U.S. Stocks Bear Market Deepens With Sixth Straight Weekly Drop

By Elizabeth Stanton

July 12 (Bloomberg) -- U.S. stocks fell for a sixth week, sending the Standard & Poor's 500 Index into a bear market, as fuel prices climbed to records and investors speculated Fannie Mae and Freddie Mac won't survive the mortgage crisis.

Fannie Mae and Freddie Mac, the government-chartered companies that are the largest source of financing for U.S. home mortgages, tumbled to 17-year lows. They led the S&P 500 to a 20 percent drop from its Oct. 9 record, marking a bear market for the benchmark equity gauge. The Dow Jones Industrial Average entered a bear market a week earlier.

The S&P 500 fell 1.9 percent to 1,239.49, the lowest since July 2006, completing the longest streak of weekly declines since July 2004. The Dow average fell 1.7 percent to 11,100.54 for its fourth weekly drop. The MSCI World Index of 23 developed markets fell 1.1 percent to 1345.47, entering a bear market.

``I would love to be bullish, but I think that's a little premature,'' said Julie Van Cleave, who manages $4 billion as head of large U.S. growth stocks at Deutsche Asset Management in Milwaukee. ``We're going from a period of credit expansion to a period of credit contraction.''

The declines left the S&P 500 and the Dow down 16 percent for the year as earnings season enters its second week. Eight of the 30 companies in the Dow average and 62 S&P 500 companies are scheduled to report results next week, beginning with Intel Corp. and Johnson & Johnson on Tuesday.

Declining Profits

S&P 500 profits are forecast to decrease 13.6 percent from a year ago, led by a 69 percent drop in financial earnings, according to analysts surveyed by Bloomberg. A fourth consecutive quarterly decline would be the longest streak since the last recession in 2001.

The cost of using options as insurance against losses in the S&P 500 rose to a three-month high. The VIX, as the Chicago Board Options Exchange Volatility Index is known, climbed 11 percent to 27.49.

Financial shares led the S&P 500 lower, falling 6.3 percent to a nine-year low.

Fannie Mae fell 45 percent to $10.25 and Freddie Mac tumbled 27 percent to $7.75. Fannie Mae pared a decline of as much as 49 percent and Freddie Mac rebounded from a 51 percent drop after U.S. Treasury Secretary Henry Paulson signaled that a government takeover of the companies won't be necessary.

Lehman Brothers Holdings Inc., once the biggest underwriter of U.S. mortgage bonds, fell 37 percent to the lowest level since 1999.

Crude oil, little changed on the week, touched a record $147.27 a barrel yesterday. Gasoline futures reached an all-time high of $3.631 a gallon, and pump prices rose to $4.108 a gallon on July 7.

Discretionary Spending

Companies that depend on discretionary spending by consumers fell 4.1 percent to a five-year low, led by Office Depot Inc. The world's second-largest retailer of office supplies tumbled 37 percent to $6.84, its biggest drop in 11 years, after saying its second-quarter report on July 30 will show earnings deteriorated more than it previously forecast.

J.C. Penney Co. fell 16 percent to $30.75, the lowest since February 2004. The department-store chain said June sales at stores open at least a year dropped 2.4 percent.

Retail sales probably rose less in June than in July, a July 15 Commerce Department report is projected to show. Sales probably increased 0.4 percent, according to the median forecast of economists polled by Bloomberg. Excluding automobiles, they probably rose 1 percent.

`Cannot Continue'

Continental Airlines Inc. led airlines to the lowest in the 15-year history of the Amex Airline Index. James May, president of the Air Transport Association, the industry's trade group, said airlines ``cannot continue to survive at $140 oil.'' Continental, the fourth-largest U.S. carrier, fell 20 percent to $7.28, a five-year low.

Intercontinental Exchange Inc., owner of Europe's largest energy market, declined 17 percent to $88.40. Senator Joseph Lieberman yesterday proposed legislation to curb speculation in food and energy futures.

Congress ``is convinced that ICE is helping speculators manipulate the price of oil,'' said Michael Allocco, chief investment officer at Brazos Capital Management LP in Dallas, who sold his remaining shares of the company on July 10. Investors are concerned the exchange ``may bear the brunt of any ill-conceived legislation.''

Mergers or merger prospects boosted shares of target companies including Rohm & Haas Co., Hercules Inc. and Yahoo! Inc., limiting the market's decline.

Takeovers

Rohm & Haas rose 66 percent to $74.70 after the maker of paint ingredients and adhesives agreed to an $18.8 billion takeover by Dow Chemical Co. Hercules Inc. gained 30 percent to $20.95. The maker of papermaking chemicals will be acquired by Ashland Inc. for $3.3 billion.

Yahoo climbed 10 percent to $23.57. Microsoft Corp. said it may revive takeover talks for the second most popular U.S. Web search engine if investors back Carl Icahn's attempt to replace Yahoo's board and chief executive.

The Russell 2000 Index, a benchmark for companies with a median market value 23 times smaller than the S&P 500, rose 1.4 percent to 674.95.

Yields on Treasury securities declined as traders pared bets the Federal Reserve will raise interest rates before October. The 10-year note's yield declined to 3.89 percent from 3.98 percent.

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

The Material provided above is for information only and does not constitute an offer or solicitation to purchase or sell the shares mentioned