U.S. Stocks Retreat on Concern Housing Tax Credit to Phase Out

U.S. stocks slid, erasing an early rally, on concern lawmakers will phase out a tax credit for homebuyers and Bank of America Corp. will have to sell shares to pay back its government bailout. The dollar rebounded from a 14- month low against the euro and oil wiped out an early advance.


All 12 shares in a gauge of homebuilders slid. Bank of America sank 5.1 percent on speculation government officials will force the company to raise more capital, while Fifth Third Bancorp, SunTrust Banks Inc. and U.S. Bancorp declined at least 3.2 percent after Rochdale Securities LLC analyst Dick Bove downgraded the shares. Treasuries fell, with 10-year yields touching a two-month high.
The Standard & Poor’s 500 Index lost 1.2 percent to 1,066.95 at 4:04 p.m. in New York. The Dow Jones Industrial Average retreated 104.22 points, or 1.1 percent, to 9,867.96. Almost five stocks fell for each rising on the New York Stock Exchange.

“Plenty of news for traders to sell on,” said James Paulsen, who helps oversee $375 billion as chief investment strategist at Wells Capital Management in Minneapolis. “We’ve still got a rise in loan losses. Some banks will probably have to raise further capital. And on the tax-credit front, we already know we won’t have that forever. But after a nice stock market run, a lot of players wanted to have a pause.”

Equities rallied earlier, sending the S&P 500 up as much as 1.1 percent, as investors grew more confident that better-than- estimated profits will fuel further equity gains. About 80 percent of companies in the S&P 500 that reported third-quarter results have topped analysts’ earnings projections, exceeding the record pace of 72.3 percent for the period ended in June.

Builders Slump 

A gauge of 12 homebuilders in S&P indexes slumped 3.4 percent, led by declines of at least 3.8 percent in Pulte Homes Inc. and D.R. Horton Inc. Senate leaders are negotiating to extend and gradually reduce an $8,000 tax credit for first-time homebuyers through 2010, Senator Bill Nelson said. The credit was set to expire at the end of November.

“The phase out is worse than a straight extension and probably worse for housing than the consensus,” ISI Group Inc. analysts said in a note


Banks fell 3.3 percent collectively, the steepest decline in the S&P 500 among 24 industries, after Bove downgraded Fifth Third Bancorp, SunTrust and U.S. Bancorp on concern loan losses will remain high.
Fifth Third, Ohio’s largest lender, retreated 7.9 percent to $9.52. SunTrust, the seventh-largest U.S. bank, lost 5.4 percent to $19.85, while Minneapolis-based U.S. Bancorp dropped 3.1 percent to $24.15. Bank of America, the largest U.S. lender by assets, sank 5.1 percent to $15.40.

‘Meaningfully Harm’ 

“The government apparently wants the bank to raise $45 billion in the market from a new capital offering before it will let the bank redeem the TARP preferreds,” Bove wrote in a note dated Oct. 23, referring to the Troubled Asset Relief Program. “Selling more stock would meaningfully harm Bank of America’s shareholders. If the bank did what the government wants it would have to sell 3 billion shares or increase its share base by 35 percent.”

Bank of America pared an earlier slide of as much as 7.1 percent after Citigroup Inc. added the stock to its “top picks” list, saying it is “very attractive” after the sell- off.

Federal Deposit Insurance Corp. Chairman Sheila Bair said that banks continue to face “serious challenges.” Bair also said tapping a Treasury Department credit line to replenish funds depleted by a surge of bank failures would harm her agency and the banking industry. She made the comments today during a speech at an American Bankers Association convention in Chicago.

Monsanto Co. fell 6 percent to $70.69, its biggest drop since May. Goldman Sachs Group Inc. lowered its earnings estimates for the world’s largest seed producer, citing company discounts on corn-seed prices.

- Via Bloomberg