Fed Out of Bullets

U.S. Stocks Fall on Concern Fed Is Running Out of Ammunition


By Elizabeth Stanton

Dec. 17 (Bloomberg) -- U.S. stocks fell and the Standard & Poor’s 500 Index retreated from a five-week high on concern the Federal Reserve has few tools left to combat the recession after cutting its benchmark interest rate to as low as zero.

Morgan Stanley lost 4.8 percent after its $2.2 billion fourth-quarter loss was worse than analysts estimated as investment-banking fees dwindled. Citigroup Inc. and JPMorgan Chase & Co. declined more than 2 percent. Apple Inc. slid 6 percent after the maker of the iPhone said Chief Executive Officer Steve Jobs won’t speak at the Macworld Expo, spurring concern that the leader’s health is deteriorating.

“Following interest-rate cuts you always see an initial reaction and then you get back to your senses,” said Joost Van Leenders, strategist at Fortis Investments in Amsterdam, which oversees $305 billion. “All the structural indicators, such as the economic cycle and profit outlook, remain negative.”

The S&P 500 lost 0.8 percent to 906.36 at 9:49 a.m. in New York. The Dow Jones Industrial Average slipped 60.05 points, or 0.7 percent, to 8,864.09. The Russell 2000 Index of small U.S. companies retreated 0.3 percent.

The S&P 500 declined after a 5.1 percent rally yesterday spurred by the Fed’s rate cut and its plan to use “all available tools” to revive the economy. The central bank’s decision came after simultaneous recessions in the U.S., Europe and Japan dragged the S&P 500 down almost 45 percent from its 2007 record.

Europe’s Dow Jones Stoxx 600 Index slid 0.7 percent, as BNP Paribas SA tumbled as much as 19 percent after saying losses at its securities unit since October more than wiped out the division’s profit for the first three quarters of the year.

Morgan Stanley Earnings

Morgan Stanley retreated 77 cents to $15.36. The loss of $2.24 a share compared with a deficit of $3.61 a share in the same period a year earlier. The average estimate of 16 analysts surveyed by Bloomberg was for a 34-cent loss, with no estimates exceeding $1.15. Goldman Sachs slipped 0.7 percent to $75.44. The shares rallied 14 percent yesterday after the company posted a quarterly loss, its first since going public in 1999, that was narrower than analysts estimated.

The Wall Street that Morgan Stanley and Goldman Sachs dominated for decades vanished in September, when Lehman Brothers Holdings Inc. went bankrupt and Merrill Lynch & Co. sold itself to Bank of America Corp. Goldman Sachs and Morgan Stanley took $10 billion each from the U.S. government.

Apple Downgraded

Apple lost $5.73 to $89.71. Oppenheimer & Co. analyst Yair Reiner downgraded Apple to “perform” from “outperform,” saying it’s “past time” for Apple to disclose the state of Jobs’ health or outline a plan for a successor. Apple also said that the company will no longer participate in the MacWorld show after next month’s event.

Nike Inc. added 1.5 percent to $49.90. The world’s largest athletic-shoe maker is due to report second-quarter earnings today. The median analyst estimate in a Bloomberg survey calls for per-share profit of 77 cents excluding items.

Adobe Systems Inc. jumped 5.6 percent to $23.56. The world’s biggest maker of graphic-design programs said it earned 60 cents a share, excluding some items, in the fourth quarter. That beat the 57-cent average estimate in a Bloomberg survey of analysts.

Fed Rally

Yesterday’s advance in the S&P 500 was its biggest on a Fed rate-decision day since 1994, when the central bank began announcing its target on the same day the decision was made, according to Bespoke Investment Group LLC. The rally put the index above its average level during the past 50 days for the first time since September.

The Fed cut its target rate for overnight loans between banks to a range of zero to 0.25 percent. The Fed said in its statement that the recession is likely to warrant exceptionally low levels of the federal funds rate “for some time.”

The statement noted that the Fed has already announced it will purchase agency debt and mortgage-backed securities, and said the central bank is ready to expand the program. Policy makers continue to weigh the potential benefits of buying longer-term Treasury securities, the statement said.

To contact the reporter on this story: Elizabeth Stanton in New York at estanton@bloomberg.net;