March 2 (Bloomberg) -- Stocks fell worldwide, sending the Dow Jones Industrial Average below 7,000 for the first time since 1997, and Treasuries rose after Warren Buffett said the economy is in “shambles” and American International Group Inc. posted the largest corporate loss in U.S. history.
Berkshire Hathaway Inc. retreated 7.8 percent after the steepest annual drop in book value in Buffett’s career at the company. Bank of America Corp. and Citigroup Inc. tumbled more than 14 percent as AIG posted a $61.7 billion quarterly loss and HSBC Holdings Plc said it will raise $17.7 billion, triggering the biggest decline in U.K. bank stocks since at least 1985. Exxon Mobil Corp., the world’s biggest company by market value, fell as oil slid 10 percent and General Electric Co. sank below $8 for the first time since 1994.
“You have almost no reason to own a bank stock,” Keith Wirtz, who helps oversee $20 billion as chief investment officer at Fifth Third Bancorp in Cincinnati, told Bloomberg Television. “There is too much turmoil.”
The Dow average decreased 243.8 points, or 3.5 percent, to 6,819.13 at 1:43 p.m. in New York. The Standard & Poor’s 500 Index dropped 4 percent to 705.69. Europe’s Dow Jones Stoxx 600 Index tumbled 4 percent, its steepest loss of the year. Treasuries rose as investors sought a haven, driving the yield on 10-year notes down to 2.9 percent from 3.01 percent.
The MSCI World Index of stocks in 23 developed nations fell 4.6 percent to 716.13, the lowest intraday level since the Iraq War began in March 2003. The MSCI Emerging Markets Index slid 4.8 percent, while Hungary’s forint dropped after European Union banks spurned aid pleas for eastern Europe.
Worst Start to Year
The deepening global recession, a third government rescue for Citigroup Inc. and dividend cuts at companies from General Electric Co. to JPMorgan Chase & Co. have dragged the MSCI World Index to three consecutive weeks of declines. The benchmark has fallen 22 percent this year, adding to last year’s 42 percent slump.
Options investors are paying twice this decade’s average to protect against losses in U.S. stocks through 2011, signaling the bear market that already wiped out $10.4 trillion of equity value may last two more years.
“There’s a real panic in the markets, with some people wanting to buy long-term insurance at any price,” said Peter Sorrentino, who helps manage $16 billion, including $130 million in options at Huntington Asset Advisors Inc. in Cincinnati. “People have lost hope.”
Contracts to protect against a drop in the S&P 500 for two years cost $15,160 on the Chicago Board Options Exchange at the end of last week, compared with $6,875 in 2007, according to price-adjusted data compiled by Bloomberg. That shows traders expect the benchmark gauge for U.S. equities to fluctuate twice as much in the next two years as it has since 2000.
‘Freefall’
Berkshire Hathaway Class B shares lost 7.8 percent to $2,365. Berkshire, which owns stakes in companies from Coca-Cola Co. to American Express Co., posted a fifth-straight profit drop, the longest streak of quarterly declines in at least 17 years, on losses from derivative bets tied to stock markets.
Buffett said the economy will be “in shambles” this year, and perhaps longer, before recovering from the reckless lending that caused the worst “freefall” he ever saw in the financial system.
Financial stocks in the MSCI World Index dropped 6.8 percent, leading all 10 industries lower.
HSBC Raises Capital
HSBC tumbled 19 percent to 399 pence, sending a measure of U.K. bank shares down 16 percent, the biggest one-day decline since the index was created in 1985. Europe’s largest bank by market value said it plans to raise 12.5 billion pounds ($17.7 billion) in a rights offer, increasing concern that banks need more capital.
PNC Financial Services Group Inc. dropped 5.3 percent to $25.88. The fifth-largest U.S. bank by deposits slashed its dividend 85 percent, to 10 cents from 66 cents, to save $1 billion amid “extreme market deterioration.”
Aggregate dividends by S&P 500 companies will fall 23 percent this year, the biggest decline since 1938, S&P predicts. More than 288 U.S. companies cut or suspended payouts last quarter, the most since S&P records began 54 years ago.
GE, once the S&P 500’s biggest dividend payer, slid 10 percent to $7.64. The only company left in the 30-stock Dow Jones Industrial Average from its founding in 1896 is adding to investor pessimism as credit analysts threaten to reduce its AAA rating. GE cut its quarterly dividend by 68 percent, to 10 cents from 31 cents, last week. GE Chief Executive Officer Jeffrey Immelt bought 50,000 shares at $8.26 a share today.
AIG’s Loss
AIG advanced 14 percent to 48 cents. The insurer deemed too important to fail will get as much as $30 billion in new government aid in a revised bailout after posting a record $61.7 billion fourth-quarter loss.
Raw-material producers and energy stocks in the MSCI World Index slid more than 5 percent. The Reuters/Jefferies CRB Index of 19 commodities fell 4.8 percent as oil retreated 10 percent to $40.11 a barrel on the New York Mercantile Exchange, the biggest intraday decline since Jan. 20.
Raymond James Financial Inc. cut its forecast for the average price of oil in 2009 by 28 percent to $43 a barrel as the worldwide economic slump cuts consumption.
Exxon, the world’s biggest oil producer, fell 2.7 percent to $66.05. Freeport-McMoRan Copper & Gold Inc., the world’s largest publicly traded copper producer, sank 12 percent to $26.77.
Eastern Europe Concern
The MSCI EM Eastern Europe Index slumped 3.8 percent to 88.48. The forint dropped as much as 2.7 percent against the euro, the most since Dec. 26. European Union leaders rejected requests for a region-wide aid package, bowing to German concerns that it would put too much pressure on budget deficits in western Europe as the economy slumps.
Deere & Co. and Caterpillar Inc. declined more than 8 percent after a government report showed spending on U.S. construction projects fell in January more than twice as much as forecast.
The 3.3 percent decline followed a revised 2.4 percent drop the prior month that was larger than previously reported, the Commerce Department said. Economists had forecast construction spending would decrease 1.5 percent, based on a Bloomberg survey of economists.
The market remained lower even after the Institute for Supply Management’s factory index unexpectedly climbed to 35.8 in February from 35.6 the prior month. A reading of 50 is the dividing line between growth and contraction.
“At the beginning of year, everyone expected recovery in the second half of the year,” said Kevin Shacknofsky who helps manage $1.8 billion at Alpine Mutual Funds in Purchase, New York. “The negative news coming out of the financial sector, the continue weakness in the housing market and disappointment with government policy is pushing the recovery date beyond the second half of year.”
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