U.S. Stocks Decline to Lowest Since 2006 on Record Foreclosures

By Eric Martin and Lynn Thomasson

March 8 (Bloomberg) — U.S. stocks declined for a second week, falling to the lowest since 2006, after record home foreclosures and an unexpected drop in payrolls heightened concern that the economy is in a recession.

Washington Mutual Inc. and CIT Group Inc. led financial shares to the steepest slump in the Standard & Poor’s 500 Index. Citigroup Inc. and American International Group Inc. helped send the Dow Jones Industrial Average below 12,000 for the first time since January. Nine of 10 S&P 500 industries slipped after more borrowers with adjustable-rate loans walked away from properties, employers eliminated 63,000 jobs in February and Thornburg Mortgage Inc. and a Carlyle Group fund defaulted on loans.

“The problems that we’re seeing in the housing market are going to continue,” Hans Olsen, who helps oversee $120 billion as chief investment officer of JPMorgan Private Client Services, said during an interview with Bloomberg Television in New York. “It’s clear that we’re heading into a period of economic slowdown. Credit is the lifeblood of the economy, so when you have problems it’s never easily resolved.”

The S&P 500 retreated 2.8 percent this week to 1,293.37, the lowest close since August 2006. The Dow lost 3 percent, the most in a month, to 11,893.69. The Russell 2000 Index, a measure of companies with a median market value 96 percent less than the S&P 500, dropped 3.8 percent to a two-year low of 660.11.

Financials Retreat

An all-time high in U.S. mortgage foreclosures and the biggest drop in jobs in five years added to signs of economic weakness. New foreclosures jumped to 0.83 percent of all home loans in the fourth quarter from 0.54 percent a year earlier. Payrolls fell for a second straight month in February, the Labor Department said.

The S&P 500 Financials Index dropped 6 percent, bringing its year-to-date loss to 17 percent. Banks, mortgage lenders and bond insurers were six of the 10 biggest decliners in the S&P 500.

Financial shares trimmed their weekly loss after the Fed said yesterday that it will add as much as $200 billion to the banking system over the next month to offset the credit crisis.

Washington Mutual slumped for a fifth week, erasing 28 percent to $10.71. Standard & Poor’s lowered the largest U.S. savings and loan’s credit rating to two steps above junk and said another cut is possible. Merrill Lynch & Co. said Washington Mutual may report $11.2 billion in losses through next year as more borrowers default on home loans.

`In a Recession’

CIT had the steepest weekly loss since its 2002 initial public offering, tumbling 24 percent to $16.92. KBW Inc. analystSameer Gokhale slashed his first-quarter earnings estimate by 89 percent on expectations the largest U.S. independent commercial finance company will write down the value of its student loan holdings.

“We’ve been in a recession for a while,” David Baker, the Boston-based chief investment officer at North American Management, which oversees $1.1 billion, said during an interview with Bloomberg Radio. “We’re going to see likely earnings estimates being lowered going into the summer.”

Thornburg plunged 80 percent to $1.79, the lowest price since its 1993 IPO. The home lender may go out of business because it can’t meet $610 million of margin calls. Falling prices for mortgage assets and the company’s shrinking liquidity “have raised substantial doubt” about Thornburg’s ability to keep operating, according to a company statement.

Treasury Yields

Carlyle Capital Corp., the publicly traded mortgage bond fund owned by the world’s second-biggest private-equity firm, said it missed four of seven margin calls yesterday totaling more than $37 million. Carlyle Group’s fund tumbled 58 percent to $5 in Amsterdam trading on March 6.

The yield on two-year U.S. Treasury notes declined to 1.52 percent, the lowest since March 2004. Ten-year notes rose to 3.53 percent. Traders give 92 percent odds that the Federal Reserve will cut its benchmark interest rate to 2.25 percent this month to prop up economic growth. At least $188 billion in bank losses from the collapse of the subprime-mortgage market have pushed the economy to the brink of recession.

Consumers spent less at U.S. retailers in February as increasing fuel costs eroded Americans’ buying power, economists said reports next week will show. Purchases rose 0.2 percent after a 0.3 percent gain in January, according to the median estimate in a Bloomberg News survey. A report from the Labor Department may show the cost of living increased.

Three members of the S&P 500 are scheduled to report quarterly results next week: Kroger Co., the largest U.S. grocery chain; Dillard’s Inc., the department-store chain; and Liz Claiborne Inc., the maker of Kate Spade handbags and Juicy Couture clothing.

To contact the reporters on this story: Eric Martin in New York at emartin21@bloomberg.net; Lynn Thomasson in New York at lthomasson@bloomberg.net.