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BLBG: U.S. Stocks Drop on Economic Data, Rising Bank Rates; GE Falls
By Lynn Thomasson

Oct. 2 (Bloomberg) -- U.S. stocks dropped for a second day as a jump in borrowing costs and reports showing a worsening economy spurred concern that the government's $700 billion bank bailout plan won't be enough to stimulate growth.

Caterpillar Inc., Alcoa Inc. and Deere & Co. tumbled more than 5 percent as three-month bank lending rates climbed to the highest since January, while the government said factory orders slumped more than forecast. General Electric Co. sank as much as 10 percent after selling $12.2 billion in shares at a discount. Monsanto Co. slid as much as 21 percent, its steepest intraday loss since going public in 2000, after Merrill Lynch & Co. said slumping demand will hurt farm companies.

``If banks aren't willing to lend money to a bank, are they going to be willing to lend to an average person? No, they're not,'' said Frank Ingarra, money manager at Hennessy Advisors Inc., which oversees $1.1 billion in Novato, California. ``We could be at the start of a pretty bad recession.''

The Standard & Poor's 500 Index slid 27.03, or 2.3 percent, to 1,134.03 at 12:04 p.m. in New York. The Dow Jones Industrial Average lost 210.03, or 1.9 percent, to 10,621.04. The Nasdaq Composite Index slipped 2.5 percent to 2,018.14. Eight stocks retreated for each that rose on the New York Stock Exchange.

`Flat on the Floor'

The S&P 500 has slumped 23 percent this year as the subprime mortgage crisis brought down banks including Lehman Brothers Holdings Inc. and made borrowing more expensive for companies and consumers. The benchmark index for U.S. stocks still trades for 21.8 times profit from the past 12 months. Only three of 48 developed and emerging nations tracked by MSCI Inc. -- Switzerland, Jordan and Morocco -- have a higher price-to- earnings ratio, according to data compiled by Bloomberg.

Billionaire Warren Buffett, the world's preeminent stock picker, described the world's largest economy yesterday as being ``flat on the floor'' after a cardiac arrest.

Caterpillar, the biggest maker of earthmoving equipment, lost $3.06 to $53.89. Deere, the largest producer of tractors, declined 12 percent to $40.89.

The cost of borrowing in dollars in London for three months rose for a fourth day, signaling that banks haven't started to lend after the U.S. Senate approved a plan to rescue beleaguered financial institutions. The London interbank offered rate, or Libor, that banks charge each other for such loans climbed 6 basis points to 4.21 percent today, the highest since Jan. 11.

`Liquidity Crisis'

The market for commercial paper plummeted the most on record as banks and insurers were unable to find buyers for the short-term debt. Commercial paper outstanding tumbled $94.9 billion, or 5.6 percent, to a seasonally adjusted three-year low of $1.6 trillion for the week ended Oct. 1, the Federal Reserve said today in Washington. Financial paper accounted for most of the decline.

``There's a liquidity crisis going on that's putting investors on edge,'' said Alan Gayle, the Richmond, Virginia- based senior investment strategist at Ridgeworth Investments, which oversees about $70 billion. ``Liquidity is like oxygen. Lack of it can cause serious damage in a very short time.''

The S&P 500 Industrials Index lost 5.4 percent after the 4 percent decrease in bookings at factories topped the average forecast of economists in a Bloomberg survey. A separate government report showed first-time claims for unemployment benefits climbed to a seven-year high.

GE's Offering

GE, which got a $3 billion investment from Buffett's Berkshire Hathaway Inc. yesterday, dropped $2.30 to $22.20 and lost as much as $2.45. The Fairfield, Connecticut-based company sold stock today at a 9.2 percent discount to yesterday's closing price as it seeks to fund its operations. GE's shares are trading at a valuation of 10 times trailing earnings, the lowest since Bloomberg began tracking the data in 1990.

Producers of agricultural products slumped after Merrill downgraded the fertilizer industry to ``underperform'' and Mosaic Co., the world's largest producer of phosphates, reported weaker-than-estimated earnings.

Merrill analysts cut their rating on Monsanto, the world's biggest seed producer, to ``neutral'' from ``buy,'' sending its shares down as much as $20.74 to $77.10. The stock pared its loss to 12 percent after the company said in an e-mailed statement that profit in its 2008 fiscal year was about $3.64 a share, up from a previous estimate of as much as $3.60.

Mosaic Tumbles

Mosaic tumbled 32 percent to $46.14, its steepest retreat since its shares began trading in 2004. CF Industries Holdings Inc., a maker of nitrogen and phosphate fertilizers, slumped 26 percent to $65.91. Terra Industries Inc. fell 22 percent to $21.97.

Alcoa, the largest U.S. aluminum producer, slumped 7.9 percent to $18.60 after Goldman Sachs Group Inc. downgraded the shares to ``neutral'' from ``buy.''

Monsanto and CF led a gauge of raw-material producers to a 5.1 percent tumble, the steepest retreat among 10 industry groups in the S&P 500, all of which fell.

The Dow Jones Transportation Average lost 7.3 percent in the biggest intraday drop in seven years. Con-way Inc., the second-largest U.S. trucking company, cut its annual profit outlook because of less freight demand and led the decline in the index of railroads, airlines and shippers. Con-way shares fell 17 percent to $35.72.

EBay Inc., the largest Internet auction company, lost 8 percent to $19.17. The shares were downgraded to ``equal- weight'' from ``overweight'' at Morgan Stanley, which said ``trends deteriorated more than expected'' in the third quarter.

Bailout Plan

The financial-market rescue legislation, which the House likely will act on tomorrow, passed the Senate on a 74-25 vote. It would give the Treasury Department authority to buy assets including mortgage-backed securities that are burdening financial institutions. The Senate added tax provisions to woo Republican votes in the House, where an earlier version of the bailout plan failed on Sept. 29 and sent the Dow average to a 777-point plunge.

``If I were a congressman I would hold my nose and vote yes, but people shouldn't be under any illusions about what's going to happen,'' Charles Bobrinskoy, who helps manage about $13 billion as vice chairman of Ariel Investments in Chicago, told Bloomberg Television.

The U.S. Securities and Exchange said it will extend a prohibition on short-sales of financial stocks, keeping restrictions on bets against companies' shares in place while Congress works on the bailout plan.

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