Aug. 10 (Bloomberg) -- U.S. stocks fell, led by commodity producers and retailers, after four straight weeks of gains left the Standard & Poor’s 500 Index trading at the highest level relative to earnings since 2004. European equities also dropped, while Treasuries rose for the first time in six days. 3M Co., Cisco Systems Inc. and Alcoa Inc. led the Dow Jones Industrial Average lower. Eli Lilly & Co. and Best Buy Co. lost at least 3 percent after Goldman Sachs Group Inc. cut its rating on the shares. State Street Corp. slid 2.4 percent after saying it may exhaust $625 million in reserves set aside in 2007 to settle claims stemming from losses linked to subprime mortgages. The S&P 500 slipped from a 10-month high, retreating 0.3 percent to 1,007.1 as of 4:05 p.m. in New York. The Dow average fell 32.12 points, or 0.3 percent, to 9,337.95. Four stocks fell for every three that rose on the New York Stock Exchange. “It’s reasonable to think that the market would take a breather after recent weeks,” said Lawrence Creatura, a Rochester, New York-based money manager at Federated Investors Inc., which oversees $407 billion. “It’s not natural for one- way markets to last long. A little pause would be normal and perhaps healthy.” The S&P 500 climbed 2.3 percent last week, rising above 1,000 for the first time since November, as better-than- estimated employment, manufacturing and home-sales data boosted confidence that the recession is ending. The index jumped 49 percent from a 12-year low on March 9 through last week, the steepest surge since the Great Depression, as three quarters of its companies that posted second-quarter earnings beat consensus analyst estimates. Valuation Watch The S&P 500 was valued at 18.6 times the profits of its companies as of the start of trading, the highest ratio since December 2004. The index must rally 55 percent to surpass its all-time high of 1,565.15 set on Oct. 9, 2007. Before November, it had remained above 1,000 for five years. “There is a gradual period of slow growth beginning in the economy,” said Joseph Keating, who oversees $4 billion as chief investment officer of Raleigh, North Carolina-based RBC Bank, a unit of Royal Bank of Canada. “But investors are a little concerned that we’re getting ahead of ourselves.” Options traders have increased bets that the S&P 500’s rally won’t survive September, historically the worst month for U.S. equities. Bearish VIX Bets Traders are betting the VIX, a gauge of expected stock swings, will increase 13 percent in the next five weeks, according to futures prices compiled by Bloomberg as of Aug. 7. That’s the biggest spread since August 2008, right before the S&P 500 suffered the steepest two-month plunge in 21 years. The indexes have moved in the opposite direction 81 percent of the time over the past five years, Bloomberg data show. 3M, the maker of 55,000 products, lost 2.7 percent to $70.91. Cisco, the largest maker of networking equipment, fell 2.5 percent to $21.64. Alcoa, the biggest U.S. aluminum company, retreated 2.4 percent to $12.69. Eli Lilly dropped 3 percent to $33.83. Goldman Sachs downgraded the drugmaker to “sell” from “neutral” and added the stock to its “conviction sell” list, saying its “patent cliff” is the largest in the industry. Best Buy slipped 5.3 percent to $37.66. Goldman Sachs reduced its recommendation on shares of the world’s largest electronics retailer to “neutral” from “buy,” citing competition, “erosion” in entertainment software and “aggressive” spending to fuel growth. State Street Slumps State Street, the manager of $1.6 trillion as of June 30, fell 2.4 percent to $52.57. Its reserve “may not be sufficient to address ongoing litigation” if the U.S. Securities and Exchange Commission sues State Street and seeks monetary penalties, the Boston-based custody bank said in a regulatory filing today. Producers of raw materials slumped 1.6 percent collectively, the steepest drop among 10 industries in the S&P 500. The group has rallied 23 percent in the past month. Dow Chemical Co., the largest U.S. chemical company, slid 3.1 percent to $22.33. Nucor Corp., the nation’s second biggest steel producer, lost 4.1 percent to $47.10. “The groups that are the hardest hit today are those that have had the biggest moves during the recent rally,” said Marshall Front, who oversees about $500 million in Chicago as chairman of Front Barnett Associates LLC. “People have become wary, but whatever declines we see will be very contained and modest.” Gold producers retreated with the price of bullion, which fell 1.3 percent to $946.90 an ounce in New York, the steepest decline since July 28. Freeport-McMoRan Copper & Gold Inc., which operates the world’s biggest gold mine, fell 1.6 percent to $62.38. ‘Focus on the Consumer’ A group of retailers, homebuilders, restaurant chains and other so-called consumer discretionary companies, which has gained 64 percent since March 9, fell 1.2 percent today for the second-biggest decline among the 10 main S&P 500 industries. Ford Motor Co. retreated 3.6 percent to $7.72, and Lowe’s Cos., the second-biggest U.S. home improvement retailer, fell 2.2 percent to $23.33. “There’s a lot of focus on the consumer,” said Wayne Reisner, president of Carret Asset Management in New York, which oversees $1.4 billion. “It’s still a dicey call because consumers are not completely flush at the moment and incomes are not rising at a dramatic rate.” Consumer bankruptcies have risen more than a third this year and may hit 1.4 million by Dec. 31 as jobs are lost and loans are harder to get, according to the trade group American Bankruptcy Institute. More than 126,000 consumers filed for bankruptcy in the U.S. last month, 34 percent more than in July 2008, the ABI said. Timber Prices Timber producers retreated after Barron’s reported prices may decline as much as 50 percent in coming years, according to the weekly newspaper’s Aug. 10 issue. Plum Creek Timber Co. tumbled 4.4 percent to $33.56. Allied Capital Corp. fell 11 percent to $3.44, the lowest closing price since July 14. The buyout and lending firm reported second-quarter profit excluding some items of 10 cents a share, missing the average analyst estimate by 49 percent. The company also said it has defaulted on some debt covenants and it will not pay its dividend for an “extended period of time.” Research In Motion Ltd., the maker of the BlackBerry smartphone, fell after it was downgraded to “neutral” from “buy” by analyst Maynard Um at UBS, who said the shares are expensive. The shares retreated 4.9 percent to $73.28. Freddie Rallies Freddie Mac, which has been relying on $200 billion in financing pledged by the Treasury to stay afloat since regulators seized the company in September, jumped 128 percent to $1.69 after reporting its first profit in two years. The mortgage-finance company reported second-quarter net income of $768 million and didn’t ask the U.S. Treasury for more aid. McDonald’s Corp., the world’s largest restaurant company, added 1.9 percent to $56.27 for the best gain in the Dow after reporting global sales rose 4.3 percent in July, more than some analysts estimated, on demand for hamburgers and McCafe coffees. Priceline.com Inc., an internet travel agency, advanced 14 percent to $150.24 after it forecast third-quarter profit above analysts’ estimates. The company said third-quarter earnings will be $2.70 to $2.85 a share, on an adjusted basis. The average of 13 analysts’ estimates is $2.57 a share. Barnes & Noble Inc. rallied 4 percent to $25.01, the highest closing price since June 4. The largest U.S. bookstore chain agreed to buy Barnes & Noble College Booksellers Inc. for $596 million from Leonard Riggio, the retailer’s chairman and founder. Mobius Predicts Declines Mark Mobius said global stocks will drop as much as 30 percent after advancing from multiyear lows and as companies increase share sales. The slide “can happen anytime, probably this year,” Mobius, the executive chairman of Templeton Asset Management Ltd., said in an interview in Kuala Lumpur today. He said he was referring to shares “globally.” Warren Buffett’s Berkshire Hathaway Inc. is buying corporate debt and securities issued by governments outside the U.S. as the billionaire investor’s spending on stocks falls to the lowest in more than five years, according to an Aug. 7 regulatory filing. Buffett is increasing fixed-income investments after results slumped at operating units including NetJets Inc., the money-losing plane-rental business, and companies in Berkshire’s equity portfolio including Wells Fargo & Co. slashed dividends. To contact the reporter on this story: Kayla Carrick in New York at kcarrick1@bloomberg.net

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