U.S. Stocks Extend Steepest Drop in 5 Months on Credit Concern

By Lynn Thomasson

July 27 (Bloomberg) -- U.S. stocks extended their biggest plunge in five months on growing concern that takeovers will slow as the money to pay for them grows scarcer.

Marsh & McLennan Cos., Wyndham Worldwide Corp. and Dillard's Inc. led the Standard & Poor's 500 lower as investors abandoned shares that rose on buyout speculation. Baker Hughes Inc., the world's third-biggest oilfield contractor, helped push energy shares to the steepest drop in the S&P 500 after reporting a decrease in earnings.

Stocks declined after Cadbury Schweppes Plc became the first company to delay an acquisition because of ``extreme volatility'' in debt markets. Banks have failed to sell at least $32 billion of takeover-related debt to investors, reducing their ability to finance new deals.

``The bubble has been in private equity from the cheap financing and when the bubble bursts, there is going to be pain,'' said Tom Wirth, who manages $1.8 billion as senior investment officer at Chemung Canal Trust in Elmira, New York. ``There'll be continued volatility and downside pressure for the market.''

The S&P 500 lost 6.7, or 0.5 percent, to 1475.96 at 3:32 p.m. in New York. The Dow Jones Industrial Average retreated 67.55, or 0.5 percent, to 13,406.02. The Nasdaq Composite Index slipped 13.09, or 0.5 percent, to 2586.25.

The S&P 500, Dow average and Nasdaq have each lost more than 3 percent this week. All three indexes are heading for the biggest weekly decline since the first week in March, when a sell-off in China spread globally and wiped out $3.3 trillion from markets worldwide.

Volatility Spike

A gauge of stock-market volatility climbed to the highest in more than a year. The Chicago Board Options Exchange Volatility Index rose 4 percent to 21.60. Higher readings in the so-called VIX, derived from the prices paid for options on the S&P 500, indicate traders expect bigger stock-market swings.

European stocks had their biggest weekly retreat in almost five months. Europe's Dow Jones Stoxx 600 Index lost 5.1 percent this week. The Morgan Stanley Capital International index of emerging market stocks headed for its biggest two-day decline in a year as investors shunned riskier assets. Benchmark indexes also dropped in Brazil, Taiwan, Hong Kong and Canada.

Takeover Speculation

Marsh & McLennan, Wyndham, Dillard's and more than a dozen other takeover candidates extended yesterday's losses as investors pared bets on mergers and acquisitions. The stocks are unlikely to bounce back because funds for leveraged buyouts are drying up, Richard Bernstein, Merrill Lynch & Co.'s chief investment strategist, wrote in a report yesterday. ``Equity investors should discontinue their speculation regarding takeovers,'' Bernstein said.

Marsh & McLennan, the world's largest insurance broker, lost 97 cents to $27.72. Citigroup Inc. analyst Keith Walsh said in June that speculation Marsh would be bought was buttressing its stock.

Wyndham Worldwide, the hotel company that climbed on buyout speculation after Hilton Hotels Corp. agreed earlier this month to be purchased by Blackstone Group LP, dropped $1.23 to $33.72.

Dillard's, which surged 8.1 percent on June 28 after a group of investors urged the company to ``unlock the value'' of its real-estate holdings, retreated $1.56 to $30.04.

Surging Debt Risk

The risk of owning corporate bonds soared to the highest on record on concern that banks and hedge funds face widening losses from subprime mortgages and leveraged buyouts. The cost to protect debt of companies from Goldman Sachs Group Inc. to Deutsche Bank AG and Australia's Westpac Banking Corp. jumped as investors shunned all but the safest of debt, according to credit-default swap traders.

Cadbury Schweppes, the world's largest confectionery company, extended the deadline to sell its U.S. beverage brands, including Canada Dry to Snapple. Two buyout groups vying for the division may offer less than planned, four people with knowledge of the bidding said this week. Martin Deboo, an analyst at Investec Securities in London yesterday cut his estimate for the sale price to 7.2 billion pounds ($14.7 billion) from 8 billion pounds.

More than 40 companies reworked or abandoned bond offerings in the past three weeks.

Energy Shares Drop

Baker Hughes Inc. dropped $1.35 to $79.91. The company said second-quarter profit from continuing operations, excluding one- time items, fell 2.8 percent to $349.6 million from $359.8 million, a year earlier.

Falling energy shares helped pull down the S&P 500 as investors sold riskier assets, even as the price of crude oil climbed $2.03 to $76.98 a barrel in New York. The S&P 500 Energy Index, which more than tripled after a 4 1/2-year rally, dropped 0.7 percent today.

Exxon Mobil Corp., the world's largest oil company, fell $1.24 to $86.99 and posted the steepest two-day decline since 2005. Chevron Corp., the second-largest U.S. oil producer, slipped 45 cents to $86.98.

``People are selling the winners and energy stocks have had a great run,'' said Igor Golalic, who manages $2.5 billion at Federated Investment Inc. in Pittsburgh.

Fannie Mae declined $1.16 to $59.44. The largest provider of money for U.S. home loans said in an e-mail that it held $47.2 billion of securities backed by subprime mortgages at the end of June. Citigroup Inc. analysts said in a report that the subprime mortgage bonds Fannie Mae and Freddie Mac hold may have lost $4.7 billion in value, the Wall Street Journal reported today.

Ingersoll-Rand, Gap

Ingersoll-Rand Co. fell $1.93 to $48.76. The maker of Bobcat machinery and Thermo-King refrigerated trucks said second-quarter sales grew 8.6 percent to $2.22 billion. Analysts, on average, estimated revenue of $2.93 billion, according to a Bloomberg survey. The company also forecast an earnings range for the third quarter that fell short of analysts' estimates.

Gap Inc. rose 64 cents to $17.55. The largest U.S. clothing retailer said it named Glenn Murphy as chief executive officer, six months after the departure of Paul Pressler. Murphy led Canada's Shoppers Drug Mart Corp. as chief executive officer for six years before stepping down earlier this year.

Ford Motor Co., the second-biggest U.S. automaker, added 12 cents to $8.21. The shares were upgraded to ``neutral'' from ``sell'' by analysts at Merrill Lynch & Co. after the company reported its first profit in eight quarters. The analysts said savings from restructuring in North America are progressing faster than they expected.

Economy Watch

In economic reports, the Commerce Department said the U.S. economy grew last quarter at the fastest pace in more than a year, propelled by rising exports, commercial construction and government spending. The 3.4 percent annual pace of growth for gross domestic product followed a 0.6 percent gain in the first quarter, the Commerce Department reported.

The Federal Reserve's preferred inflation gauge, which is tied to consumer spending and strips out food and energy costs, rose 1.4 percent, down from 2.4 percent and in line with economists' forecasts.

Confidence among U.S. consumers rose in July as gasoline prices dropped from record highs and the labor market continued to show strength, according to a private report. The Reuters/University of Michigan's final index of consumer sentiment rose to 90.4 from 85.3 in June.

U.S. stocks plunged the most in five months yesterday after higher financing costs threatened to spur debt defaults and slow takeovers.

To contact the reporter on this story: Lynn Thomasson in New York at lthomasson@bloomberg.net .

Last Updated: July 27, 2007 15:33 EDT