Dow Average Has Worst Weekly Drop Since August; Financials Fall

The Dow Jones Industrial Average had its biggest weekly slide since August as rising consumer prices reduced the odds of an interest rate cut and concern mounted that mortgage defaults may reduce profit growth at banks.

Countrywide Financial Corp., Lehman Brothers Holdings Inc. and Bear Stearns Cos. pushed a gauge of financial shares in the Standard & Poor's 500 Index to its biggest decline in 12 weeks. Hewlett-Packard Co. helped drag down the Dow average from a record after the world's largest personal-computer maker said price cuts hurt profit margins.

The government's latest inflation report reinforced comments last week by Federal Reserve Chairman Ben S. Bernanke that his primary concern is fighting inflation. A rise in loan delinquencies among riskier ``subprime'' borrowers may reduce earnings at financial companies, which account for 22 percent of the S&P 500 index's value.

``The subprime issue has been something a lot of people have been concerned about, but investors for a while were just ignoring it,'' said Edward Hemmelgarn, who oversees about $400 million as president of Shaker Investments Inc. in Cleveland. ``It tends to create a cascading effect. The more people start to default, the more investors become risk-averse.''

In a holiday-shortened week, the Dow industrials dropped 0.9 percent to 12,647.48, the biggest weekly decline since the period ended Aug. 11. The index reached a record 12,786.64 on Feb. 20.

The Standard & Poor's 500 Index slipped 0.3 percent to 1451.19.

The Nasdaq Composite Index gained 0.8 percent to 2515.10 after mergers lifted shares XM Satellite Radio Holdings Inc. and Whole Foods Market Inc.

Iran Concerns

Investors were also chilled by reports that Iran defied a United Nations Security Council demand to halt its atomic work. Stocks extended their declines on Feb. 22 as traders speculated the U.S. might raise its terror alert. The U.S. Department of Homeland Security said there has been no change in the threat level.

Consumer prices rose 0.2 percent in January, the Labor Department said on Feb. 21. Prices excluding food and energy climbed 0.3 percent, the most since June.

Economists had forecast a 0.1 percent rise in the consumer price index and a 0.2 percent gain in the so-called core CPI, a survey by Bloomberg News showed. After the report, interest-rate futures for August showed traders pared their bets the Fed will cut borrowing costs.

The price report ``told people they probably shouldn't be jumping too much to the conclusion that the Fed might be cutting rates,'' said Hemmelgarn.

Minutes of the Federal Open Market Committee's January meeting released this week showed policy makers discussed dropping their inclination to raise interest rates, and then rejected the idea because inflation remained the ``predominant concern.''

Financial Shares Drop

An S&P 500 gauge of financial companies dropped 1.2 percent for its biggest weekly decline since the period ended Dec. 1.

Countrywide Financial, the biggest U.S. mortgage lender, dropped for a third straight week. The shares fell 5.7 percent to $39.33, the fourth-biggest decline in the S&P 500.

Subprime-mortgage defaults have been rising nationwide as weaker home prices and higher interest rates make it harder for borrowers to repay. HSBC Holdings Plc and New Century Financial Corp., the largest U.S. lenders to the riskiest borrowers, this month said profit may suffer as more loans go sour.

Lehman, the fourth-biggest U.S. securities firm by market value, fell 4.3 percent to $79.04. Bear Stearns, the sixth- biggest, dropped 3.5 percent to $161.29. Both banks make loans and repackage them into securities. New Century's shares tumbled 20 percent to $15.52.

GM Falls

General Motors Corp. fell 5.7 percent to $34.26 for the biggest drop in the Dow industrials. GMAC LLC, the lender partly owned by GM, had ratings on some senior notes lowered by Merrill Lynch analyst James Leda, who cited ``the potential for increased volatility'' of its mortgages to higher-risk borrowers.

GM, the world's biggest automaker, still owns a 49 percent stake in GMAC after selling a majority interest to a group led by Cerberus Capital Management LP.

NovaStar Financial Inc., a subprime mortgage lender, on Feb. 20 posted a surprise fourth-quarter loss and said it won't make much money on its mortgage investments for the next five years. The shares plunged 51 percent to $8.48, a level not seen since February 2002.

``Everybody is going to try to cash out before this mortgage fallout, and financials are going to be the first to get hit,'' said Billy Groeneveld, equity markets head trader at vFinance Inc. in Boca Raton, Florida.

Homebuilders

Homebuilders also declined, pushing an S&P gauge of the companies down 4.5 percent.

Toll Brothers Inc. dropped 4.5 percent to $31.60. The largest U.S. luxury-home builder lowered its fiscal 2007 earnings forecast and said it may deliver fewer homes than it previously predicted.

D.R. Horton Inc., the second-largest U.S. homebuilder, dropped 4.2 percent to $27.02.

KB Home fell 4.8 percent to $51.60. The fifth-largest U.S. homebuilder by sales is under criminal investigation by federal prosecutors over stock-options backdating that led to the resignation of its chief executive officer, people familiar with the matter said.

KB Home Associate General Counsel David Simons declined to comment. Assistant U.S. Attorney Alex Bustamante in Los Angeles also declined to comment.

M&A

XM increased 8 percent to $15.10. Sirius Satellite Radio Inc. agreed to buy its pay-radio rival for $4.57 billion to stem billions of dollars in losses. Mel Karmazin, chief executive officer of Sirius, will be CEO of the combined company. The deal will face antitrust scrutiny and must also be approved by the U.S. Federal Communications Commission. Sirius shares gained 1.1 percent to $3.74.

Whole Foods, the biggest U.S. natural-foods grocer, surged on its plan to buy rival Wild Oats Markets Inc. for $565 million. Buying Wild Oats will help counter slowing growth at the company, which faced competition from Safeway Inc., Trader Joe's and other grocery stores selling organic and prepared food. Whole Foods gained 8.7 percent to $50.47, its best weekly advance since August. Wild Oats jumped 18 percent to $18.43.

Analog Devices Inc. had the biggest gain in the S&P 500. The maker of chips used in mobile phones and cars said January orders were ``encouraging'' after slowing demand had led to a buildup of inventory. The strengthening in orders countered predictions by some analysts that the company would forecast further declines in sales. The shares jumped 12 percent to $36.95, the biggest weekly gain since August 2003.

Chipmakers Climb

Other chipmakers also jumped after Analog Devices' forecast. Linear Technology Corp. had the second-best advance in the S&P 500, climbing 10 percent to $34.46. Texas Instruments Inc., the world's biggest maker of processors for mobile phones, gained 4.7 percent to $32.21.

National Semiconductor Corp., whose chips extend battery life in mobile phones, climbed 9.3 percent to $25.50 after Morgan Stanley upgraded the stock on optimism earnings will show ``solid signs of improvement.''

A gauge of semiconductor companies in the S&P 500 rose 1.7 percent for the best gain among 24 industry groups.

Hewlett-Packard had its biggest weekly decline since July after holiday price cuts on PCs weighed on profit margins and the company's growth forecast disappointed some investors. The shares dropped 4.6 percent to $40.82.

source:www.bloomberg.com