U.S. Stocks Drop, Erasing Early Gains, as Banks Slump on Libor

U.S. stocks slid for a seventh day, the longest losing streak for the Standard & Poor's 500 Index since 1996, as higher lending rates sent a gauge of financial shares to its lowest level in almost 12 years.

SLM Corp., the education lender known as Sallie Mae, lost as much as 47 percent and Prudential Financial Inc., the second- biggest U.S. life insurer, tumbled 26 percent as the benchmark three-month Libor rate climbed to the highest level of the year. Chevron Corp. slumped 3.9 percent, sending the S&P 500 Energy Index to a two-year low, as oil slid below $87 a barrel on concern the global economy is heading into a recession.

The S&P 500 fell 8.29 points, or 0.8 percent, to 976.65 at 12:10 p.m. in New York. The Dow Jones Industrial Average slid 68.1, or 0.7 percent, to 9,190. The Nasdaq Composite Index increased 0.3 percent to 1,744.6 as better-than-estimated earnings at International Business Machines Corp. spurred gains in technology stocks. Two stocks fell for each that rose on the New York Stock Exchange.

``Everyone's watching the Libor, looking for the credit market to thaw and it's not there yet,'' said Alec Young, a New York-based equity strategist at Standard & Poor's. ``Until you get some convincing thawing in the credit markets, the threat of a global recession and a global profits recession remains and it's going to be difficult for stocks to build momentum.''

U.S. stocks fell yesterday after Treasury Secretary Henry Paulson said more banks may collapse and unprecedented global interest-rate cuts failed to convince investors the economy will avoid a contraction. Paulson signaled the government may invest in banks as the next step in trying to resolve the deepening credit crisis.

Second-Worst Slump

The S&P 500's 2008 slump of 32.9 percent through yesterday was the worst year-to-date plunge since 1974 and the second- biggest drop ever compared with previous returns through Oct. 8, according to Harrison, New York-based research firm Bespoke Investment Group LLC.

The 37 percent decline from its record a year ago today left the measure valued at less than 19 times the reported earnings of its companies at the start of trading today, the cheapest since February. Europe's Dow Jones Stoxx 600 Index trades at 9.59 times profit, while the MSCI World is valued at 12.07 times the reported earnings of companies in the index, according to Bloomberg data.

SLM lost $1.90 to $5.95. Prudential tumbled $10.30 to $32.99, dragging a group of insurers in the S&P 500 to a 4 percent decline. Chevron slumped 4.8 percent.

XL Capital Ltd., the Bermuda-based business insurer, dropped 38 percent to $5.40 for the steepest plunge since its initial public offering in July 1991 on concern that investment losses will weigh on results. The company was removed from Goldman Sachs Group Inc.'s ``conviction buy'' list yesterday on ``concern regarding the quality of XL's investment portfolio.''

Ford, GM Sink

Ford Motor Co. and General Motors Corp. fell more than 7.8 percent. The U.S. automakers may not receive $25 billion in loan guarantees from the U.S. government in time to help them survive the crises in the credit and equity markets, according a report from the Globe and Mail newspaper, citing a Citibank Inc. analyst.

Analysts expect a 5.6 percent drop in third-quarter profit at S&P 500 companies, according to Bloomberg data. Alcoa Inc., the biggest U.S. aluminum producer, kicked off the earnings season with lower-than-estimated profit, saying net income slid by more than half.

Shorts Return

The end of a three-week ban on short selling financial stocks may reduce the market's record price swings as hedge funds increase trading.

After the Securities and Exchange Commission started the rule Sept. 19, volume on the New York Stock Exchange dropped 35 percent and the Chicago Board Options Exchange Volatility Index surged to 57.53, its third straight record. Options on the VIX, as the volatility gauge is known, imply it will fall 44 percent in the next two weeks after the rule expired last night.

Financial companies led the S&P 500's retreat from its record a year ago today, losing 57 percent as a group as Lehman Brothers Holdings Inc. filed for bankruptcy, American International Group Inc. was seized by the government and Bear Stearns Cos. and Merrill Lynch & Co. were forced into emergency takeovers.

Telephone companies had the second-steepest decline among 10 groups in the S&P 500, losing 44 percent over the past year. Indexes of each of the other eight industries plunged at least 25 percent, except for companies that sell consumer staples, which lost only 10 percent.

Four companies in the benchmark index for U.S. equities tumbled more than 90 percent over the past year: AIG, National City Corp., General Growth Properties Inc. and Wachovia Corp.

The three biggest gains in the bear market came from tobacco, beer and hospital companies: UST Inc., Tenet Healthcare Corp. and Anheuser-Busch Cos. each climbed more than 22 percent over the past year.