Stocks Tumble, Oil Prices Soar Past $100 a Barrel

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American stocks tumbled, led by banks and computer companies, after the biggest decline in manufacturing in five years sent the Dow Jones Industrial Average to its worst start since 1983.

Crude oil futures touched $100 a barrel for the first time, extending last year’s 57% climb reflecting demand growth outpacing the industry’s ability to find deposits. Schlumberger Ltd., the world’s largest oilfield-services provider, rose $2.21 to $100.58. Energy shares were the only industry group in the S&P 500 to rise as natural gas futures also climbed, reaching a one-month high.

“My big worry is that fears of higher oil prices would continue to impact consumer confidence and it would continue to fall” the president and portfolio manager at James Investment Research in Xenia, Ohio, Barry James, said. The firm manages $2.1 billion.

Intel Corp., the largest semiconductor maker, fell the most in almost a year after Bank of America Corp. lowered its rating and investors speculated companies will spend less on technology. Caterpillar Inc., the largest maker of earth-moving equipment, and International Business Machines Corp., the biggest computer services company, led the Dow Jones Industrial Average to a 1.7% plunge.

The Standard & Poor’s 500 Index lost 21.20, or 1.4%, to 1,447.16, the most to start a year since it fell 2.8% on January 2, 2001. The Dow average slipped 220.86 points to 13,043.96. The Nasdaq Composite Index decreased 42.65, or 1.6%, to 2,609.63. More than three stocks fell for every one that rose on the New York Stock Exchange.

The decline in the Institute for Supply Management’s manufacturing index “increases the odds we’re going to go into a recession, and recessions are associated with bear markets,” a manager of $12 billion at ING Investment Management in New York, Brian Gendreau, said.

The ISM index dropped to 47.7, the lowest since April 2003 and the first reading below 50 since last January. The report, combined with a rise in the price of oil to a record $100 a barrel, spurred concern that a slowdown in spending will halt the five-year economic expansion.

Two-year Treasuries rose the most in more than three weeks after the ISM report, while the dollar fell against the euro and yen, as traders increased bets the Federal Reserve will lower the benchmark interest rate half a percentage point at its next meeting.

Shares of department stores and discounters in the S&P 500 lost 2.1%. American retail sales rose 2.3% last week at stores open at least a year as consumers slowed spending during what may have been the worst holiday shopping season in five years, the International Council of Shopping Centers said.

Concern that credit-market losses will curb bank lending and spur a recession sent the S&P 500 down 3.8% in the fourth quarter, cutting the gauge’s 2007 gain to 3.5%. Financial shares in the S&P 500 fell 2.5%, extending a 21% slide in 2007 that was their biggest in 17 years.

Intel lost $1.31 to $25.35, leading semiconductor makers in the S&P 500 to a 3.7% retreat, the biggest since July 2006 and the most among 24 industry groups in the index. Profit growth that exceeds analysts’ estimates “will be hard to come by,” an analyst at Bank of America, Sumit Dhanda, wrote in a note to clients yesterday.

Bank of America trimmed its forecast for semiconductor sales growth this year to 7% from 11%. Advanced Micro Devices Inc., National Semiconductor Corp. and LSI Corp. were downgraded to “sell” from “neutral.” Advanced Micro fell 36 cents to $7.14, National Semiconductor lost $1.23 to $21.41, and LSI decreased 43 cents to $4.88.

Intel, Analog Devices Inc., Semtech Corp., Texas Instruments Inc. and Power Integrations Inc. were downgraded to “neutral” from “buy.” Texas Instruments fell $1.05 to $32.35 and Analog Devices sank $1.33 to $30.37.

The price-weighted Philadelphia Semiconductor Index fell 2.8% to the lowest since July 2006.

National City Corp., Ohio’s largest bank, led declines in financial shares, falling 87 cents to $15.59 after cutting its dividend by 49% to offset losses in the housing market. Morgan Stanley, the second-biggest American securities firm, fell $2.16 to $50.95. Fannie Mae, the largest provider of money for home loans, decreased $2.52 to $37.46.

“If we get a cyclical drop in the economy then we have to worry about traditional credit losses coming in, which would be a second shoe to drop for the financials,” a senior investment strategist and director of asset allocation at Trusco Capital Management in Richmond, Virginia, which oversees $17 billion of equities, Alan Gayle, said.

The Dow average gained 6.4% in 2007 and the Nasdaq rose 9.8%, its steepest yearly advance since 2003. The S&P 500’s 3.5% increase extended to five years its streak of annual advances.

Wall Street strategists forecast gains for American stocks in 2008. The S&P 500 may climb 11% in 2008, extending the five-year bull market, according to the average forecast from 15 strategists surveyed by Bloomberg.

Analysts are bullish even as economists predict a slowdown in America. Gross domestic product probably grew at an annual rate of 1% in the final three months of 2007 and will expand 1.5% this quarter, according to the median forecast of economists polled by Bloomberg last month. That compares with 4.9% growth in the third quarter of last year.

“The manufacturing sector of the economy is indeed contracting and that’s certainly not good news and contributes to the view that we’re headed towards a recession,” the chairman of Johnson Illington Advisors LLC in Albany, Hugh Johnson, said. “For the first part of this year when there’s not a lot of confidence in earnings, the markets are not going to do well.”

Profits among S&P 500 members are forecast to rise 15.1% in 2008, the average estimate of analysts surveyed by Bloomberg, after growth slowed to an estimated 1.4% last year. Most of the gain is predicted in the third quarter, when analysts expect earnings to increase by 19.7%.


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