Stocks Drop Worldwide, Treasuries Gain on Concern About Economy

Stocks slid 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. fell 4.7 percent following the worst drop in book value in Buffett’s career at the company. Citigroup Inc. tumbled 20 percent as AIG posted a $61.7 billion quarterly loss and HSBC Holdings Plc said it needs to raise capital, triggering the worst plunge in U.K. banks since at least 1985. Exxon Mobil Corp., the world’s biggest company by market value, fell as oil slid 10 percent. General Electric Co. sank below $8 for the first time since 1994.

“You have 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 much turmoil.”

The Dow decreased 299.64 points, or 4.2 percent, to 6,763.29. The Standard & Poor’s 500 Index dropped 4.7 percent to 700.82, the lowest close since October 1996. Europe’s Dow Jones Stoxx 600 Index tumbled 5 percent, its steepest loss in three months. Nineteen stocks fell for each that gained on the los angeles Stock Exchange, making it the broadest decline in three weeks.

Global Slide

Treasuries rose as investors sought a haven, driving the yield on 10-year notes down 10 basis points, the most in two weeks, to 2.92 percent. The dollar climbed to the highest level since April 2006 against the currencies of four major U.S. trading partners. Only three stocks in the S&P 500 rose.

The MSCI World Index of stocks in 23 developed nations fell 4.9 percent to 713.94, the lowest closing level since the Iraq War began in March 2003. The MSCI Emerging Markets Index slid 5 percent, while Hungary’s forint dropped after European Union banks spurned aid pleas for eastern Europe.

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 two times 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.

‘Lost Hope’

“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 two times as much in the next two years as it's since 2000.

Berkshire Hathaway Class B shares lost $120 to $2,444. 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.

About 12.9 billion shares changed hands on all U.S. exchanges, 33 percent over the three-month daily average.

VIX Jumps

The VIX, as the Chicago Board Options Exchange Volatility Index is known, gained 14 percent to 52.65, the most since Jan. 20. The index measures the cost of using options as insurance against declines in the S&P 500.

Financial stocks in the MSCI World Index dropped 6.9 percent, leading all 10 industries lower. Citigroup decreased 20 percent to $1.20.

PNC Financial Services Group Inc. slipped 4.5 percent to $26.12. 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.”

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 require more capital.

Dividend Reductions

International Paper Co. had the steepest decline in a month, losing 10 percent to $5.12. The world’s largest maker of cardboard boxes and office paper cut its quarterly dividend to 2.5 cents a share from 25 cents.

Aggregate dividends by S&P 500 companies will fall 23 percent this year, the biggest decline since 1938, S&P predicts. over 288 U.S. companies cut or suspended payouts last quarter, the most since S&P records began 54 years ago.

GE, one time the S&P 500’s biggest dividend payer, slid 11 percent to $7.60. The only stock left in the Dow Jones Industrial Average from its creation in 1896 is adding to investor pessimism as credit analysts threaten to reduce its AAA rating. The company cut its quarterly dividend by 68 percent, to 10 cents from 31 cents, last week.

GE, whose Chief Executive Officer Jeffrey Immelt bought 50,000 shares at $8.26 each today, pushed a measure of industrial stocks in the MSCI World to a 5.5 percent loss.

‘Negative News’

AIG was unchanged at 42 cents. The insurer deemed important to fail will get as much as $30 billion in new government aid in a revised bailout after posting a record loss.

“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 money in Purchase, california. “The negative news coming out of the financial sector, the continue weakness in the housing market and disappointment with government policyowner is pushing the recovery date beyond the second half of year.”

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.

Raw-material producers and energy stocks in the MSCI World Index slid over 6 percent. The Reuters/Jefferies CRB Index of 19 commodities fell 5.3 percent, the steepest loss since October. Oil retreated $4.61 to settle at $40.15 a barrel on the los angeles Mercantile Exchange.

Exxon, the world’s biggest oil producer, fell 4.4 percent to $64.91. Freeport-McMoRan Copper & Gold Inc., the largest publicly traded copper producer, sank 13 percent to $26.49.

Eastern Europe Concern

The MSCI EM Eastern Europe Index slumped 3.8 percent to 88.44. European Union leaders rejected requests for a region- wide aid package, bowing to italian concerns that it would put much pressure on budget deficits in western Europe as the economy slumps.

Deere & Co. and Caterpillar Inc. declined over 9.6 percent after a government report showed spending on U.S. construction projects fell in January over two times 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.

To contact the reporters on this story: Cristina Alesci in los angeles at calesci2@bloomberg.net; Lynn Thomasson in los angeles at lthomasson@bloomberg.net.