U.S. Stocks Drop, Led by Financial Shares, AIG, Banks Retreat

Aug. 25 (Bloomberg) -- U.S. stocks fell the most in a month as a Kansas bank's failure and speculation American International Group Inc. will post a loss heightened concern that credit writedowns will keep rattling the financial system. 

AIG tumbled to a 13-year low after Credit Suisse Group said the insurer may lose $2.41 billion this quarter on mortgage- related writedowns. Washington Mutual Inc. and Huntington Bancshares Inc. each dropped more than 6 percent after Columbian Bank & Trust Co. became the ninth U.S. bank to collapse this year. Alcoa Inc. and Freeport-McMoRan Copper & Gold Inc. led the Standard & Poor's 500 Materials Index to a 2.3 percent retreat as gold and aluminum prices decreased. 

``The market's going to struggle until we get a clear indication that we know what the bottom is in the financials, and that may be a while,'' Peter Sorrentino, senior portfolio manager at Cincinnati-based Huntington Asset Advisors, which manages about $17 billion, told Bloomberg Television. 

The S&P 500 dropped 25.36, or 2 percent, to 1,266.84, ending a three-day advance. The Dow Jones Industrial Average slid 241.81, or 2.1 percent, to 11,386.25, with all 30 of its companies lower. The Nasdaq Composite Index decreased 49.12 to 2,365.59. About 865 million shares changed hands on the New York Stock Exchange, the slowest trading day of the year. Volume last week was 35 percent less than the year-to-date average. 

Broad Retreat 

Almost 10 stocks retreated for each that rose on the NYSE. All 10 industry groups in the S&P 500 retreated as the index extended its first weekly decline since July. The benchmark for American equities slipped 0.5 percent last week as energy prices climbed and concern grew that the government may need to bail out Fannie Mae and Freddie Mac. 

Stocks fell even after a report showed sales of previously owned homes in the U.S. rose in July from a 10-year low as declining prices helped stabilize demand and investor appetite increased for Freddie Mac's weekly sale of short-term debt securities. 

Morgan Stanley cut its year-end forecast for the S&P 500 on concern banks will report more credit-related writedowns and the global economic slowdown will curb profits at technology and industrial companies. 

``Our biggest concern for 2009 earnings estimates is that a combination of global growth slowdown, declining operating leverage, a stronger U.S. dollar, less share count reduction and a long tail to dysfunctional credit markets will create powerful headwinds for what appear to be very optimistic consensus expectations,'' Abhijit Chakrabortti wrote in a note to clients dated yesterday. 

AIG, Banks Retreat 

AIG fell 5.5 percent to $18.78 for the biggest drop in the Dow average. Credit Suisse analyst Thomas Gallagher predicted AIG will lose 86 cents a share in the third quarter. Previously he forecast a 13-cent profit. ``Recent deterioration'' in debt holdings may cause losses in the firm's credit-default swaps, Gallagher wrote today in a research note. He rates New York-based AIG ``neutral.'' 

The KBW Bank Index retreated 3.4 percent as all 24 of its companies decreased. Washington Mutual lost 23 cents to $3.60. Huntington Bancshares retreated 51 cents to $7.00. SunTrust Banks Inc., the largest bank based in Georgia, fell 6 percent to $40.15 after Citigroup Inc. began covering it with a ``sell'' rating. 

Columbian Bank, with $752 million in assets and $622 million in total deposits, was shuttered by the Kansas state bank commissioner's office and the Federal Deposit Insurance Corp. on Aug. 22. 

`Last Shoe' 

The pace of bank closings is accelerating as global financial firms have reported more than $500 billion in writedowns and credit losses since 2007. The FDIC's ``problem'' bank list grew by 18 percent in the first quarter to 90 banks with combined assets of $26.3 billion. Prior to yesterday, the FDIC had closed 36 banks since October 2000, according to a list at fdic.gov. The U.S. shut 12 banks in 2002, the highest in the period, and 2005 and 2006 had no closures. 

``Trying to guess when the last shoe has dropped is going to be a difficult way of making money,'' said Jeffrey Coons, co- director of research at Manning & Napier Advisors Inc., which manages $19 billion in Fairport, New York. Investors ``should focus on companies that aren't reliant on you picking a bottom in the financial crisis,'' he said. 

-- Editors: Michael Regan, Chris Nagi 

To contact the reporter on this story: Elizabeth Stanton in New York at estanton@bloomberg.net.