Stocks Drop Worldwide

By Cristina Alesci and Lynn Thomasson for 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. reported a $61.7 billion loss.

Berkshire Hathaway Inc. retreated 5 percent after reporting the worst annual drop in book value since Buffett took control in 1965. HSBC Holdings Plc tumbled 17 percent after announcing a rights offering, driving down lenders such as Bank of America Corp. BHP Billiton Ltd., the world’s largest mining company, lost 3.9 percent as copper and nickel fell and oil slid 6.6 percent.

“The bear market has only begun,” Robert Prechter, the founder of Gainesville, Georgia-based Elliott Wave International Inc. who is famous for predicting the 1987 stock market crash, said on Bloomberg Radio. “I don’t see the clear weather yet.”

The Dow average decreased 104.18 points, or 1.5 percent, to 6,958.75 at 10:03 a.m. in New York. The Standard & Poor’s 500 Index dropped 1.6 percent to 723.09. Treasuries rose as investors sought a haven, driving the yield on 10-year notes down to 2.96 percent from 3.01 percent.

The MSCI World Index of stocks in 23 developed nations fell 2.7 percent and dropped as low as 727.59, the lowest intraday level since the Iraq War began in March 2003. The MSCI Emerging Markets Index slid 3.8 percent, while Hungary’s forint dropped after European Union banks spurned aid pleas for eastern Europe.

Worst Start to Year

U.S. stocks have fallen for three straight weeks as the government rescued Citigroup and drugmakers fell on President Barack Obama’s health-care plan. The S&P 500 is off to its worst start to a year with a 20 percent loss.

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 5 percent to $2,367.78 in Germany. Fourth-quarter net income fell 96 percent to $117 million on the falling value of holdings including derivative bets. The 9.6 percent drop in Berkshire’s book value last year compares with the 37 percent retreat in the S&P 500, including reinvested dividends, the best relative performance since 2002.

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.

HSBC tumbled 17 percent to 409.5 pence. 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 Cuts Dividend

PNC Financial Services Group Inc. dropped 3.2 percent to $26.48. 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.”

Raw-material producers in the MSCI World Index lost 2.4 percent, a decline that was second only to financial institutions among 10 industries. The measure of banks, brokerages and insurers slid 4.8 percent.

BHP, the world’s largest mining company, declined 3 percent to 1,073 pence. The Reuters/Jefferies CRB Index of 19 commodities fell 2 percent. Oil fell for a second day, losing 6.6 percent to $41.80 in New York.

AIG advanced 14 percent to 48 cents. The insurer deemed too important to fail will get as much as $30 billion in new government capital in a revised bailout after posting a record fourth-quarter loss. [quiet nationalization occurring - see paragraph 7]

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.

“The situation is very difficult and economic data isn’t stabilizing,” said Guillaume Duchesne, Geneva-based equity strategist at Fortis Private Banking, which oversees about $117 billion. “That justifies the negative spiral in the stock market.”

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