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U.S. Stocks Fall on JPMorgan Miss; Treasuries, Oil Rise

By Callie Bost and Jeremy Herron
April 11, 2014 4:31 PM EDT 35 Comments
A financial trader monitors data on computer screens at the Frankfurt Stock Exchange in Frankfurt.
Photographer: Ralph Orlowski/Bloomberg
A financial trader monitors data on computer screens at the Frankfurt Stock Exchange in Frankfurt.

U.S. stocks fell, giving the Standard & Poor’s 500 Index its worst week since 2012, amid disappointing results at JPMorgan Chase & Co. and signs hedge funds were dumping the bull market’s top performers. Treasuries rose, while oil hit a five-week high.

The S&P 500 sank 0.9 percent at 4 p.m. in New York. The Nasdaq Composite Index fell 1.3 percent to close below 4,000 for the first time in two months. The 10-year Treasury yield lost three basis points to 2.62 percent while 30-year yields hit a nine-month low. The dollar snapped five days of losses as investor risk appetite shrank amid a drop in global equities.

The S&P 500 sank 2.6 percent this week on concern that valuations aren’t justified as earnings start. JPMorgan, the first major bank to report, fell the most since 2012, dropping 3.7 percent after profit sank on lower revenue from fixed-income trading and mortgages. Consumer confidence rose in April to the highest level since July. China’s producer price index declined 2.3 percent in March, adding to signs of weak demand after data yesterday showed shrinking trade.

“You need to shake out some of the speculative money and throw water on the irrational exuberance,” Randy Frederick, managing director of trading and derivatives at Charles Schwab Corp. which manages $2.2 trillion in client assets, said in a phone interview. “It’s a good reminder that markets don’t go straight up. While the long-term is positive we need to have these steps back along the way. We need this kind of pullback.”

Equities Pullback

The S&P 500 is down 4 percent from a record close on April 2 and trades below its average price over the past 100 days. The Nasdaq, which has lost 8.2 percent from a March high, plunged 3.1 percent yesterday, the most since November 2011. The Nasdaq Biotechnology Index sank 2.6 percent today, bringing its loss from a February high to more than 20 percent, meeting the common definition of a bear market.

The percentage of hedge-fund bets that stocks will rise has decreased to 46 percent, compared with 2014’s high of 58 percent, according to an April 9 research note from Credit Suisse Group AG. Net exposure in the U.S. declined to the lowest level since August 2012, the report said.

“So far, exposure reductions have been measured and at least for the time being, there has been no mass rush for the exits,” Credit Suisse’s Jon Kinderlerer wrote. “Unsurprisingly, we have seen exposure being trimmed the most in information technology where the popular longs have underperformed significantly over the last few weeks.”

Hedge-Fund Holdings

Companies with high levels of hedge fund ownership have fallen about twice as much as the overall market. S&P 500 stocks that are most popular among the speculators have fallen 7.5 percent since April 2.

Hedge funds make up at least 30 percent of the shareholders in Allegion Plc, Dollar General Corp. and Constellation Brands Inc., the most among companies in the equities benchmark. About 37 percent of Allegion shares are owned by hedge funds, top among S&P 500 companies. The maker of security systems is almost 9 percent lower since April 2. H&R Block Inc., the tax software provider, is down 11 percent and is about 27 percent owned by hedge funds.

Pressure may be mounting on professional speculators with losses in individual stocks spurring more pain than they do for ordinary investors. The average hedge fund has 63 percent of its assets invested in the 10 largest holdings, twice as much as mutual funds, according to a Goldman Sachs Group Inc. note from Feb. 20. About 28 percent of their holdings changed in the fourth quarter, an all-time low, the note said.

Earnings Season

Investors have been anticipating corporate earnings reports to gauge how much weather effected results. Profit for members of the S&P 500 probably fell 0.9 percent in the first quarter, analysts now forecast, after anticipating a 6.6 percent rise in January. Sales increased 2.6 percent, according to projections.

Analysts have reduced earnings estimates more than they usually do over the last three months, according to Goldman Sachs Group Inc. strategists led by David Kostin. Average profit forecasts for S&P 500 companies fell about 4 percent in the first quarter, a percentage point more than normal, they wrote.

The selloff that began last week was sparked by growing concern that valuations may be too high as earnings season begins. The Nasdaq Composite trades at 35 times reported earnings of the companies in the index. That’s double the ratio for the S&P 500, which trades at about 17 times earnings.

Lackluster Earnings

Wells Fargo & Co. added 0.8 percent after the most profitable bank in 2013 said earnings rose 14 percent as fewer customers missed loan payments. Bed Bath & Beyond Inc. tumbled the most in three months yesterday after profit fell short of estimates.

“The market’s looking for a pretty lackluster earnings season and anything better than that will be viewed positively,” said Julian Chillingworth, who oversees about 22 billion pounds ($36.8 billion) at Rathbone Brothers Plc in London.

About 54 companies in the S&P 500 are scheduled to report results next week, including Coca-Cola Co., Goldman Sachs Group Inc., Google Inc. and General Electric Co.

The Thomson Reuters/University of Michigan preliminary April index of sentiment rose more than forecast, boosted by further improvement in the labor market that will provide some traction for the economy after a weather-related slowdown.

Volatility Gauge

The Chicago Board Options Exchange Volatility Index, the gauge of S&P 500 options prices known as the VIX, rose 8.3 percent after jumping 15 percent yesterday, the most since Feb. 3. The CBOE NDX Volatility Index of Nasdaq 100 contracts climbed 10 percent to the highest since December 2012, adding to a 16 percent surge yesterday.

The MSCI Emerging Markets Index declined 0.7 percent, halting five days of gains and trimming this week’s advance to 1.2 percent, its fourth consecutive weekly gain. The Hang Seng China Enterprises Index of mainland companies listed in Hong Kong slid 1.9 percent and the Shanghai Composite Index slid 0.2 percent.

The dollar was little changed at $1.38831 per euro, bringing this week’s decline to 1.3 percent. The Bloomberg Dollar Spot Index, which tracks the currency against 10 major counterparts, rose for the first time in six days, adding 0.1 percent. That trimmed the decline since April 4 to 1.1 percent.

Dollar Buying

“It’s dollar-buying and yen-buying in a sign of market jitters,” Brad Bechtel, managing director at Faros Trading LLC in Stamford, Connecticut, said in a phone interview. “More of the developed-market equity space is getting taken to the woodshed and sparked dollar- and yen-buying.”

Nickel rose for the 10th day, adding as much as 2.4 percent to $17,489 a metric ton, the highest since Feb. 20. Indonesia, the largest producer of the metal from mines, banned exports of ore nickel in January to encourage refining in the country.

Minutes of the Federal Reserve’s March 18-19 meeting released this week damped speculation U.S. policy makers are moving toward raising interest rates.

A 0.5 percent rise in producer prices in March exceeded forecasts while also signaling the central bank still has room to keep its benchmark-interest-rate target at almost zero without spurring above-target inflation.

Treasuries headed for a weekly gain, with 10-year yields dropping the most in a month. Thirty-year yields sank to 3.48 percent, the lowest since July.

West Texas Intermediate crude climbed 0.6 percent to $104.47 a barrel in New York, as U.S. consumer confidence rose in April and gasoline demand strengthened. Brent’s premium to WTI shrank to the narrowest since September.

To contact the reporters on this story: Callie Bost in New York at cbost2@bloomberg.net; Jeremy Herron in New York at jherron8@bloomberg.net

To contact the editors responsible for this story: Lynn Thomasson at lthomasson@bloomberg.net Jeremy Herron, Stephen Kirkland

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