Market on three-day losing streak

January 22, 2010

U.S. stocks sank again Friday, extending the market’s biggest three-day tumble since March, as financial shares slumped on President Barack Obama’s plan to rein in banks and results at Google Inc. disappointed investors.

Bank of America Corp. led the S&P 500 Financials Index to a 3.3-percent drop as uncertainty over Ben S. Bernanke’s confirmation for another term as head of the Federal Reserve also weighed on lenders. Google sank 5.7 percent after fourth-quarter sales growth missed the most optimistic of analysts’ estimates. U.S. Steel Corp. fell as Goldman Sachs Group Inc. said China’s move to slow its economy will hurt metal producers.

The Standard & Poor’s 500 Index lost 2.2 percent, to 1,091.74, plunging the most since October and erasing its 2010 gain. The gauge slid 5.1 percent over the past three days as China moved to slow lending and Obama proposed banks be banned from proprietary trading. The Dow Jones industrial average sank 216.9 points, or 2.1 percent, to 10,172.98. The VIX, a measure of volatility, jumped 56 percent, to 27.46, in the past three days in its biggest gain since 2007.

“Bernanke is viewed by markets around the world as a positive for the U.S. economy and the uncertainty about his reconfirmation is accelerating today’s sell-off,” said Michael Holland, who oversees more than $4 billion as chairman of Holland & Co. in New York. “Tag that onto the concerns over China’s economy and Washington’s offensive against the banks.”

The S&P 500 is down 4.8 percent since Alcoa Inc. started the fourth-quarter earnings season on Jan. 11 with lower-than-estimated profit.

Morgan Stanley lost 5.2 percent, to $27.80, Bank of America fell 3.7 percent, to $14.90 and Goldman Sachs declined 4.2 percent, to $154.12. The S&P 500 Financials Index has slipped 6.1 percent over the past two days, its biggest decline since September.

Obama yesterday called for limiting the size and trading activities of financial institutions as a way to reduce risk-taking and prevent another financial crisis. The proposals, to be added to an overhaul of regulations being considered by Congress, would prohibit banks from running proprietary trading operations solely for their own profit and sponsoring hedge funds and private equity funds.

Meredith Whitney, the banking analyst who forecast Citigroup Inc.’s dividend cut in 2008, said Obama’s plan will probably be approved and may “dramatically” reduce trading profits.

“Short sellers have come out heavy against the financials because their view is that Washington is at war with the banks now,” said Kevin Shacknofsky, who manages $2.5 billion for Alpine Mutual Funds in Purchase, N.Y. “Financials will be the political scapegoat this year and it’s going to be really tough to own bank stocks until the November elections.”

Morgan Stanley Asia Chairman Stephen Roach said Obama’s plan amounts to “bank bashing” and called on politicians to take a more balanced approach. Banks may have to sell some private-equity businesses and stop investing in buyouts under the proposal.

Financial shares extended declines as Democratic Senators Barbara Boxer and Russ Feingold said they won’t support Ben S. Bernanke for a second term as the chairman of the Federal Reserve is coming up for confirmation in a Senate vote. A second term would begin on Feb. 1.

A failure to confirm Bernanke “would really rattle the market,” said Karl Mills, who helps manage about $30 million as chief investment officer for Jurika Mills & Keifer LLC in Oakland. “The Fed chair you know is better than the one you don’t. In this political environment, we’re not presuming anything anymore.”

American Express Co. and Capital One Financial Corp. fell 8.5 percent and 12 percent, respectively, as analysts at FBR Capital Markets reduced earnings estimates, citing shrinking margins and new U.S. credit-card regulations.

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