that the deal saved the troubled mortgage  
lender from possible collapse. However, Countrywide’s shares fell  
21.6 per cent to $6.61 this week, below the $7.16 per share implied  
transaction value, and Bank of America fell 2.3 per cent to $38.95  
amid concerns over the deal.

In a further sign of nascent consolidation in the sector, CNBC  
reported that JPMorganhad held “very preliminary” takeover talks  
with Washington Mutual Wamu’s shares rose 14.3 per cent to $14.95  
this week.

Although banks advanced on Friday amid hopes of further consolidation  
and more foreign capital, investors are nervous about calling a  
bottom in the sector.

Underscoring the risks, the New York Times reported that Merrill  
Lynch may take a $15bn writedown in the fourth quarter. Merrill, up 8  
per cent this week at $54.30, Citigroup, up 2.2 per cent at $28.88,  
and JPMorgan, up 0.8 per cent at $41.32, all report quarterly  
earnings next week.

Fourth-quarter profits in the financial sector are expected to plunge  
72 per cent, according to Thomson Financial, with earnings for S&P  
500 down 11.3 per cent.

Consumer-facing stocks were sold off on Friday after American Express  
said it would take a $440m fourth-quarter charge to cover rising  
delinquencies and gave a cautious outlook for this year. American  
Express’s warning came after Capital One Financial, the card issuer,  
cut its full-year profit guidance by more than 20 per cent. The  
shares fell 11.8 per cent to $43.29 and 7.6 per cent to $42.46,  
respectively.

Economists have long feared mortgage-related losses would spread into  
the broader economy as consumers unable to make home payments default  
on loans.

Tiffany & Co added to these worries after the luxury jeweller cut its  
fiscal-year earnings outlook, causing it to sink 13.8 per cent to  
$35.65 for the period. The news capped a poor week for US retailers  
after some poor same-store sales from mid-market clothing chains. Gap  
fell 12.2 per cent to $17.28 this week.

Wall Street hopes aggressive Fed action will help prevent the US  
economy from tipping into recession. However, stocks managed only a  
mute rally after a speech by Mr Bernanke opened the door to further  
rate cuts.

While the domestic economy is seen weakening, some analysts argue US  
multinationals will suffer less from a downturn because so much of  
their revenues are overseas. Coca-Cola fell sharply on Friday but  
rose 3.2 per cent to $63.80 for the week.

Telecoms also sold off after AT&T warned of a slowdown in its  
domestic consumer business. Shares lost 6.9 per cent to $38.05.

Copyright The Financial Times Limited 2008