U.S. Stocks Fall on Valuations; Eli Lilly, Best Buy, Nucor Drop
Aug. 10 (Bloomberg) -- U.S. stocks fell, led by mining companies and retailers, after four straight weeks of gains left the Standard & Poor’s 500 Index trading at the highest level relative to earnings since 2004. European equities also dropped, while Treasuries rose for the first time in six days.
3M Co., Cisco Systems Inc. and Alcoa Inc. led the Dow Jones Industrial Average lower. Eli Lilly & Co. and Best Buy Co. lost at least 3 percent after Goldman Sachs Group Inc. cut its rating on the shares. State Street Corp. slid 2.4 percent after saying it may exhaust $625 million in reserves set aside in 2007 to settle claims stemming from losses linked to subprime mortgages.
The S&P 500 slipped from a 10-month high, retreating 0.3 percent to 1,007.1 as of 4:05 p.m. in New York. The Dow average fell 32.12 points, or 0.3 percent, to 9,337.95. Four stocks fell for every three that rose on the New York Stock Exchange.
“It’s reasonable to think that the market would take a breather after recent weeks,” said Lawrence Creatura, a Rochester, New York-based money manager at Federated Investors Inc., which oversees $407 billion. “It’s not natural for one- way markets to last long. A little pause would be normal and perhaps healthy.”
The S&P 500 climbed 2.3 percent last week, rising above 1,000 for the first time since November, as better-than- estimated employment, manufacturing and home-sales data boosted confidence that the recession is ending. The index jumped 49 percent from a 12-year low on March 9 through last week, the steepest surge since the Great Depression, as three quarters of its companies that posted second-quarter earnings beat consensus analyst estimates.
Valuation Watch
The S&P 500 was valued at 18.6 times the profits of its companies as of the start of trading, the highest ratio since December 2004. The index must rally 55 percent to surpass its all-time high of 1,565.15 set on Oct. 9, 2007. Before November, it had remained above 1,000 for five years.
“There is a gradual period of slow growth beginning in the economy,” said Joseph Keating, who oversees $4 billion as chief investment officer of Raleigh, North Carolina-based RBC Bank, a unit of Royal Bank of Canada. “But investors are a little concerned that we’re getting ahead of ourselves.”
Options traders are increasing bets that the S&P 500’s rally won’t survive September, historically the worst month for U.S. equities.
Bearish VIX Bets
Traders are betting the VIX, a gauge of expected stock swings, will increase 13 percent in the next five weeks, according to futures prices compiled by Bloomberg as of Aug. 7. That’s the biggest spread since August 2008, right before the S&P 500 suffered the steepest two-month plunge in 21 years. The indexes have moved in the opposite direction 81 percent of the time over the past five years, Bloomberg data show.
State Street, the manager of $1.6 trillion as of June 30, fell 2.4 percent to $52.57. The reserve “may not be sufficient to address ongoing litigation” if the U.S. Securities and Exchange Commission sues State Street and seeks monetary penalties, the Boston-based custody bank said in a regulatory filing today.
Eli Lilly dropped 3 percent to $33.83. Goldman Sachs downgraded the drugmaker to “sell” from “neutral” and added the stock to its “conviction sell” list, saying its “patent cliff” is the largest in the industry.
Best Buy slipped 5.3 percent to $37.66. Goldman Sachs reduced its recommendation on shares of the world’s largest electronics retailer to “neutral” from “buy,” citing competition, “erosion” in entertainment software and “aggressive” spending to fuel growth.
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