Saturday, January 17, 2009

S&P 500 Valuation Hits 18-Year Low

From Bloomberg.

By Eric Martin

Jan. 16 (Bloomberg) -- U.S. stocks gained for a second day as investors snapped up shares trading at the cheapest levels in 18 years and concern eased that more banks will fail.

The Standard & Poor’s 500 Index recovered from a drop of 1.6 percent after its valuation slid to 14.8 times reported earnings, the lowest since 1991. Intel Corp. climbed 3.4 percent on its prediction that profitability may improve next quarter. Bank of America tumbled 14 percent even after getting a $138 billion federal lifeline. Shares rallied in the final hour after Bill Gross, manager of the world’s largest bond fund, said the worst of the credit crisis may be over, according to Reuters.

“Nobody is really willing to step up for risk today; for the thinking investor, there’s a lot of opportunity because of that,” said Robert Lutts, president of Cabot Money Management, which oversees $400 million in Boston. “When the opportunities are there, it often doesn’t look pretty.”

The S&P 500 added 0.8 percent to 850.12 and trimmed its decline over the past five days to 4.5 percent, its worst week since November. The Dow Jones Industrial Average rose 68.73 points, or 0.8 percent, to 8,281.22. The KBW Bank Index of 24 lenders sank 4.1 percent to below its lowest closing level since June 1995.

U.S. stock-index futures and European shares rallied in early trading after the government agreed to invest $20 billion more in Bank of America and guarantee $118 billion in assets to help the lender absorb Merrill Lynch & Co. The market fluctuated in early afternoon trading as financial shares in the S&P 500 reversed course and fell 2.4 percent collectively.

Profitability Rebound

Intel Corp. helped lead gains after the world’s biggest maker of semiconductors said profitability may rebound following the first quarter, when customers finish working through excess supplies. The company said revenuethis quarter may be about $7 billion, without providing an official forecast. Intel climbed 45 cents to $13.74.

Technology shares in the S&P 500 climbed 1 percent collectively and contributed the most to the market’s advance.

Bank of America tumbled $1.14 to $7.18, an 18-year low, after earlier rallying as much as $1 to $9.32. The largest U.S. bank by assets also posted its first loss since 1991 and cut its quarterly dividend to 1 cent a share from 32 cents.

‘Bottom of the Capital Structure’

“Today’s action in the banks and the government’s actions to help them is making it clearly evident that what is good for their viability and bondholders will not square with the interests of equity holders at the bottom of the capital structure,” Peter Boockvar, equity strategist at Miller Tabak & Co., said in a note to clients.

First Horizon National Corp., Tennessee’s biggest bank, climbed 18 percent, the steepest gain in the S&P 500, to $8.82 after it posted a fourth-quarter net loss that was narrower than analysts projected.

Citigroup Inc. slipped 8.6 percent to $3.50 after earlier climbing to as high as $4.48. The bank posted an $8.29 billion fourth-quarter loss, completing its worst year, as the credit crisis eroded mortgage-bond prices and customers missed more loan payments.

Citigroup, which earlier this week said it will sell control of the Smith Barney brokerage to Morgan Stanley, plans to undo the legacy of former CEO Sanford “Sandy” Weill by splitting into two companies. Citicorp will house the New York- based company’s global bank, while Citi Holdings will hold “non-core” assets, including $301 billion of mortgages, bonds, corporate loans and other assets that the government agreed in November to guarantee.

Citigroup extended its loss this week to 48 percent, while Bank of America lost 45 percent.

‘Fool’s Game’

“Investing in the common stock of a large bank today is a fool’s game because they can’t grow,” said Malcolm Polley, chief investment officer of Stewart Capital Advisors LLC, which manages $1 billion in Indiana, Pennsylvania. “The game everyone’s playing now is: how small will these banks get?”

Energy stocks in the S&P 500 climbed 1.2 percent collectively after oil for February delivery rose $1.16, or 3.3 percent, to $36.56 a barrel as traders purchased contracts in an attempt to profit from higher prices in future months.

Tesoro Corp., the largest oil refiner in the U.S. West, led gains among energy stocks, climbing $1.48, or 10 percent, to $15.91. Sunoco Inc., the largest oil refiner in the U.S. East, increased $2.41, or 6 percent, to $42.31.

The gains in stocks today came despite economic data that signaled the recession deepened last month.

Manufacturing Slump

Output at factories, mines and utilities dropped 2 percent last month after a revised decline of 1.3 percent in November that was more than double the previously reported decrease, the Federal Reserve said today in Washington. Plant use matched the lowest level since 1983.

The cost of living fell in December, capping the smallest annual gain in a half century. Consumer prices fell 0.7 percent in December after dropping 1.7 percent the prior month. Excluding food and energy, costs were unchanged. Americans paid 0.1 percent more for goods and services in 2008, the least since 1954, the Labor Department said.

The 5.8 percent slide in the S&P 500 so far this year suggests the so-called January barometer will signal a loss for 2009. The indicator was developed byYale Hirsch, chairman and founder of the Stock Traders’ Almanac, and built on the theory that the S&P 500’s first-month performance sets its course for the year.

‘January Barometer’

Since 1950, the barometer has been at least 80 percent accurate. One of the exceptions occurred in 1978, when the index rebounded from a January drop of 6.2 percent to close 1.1 percent higher.

The S&P 500 reached an 11-year low of 752.44 and the Dow slid to the lowest since 2003 on Nov. 20. Stocks tumbled as more than $1 trillion in bank losses froze lending and spurred a global recession.

A decline in U.S. stock indexes below the 2008 lows from November may trigger a rout that pushes benchmark averages to levels not seen since the mid-1990s, according to technical analysts Ralph Acampora and John Murphy. Should the Dow fall below the 7,552.29 it touched on Nov. 20, it might tumble to 6,000, according to Acampora, who retired from Knight Capital Group Inc. in October 2007 after four decades on Wall Street.

Estee Lauder Cos. dropped 10 percent to $26.11, the steepest decline in the S&P 500 after Bank of America. The maker of Clinique and Bobbi Browncosmetics cut its sales and profit forecast for fiscal 2009 ending June 30, citing “deteriorated global economic conditions.”

“Valuations are pretty good, but people are going to wait for earnings to come through,” said Frank Ingarra, a manager at Novato, California-based Hennessy Advisors Inc. who helps oversee the $177 million Hennessy Focus 30 Fund that beat 95 percent of its peers last year. “The last few days have felt like we were back in October again: No end in sight, everyone’s going to die, it’s going to be awful. Hopefully we’re getting some semblance of calm.”

To contact the reporter on this story: Eric Martin in New York atemartin21@bloomberg.net.

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