Shaky Banking Sector Drives Down Stocks

Sunday, November 4, 2007

U.S. stocks were mostly lower last week as concerns that banks would report more loan losses overshadowed signs that the economy was accelerating.

Shares in Citigroup, the biggest U.S. bank, retreated to the lowest level since 2003 after CIBC World Markets said Citigroup may cut its dividend to shore up capital. Merrill Lynch shares fell the most in six years after Deutsche Bank said Merrill, the world's largest brokerage, may report more losses. The weakness among financial shares overwhelmed a Friday report of employment growth that was better than forecast.

"The fact that Citigroup has been potentially undermined and has a liquidity crisis scares a lot of people," said Eric Green, senior managing partner at Penn Capital Management in Cherry Hill, N.J. "That's a big issue."

The Standard & Poor's 500-stock index fell 1.7 percent last week to close at 1509.65. The Dow Jones industrial average fell 1.5 percent to 13,595.10. The Nasdaq composite index rose 0.2 percent to 2810.38.

Concern about the extent of losses among financial companies sent banks and brokerages in the S&P 500 to a 6 percent weekly decline.

Citigroup dropped 11 percent this week to $37.73. Citigroup spokesman Michael Hanretta declined to comment about dividend changes.

Merrill fell 13 percent to $57.28, its fourth consecutive weekly decline. Bond insurers Ambac Financial Group and MBIA had the steepest drops in the S&P 500 as analysts said the industry could face a "downward spiral" if mortgage defaults increase.

"The mortgage market is just so bad, I'm not sure we're done losing money in the financial sector," said Matthew King, a portfolio manager at Bell Investment Advisors in Oakland, Calif. "I would stay away."

Mortgage concerns overshadowed speculation that the economy would avoid a recession. The Dow average had its biggest rally in a month Wednesday after the Federal Reserve cut its key lending rate by a quarter-point and a report showed the economy grew faster than forecast.

The chance of another interest rate cut this year dimmed yesterday after the Labor Department said the economy added 166,000 jobs in October, nearly twice what economists had forecast.

The Treasury will sell $20 billion of three-month bills and $18 billion of six-month bills on Monday. They yielded 3.61 percent and 3.80 percent, respectively, in when-issued trading.

-- Bloomberg News


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