U.S. Stocks Drop, Led by Deere, Retailers

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American stocks dropped for a second day as earnings from Deere & Co. disappointed investors, retail sales declined, and Merrill Lynch & Co. said the contagion from the collapse of the subprime mortgage market is far from over.

Deere, the largest maker of tractors, fell 3.2% as higher materials costs and the housing slump hurt earnings. The Standard & Poor’s 500 Retailing Index declined the most since July 10 after the Commerce Department reported the first decrease in chain-store sales in five months. Bank of America Corp. led the KBW Bank Index to a 4.1% tumble. The S&P 500 briefly erased its retreat in the final hour of trading as a gain in oil prices spurred a rally in energy shares.

“Your house isn’t worth as much as it used to be, the unemployment rate is going up. and you’re paying more for gas than you’ve ever paid before,” a manager of $60 billion at Thrivent Financial for Lutherans in Minneapolis, David Heupel, told Bloomberg Radio. “A lot of crosscurrents are hitting the consumer right now and particularly the discretionary money they have to spend.”

A government report showing a jump in import prices, and the first increase in crude in four days also dimmed the outlook for retailers’ earnings.

Sales at American retailers declined in July as record gasoline prices and tighter credit reduced automobile purchases, the Commerce Department said. The 0.1% drop followed a 0.3% gain the prior month that was larger than previously reported, the government’s report showed.

Bank of America tumbled 7.3% to $28.86 and contributed the most to the decline in the KBW Bank Index as all 24 of the gauge’s companies retreated. The measure has lost more than 10% over the past two days.

Financial shares also fell as Merrill analysts lowered their recommendation on Goldman Sachs Group Inc., the world’s largest securities firm, to “underperform” from “buy.” The analysts also downgraded Lehman Brothers Holdings Inc. and Morgan Stanley.

“The credit crisis is broad, deep and global, and it is not likely to end soon,” wrote Merrill’s chief investment strategist, Richard Bernstein, in a research report yesterday.

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