U.S. Stocks Retreat as Banks, Hewlett-Packard Shares Slump

May 23-- U.S. stocks retreated, erasing gains in the final hour of trading for a second day, as the Federal Reserve predicted a deeper recession and concern grew that credit-card issuers will be hurt by new lending restrictions.

Benchmark indexes slid as minutes from the Fed's April meeting showed policy makers believe they may need to boost purchases of bonds to ensure a stronger economic recovery. Capital One Financial Corp. lost 7.2 percent as American Express Co. said U.S. legislation to curb credit-card fees may reduce lending to "consumers who need it." Hewlett-Packard Co. dropped 5.2 percent on a disappointing sales forecast.

The Standard & Poor's 500 Index slipped 0.5 percent to 903.47 at 4:09 p.m. in New York, reversing a rally of as much as 1.8 percent. The Dow Jones Industrial Average lost 52.81 points, or 0.6 percent, to 8,422.04. The MSCI Asia Pacific Index rose 0.9 percent, while Europe's Dow Jones Stoxx 600 Index added 0.5 percent.

"The Fed governors debating whether or not they would need to purchase additional Treasuries would be a sign the economy remains weak," said Peter Jankovskis, who helps manage $1.2 billion at Oakbrook Investments in Lisle, Illinois. "The American Express story is playing into it as well. If credit card companies are going to start cutting back on the availability of credit, it's going to be difficult to sustain the growth of personal consumption."

Rally Reversed

The market's earlier rally came as higher oil and metal prices boosted commodity shares and Bank of America Corp. raised $13.5 billion in a share sale. U.S. stocks declined yesterday after Moody's Investors Service said commercial property values plunged and the government reported that housing starts slid to a record low. The S&P 500 is still up 33 percent since March 9 on speculation the global recession is easing.

Financial stocks reversed earlier gains today after American Express, the third-largest credit-card network, said growth won't return to levels from before the downturn in the economy. Kenneth Chenault, the company's chief executive officer, said that while U.S. legislation to curb credit-card fees may reduce lending to "consumers who need it," the measure will hurt competitors more than his company.

Capital One, the Virginia-based credit-card lender, slid 7.2 percent to $23.11. American Express lost 3.3 percent to $23.98.

President Barack Obama plans to sign legislation to curb credit-card fees and marketing practices that legislators have called deceptive, White House spokesman Robert Gibbs said. Card companies said the new law may reduce profit, increase costs for customers and reduce perks.

Regions Slumps

Regions Financial Corp. fell 6.7 percent to $4.89. The largest Alabama bank said it began selling $1 billion of common shares and $250 million of new mandatory convertible preferred shares after the government said it needs $2.5 billion to weather a worsening recession.

Bank of America, the biggest U.S. lender by assets, raised money in a stock offering after regulators determined it needed more cash to weather an extended recession. Bank of America issued 1.25 billion shares at an average price of $10.77 each, according to a statement yesterday. The shares climbed 2.1 percent to $11.49.

Financial companies in the S&P 500 fell 2.4 percent for the steepest decline among 10 industries. Still, the group has almost doubled from a 17-year low on March 6 after the largest banks from Citigroup Inc. to Bank of America said they were profitable at the start of the year.

Treasury, Fed

Treasury Secretary Timothy Geithner said he expects a pair of programs to help banks remove their distressed assets will start by early July, policy makers' next step in ending the worst credit crisis in decades. He spoke in prepared testimony to the Senate Banking Committee in Washington.

Fed policy makers in April projected a fourth-quarter U.S. contraction of 1.3 percent to 2 percent from a year earlier, with a jobless rate of 9.2 percent to 9.6 percent during the period. Both are more pessimistic that projections made in January. For 2010, Fed officials in April foresaw economic growth of 2 percent to 3 percent, compared with 2.5 percent to 3.3 percent in January.

Hewlett-Packard dropped 5.2 percent to $34.67 for the steepest loss in the Dow. The computer maker said revenue will decrease 4 percent to 5 percent this year, the lower end of a forecast range given in February. Chief Executive Officer Mark Hurd said he's basing the forecast on the expectation that the economy won't improve in coming months.

Earnings Watch

Net income declined 36 percent at the 452 companies in the S&P 500 that have reported results since April 7, Bloomberg data show. Analysts estimate earnings will fall 35 percent and 23 percent in the second and third quarters before growing 67 percent in the final three months, according to estimates compiled by Bloomberg.

Commodity producers led the market's early gain as crude climbed as much as 4.4 percent to $62.26 a barrel, the highest since November, and copper, gold and silver advanced.

National-Oilwell Varco Inc. posted the top gain among S&P 500 energy companies, rallying 4.2 percent to $36.53. U.S. Steel Corp., the largest U.S.-based steelmaker, rose 4.3 percent to $31.24.

Procter & Gamble Co. rose 2 percent to $54.02. The world's largest household-products maker was raised to "overweight" at Barclays Plc, which cited "the potential for sales and earnings reacceleration."

'False Signals'

The VIX, the benchmark index for U.S. stock options, added 0.8 percent to 29.03 today. The gauge slipped below 30 for the first time in eight months yesterday, as traders paid less for insurance against declines in the S&P 500. The last close below yesterday's VIX level was 25.66 on Sept. 12, the session before Lehman Brothers Holdings Inc. filed for bankruptcy.

"The VIX has not had a very good record recently," Laszlo Birinyi, who spent a decade on the trading desk at Salomon Brothers Inc. and is known for pioneering money-flow analysis, said in an interview with Bloomberg Television. "It gives off too many false signals."

Steve Leuthold, who turned bullish this year after his Grizzly Short Fund returned 74 percent in 2008 amid the S&P 500's steepest annual retreat since 1937, said he may invest almost 70 percent of some funds in stocks as the economy stabilizes.

He's betting that large investment firms, which have cut equity holdings, will put more of their assets in U.S. stocks in an effort to avoid underperforming the S&P 500 as the market continues to rally. Leuthold, who spoke in a Bloomberg Television interview, turned bullish in March, five days before the index sank to the lowest level in 12 years. It has surged 30 percent since then, approaching his prediction of 1,100.