Wall Street drops on China, IBM; EBay jumps late

By Ellis Mnyandu

NEW YORK (Reuters) - The Dow suffered its worst drop of 2010 on Wednesday as U.S. stocks succumbed to fears that China's curbs on bank lending might jeopardize the global economic recovery, while IBM's outlook sparked caution about the technology sector.

Chinese authorities have ordered some major banks to curb their lending over the rest of this month after an early burst of credit, banking industry sources said.

Signals that China, the world's third-largest economy, may restrain its economic expansion hurt shares of natural resource companies, including Alcoa Inc (NYSE:AA - News), off 2.5 percent at $15.23, and big manufacturers, with Caterpillar Inc (NYSE:CAT - News), down 1.9 percent at $59.76.

The S&P materials sector index (^GSPM - News) fell 1.5 percent.

"This is really a direct result of concerns around the tightening of credit in China," said Peter Kenny, managing director at Knight Equity Markets in Jersey City, New Jersey.

Although IBM posted a stronger-than-expected quarterly profit late on Tuesday, investors had misgivings about its guarded 2010 outlook, sending the stock down nearly 3 percent.

The Dow Jones industrial average (DJI:^DJI - News) tumbled 122.28 points, or 1.14 percent, to end at 10,603.15. The Standard & Poor's 500 Index (^SPX - News) fell 12.19 points, or 1.06 percent, to finish at 1,138.04. The Nasdaq Composite Index (Nasdaq:^IXIC - News) dropped 29.15 points, or 1.26 percent, to close at 2,291.25.

The Dow suffered its largest daily percentage decline since late December, while the Nasdaq took its largest daily percentage loss in a week. It was the worst drop for the S&P 500 since Friday.

On Tuesday, the Dow and the S&P 500 ended at 15-month highs on bets the Democrats would lose a Senate seat. The S&P 500 is up 68.2 percent since bottoming out in early March 2009.

Earlier on Wednesday, the major indexes had dropped about 2 percent or more, but recovered some ground in the last hour of the session, thanks to some buying of bank stocks.

LATE JUMP FOR eBAY, STARBUCKS

The latest earnings season picked up pace after the bell, when e-commerce company eBay Inc (NasdaqGS:EBAY - News) and coffee chain Starbucks Corp (NasdaqGS:SBUX - News) posted stronger-than-expected quarterly earnings.

Shares of eBay rose 4.6 percent to $23.25 in extended trade, after ending the regular session at $22.23 on Nasdaq. Starbucks shares jumped 3 percent to $24 in after-hours trading, after ending on Nasdaq at $23.29.

Still, in the regular session, shares of International Business Machines Corp (NYSE:IBM - News), a major technology services company, ended down 2.9 percent to $130.25 as investors perceived that its 2010 outlook is pointing to a potential slowdown in profit growth.

IBM was the Dow's biggest drag, followed by energy company Chevron Corp (NYSE:CVX - News), down 1.9 percent at $78.15. Diversified manufacturer United Technologies Corp (NYSE:UTX - News), another Dow component, was down 1.2 percent at $71.43.

The S&P energy index (SNP:^GSPE - News) dropped 1.7 percent. A run-up in the U.S. dollar weighed on dollar-denominated commodity prices. U.S. February crude fell 1.8 percent, or $1.40, to settle at $77.62 a barrel.

The U.S. dollar index (^DXY - News) was up 1.1 percent against major currencies, helped by worries about Greece's ability to refinance its deficit.

On the Nasdaq, Apple Inc (NasdaqGS:AAPL - News) was the heaviest weight, down 1.5 percent at $211.725. Other tech bellwethers off 1 percent or more were Google (NasdaqGS:GOOG - News), Microsoft (NasdaqGS:MSFT - News) and Cisco (NasdaqGS:CSCO - News).

Investors count on emerging economies like China to underpin a nascent global recovery, so any restrictive policy there could be a setback for those that bet on a sustainable rebound and recently propelled the S&P 500 to 15-month highs.

Healthcare stocks, which led an advance on Tuesday on signs that a healthcare overhaul could face new hurdles in Congress, declined on Wednesday as some investors booked profits. The Morgan Stanley healthcare payor index (AMEX:^HMO - News) lost 2.1 percent and an index of pharmaceutical companies (AMEX:^DRG - News) dipped 0.3 percent.

On a busy earnings day for U.S. banks, Wells Fargo & Co (NYSE:WFC - News) and U.S. Bancorp (NYSE:USB - News) reported better-than-forecast quarterly earnings, helped by recent acquisitions, while a larger rival, Bank of America, got a boost from Merrill Lynch.

Bank of America (NYSE:BAC - News), the top U.S. bank by assets, reported a wider-than-expected loss, but said its credit problems were beginning to stabilize.

U.S. Bancorp shares rose 2.1 percent to $25.01 and Bank of America gained 1 percent to $16.49. The KBW bank index (Philadelphia:^BKX - News) rose 1.4 percent.

On the New York Stock Exchange, about 1.05 billion shares changed hands, below last year's estimated daily average of 2.18 billion. On the Nasdaq, about 2.39 billion shares traded, above last year's daily average of 1.63 billion.

Declining stocks outnumbered advancing on both the NYSE and Nasdaq by a ratio of about 3 to 1.

Nikkei likely to drift lower, eyes on China

TOKYO, Jan 21 (Reuters) - Japan's Nikkei average is likely to drift lower on Thursday, with investors keeping an eye on other markets' reaction to news that Chinese authorities ordered some major banks to curb their lending over the rest of the month. U.S. stocks slid on Wednesday and the Dow suffered its worst drop of 2010 due to fears that these curbs might jeopardize the global economic recover.

Analysts said investors could adopt a wait-and-see attitude ahead of the opening of Chinese share markets and economic data due out later in the morning, including GDP data, but that the bank lending issue itself would have only limited impact.

"A similar thing happened before, with markets getting nervous over the potential economic impact, but I think it's highly unlikely that something like this will really cool China's economy so much that it will have a bad impact on global growth, "said Nagayuki Yamagishi, a strategist at Mitsubishi UFJ Securities. "Still, investors may stay on the sidelines a bit until Shanghai opens."

Resource shares are likely to slip a bit after recent gains and on concern about China, while exporters could slip a bit after the yen gained some ground against the euro after worries about Greece's ability to finance its deficit pushed the euro to a ive-month low against the dollar. [USD/]

But the dollar was holding steady against the yen at 91.27 yen JPY=. Investors fret about a stronger yen because it eats into exporter profits when repatriated.

The benchmark Nikkei .N225 is likely to move between 10,600 and 10,800, market players said. Support will be solid around 10,600, just a little above the Nikkei's 25-day moving average, Yamagishi said. In a sign that stocks may open slightly ower, Nikkei futures traded in Chicago 2NKc1 closed at 10,690, down 0.2 percent from
the Osaka close JNIc1.

----------------------MARKET SNAPSHOT @ 2309 GMT ------------

INSTRUMENT LAST PCT CHG NET CHG

S&P 500 .SPX 1138.04 -1.06% -12.190

USD/JPY JPY= 91.24 0.02% 0.020

10-YR US TSY YLD US10YT=RR 3.6532 -- 0.000

SPOT GOLD XAU= 1112.15 0.09% 1.050

US CRUDE CLc1 77.65 -0.12% -0.090

DOW JONES .DJI 10603.15 -1.14% -122.28

-------------------------------------------------------------

> Wall St drops on China; IBM; eBay jumps late [.N]

> Euro hits 5-mo low vs dlr; China hurts risk appetite [USD/]

> Bonds do better on battered stocks [US/]

> Gold hits two-week low on dollar rally, China [GOL/]

> Oil falls below $78 on equities, China loans [O/R]

Billionaire's Big Warning On Econ

Contrarian Investor Sees Economic Crash in China
by David Barboza
Friday, January 8, 2010
provided by


James S. Chanos built one of the largest fortunes on Wall Street by foreseeing the collapse of Enron and other highflying companies whose stories were too good to be true.

Now Mr. Chanos, a wealthy hedge fund investor, is working to bust the myth of the biggest conglomerate of all: China Inc.

As most of the world bets on China to help lift the global economy out of recession, Mr. Chanos is warning that China's hyperstimulated economy is headed for a crash, rather than the sustained boom that most economists predict. Its surging real estate sector, buoyed by a flood of speculative capital, looks like "Dubai times 1,000 -- or worse," he frets. He even suspects that Beijing is cooking its books, faking, among other things, its eye-popping growth rates of more than 8 percent. More from NYTimes.com:

• More on the Magic of RICO

• To Slow Growth, China Raises an Interest Rate

• Retailers See Holiday Sales Rebound From 2008

"Bubbles are best identified by credit excesses, not valuation excesses," he said in a recent appearance on CNBC. "And there's no bigger credit excess than in China." He is planning a speech later this month at the University of Oxford to drive home his point.

As America's pre-eminent short-seller -- he bets big money that companies' strategies will fail -- Mr. Chanos's narrative runs counter to the prevailing wisdom on China. Most economists and governments expect Chinese growth momentum to continue this year, buoyed by what remains of a $586 billion government stimulus program that began last year, meant to lift exports and consumption among Chinese consumers.

Still, betting against China will not be easy. Because foreigners are restricted from investing in stocks listed inside China, Mr. Chanos has said he is searching for other ways to make his bets, including focusing on construction- and infrastructure-related companies that sell cement, coal, steel and iron ore.

Mr. Chanos, 51, whose hedge fund, Kynikos Associates, based in New York, has $6 billion under management, is hardly the only skeptic on China. But he is certainly the most prominent and vocal.

For all his record of prescience -- in addition to predicting Enron's demise, he also spotted the looming problems of Tyco International, the Boston Market restaurant chain and, more recently, home builders and some of the world's biggest banks -- his detractors say that he knows little or nothing about China or its economy and that his bearish calls should be ignored.

"I find it interesting that people who couldn't spell China 10 years ago are now experts on China," said Jim Rogers, who co-founded the Quantum Fund with George Soros and now lives in Singapore. "China is not in a bubble."

Colleagues acknowledge that Mr. Chanos began studying China's economy in earnest only last summer and sent out e-mail messages seeking expert opinion.

But he is tagging along with the bears, who see mounting evidence that China's stimulus package and aggressive bank lending are creating artificial demand, raising the risk of a wave of nonperforming loans.

"In China, he seems to see the excesses, to the third and fourth power, that he's been tilting against all these decades," said Jim Grant, a longtime friend and the editor of Grant's Interest Rate Observer, who is also bearish on China. "He homes in on the excesses of the markets and profits from them. That's been his stock and trade."

Mr. Chanos declined to be interviewed, citing his continuing research on China. But he has already been spreading the view that the China miracle is blinding investors to the risk that the country is producing far too much.

"The Chinese," he warned in an interview in November with Politico.com, "are in danger of producing huge quantities of goods and products that they will be unable to sell."

In December, he appeared on CNBC to discuss how he had already begun taking short positions, hoping to profit from a China collapse.

In recent months, a growing number of analysts, and some Chinese officials, have also warned that asset bubbles might emerge in China.

The nation's huge stimulus program and record bank lending, estimated to have doubled last year from 2008, pumped billions of dollars into the economy, reigniting growth.

But many analysts now say that money, along with huge foreign inflows of "speculative capital," has been funneled into the stock and real estate markets.

A result, they say, has been soaring prices and a resumption of the building boom that was under way in early 2008 -- one that Mr. Chanos and others have called wasteful and overdone.

"It's going to be a bust," said Gordon G. Chang, whose book, "The Coming Collapse of China" (Random House), warned in 2001 of such a crash.

Friends and colleagues say Mr. Chanos is comfortable betting against the crowd -- even if that crowd includes the likes of Warren E. Buffett and Wilbur L. Ross Jr., two other towering figures of the investment world.

A contrarian by nature, Mr. Chanos researches companies, pores over public filings to sift out clues to fraud and deceptive accounting, and then decides whether a stock is overvalued and ready for a fall. He has a staff of 26 in the firm's offices in New York and London, searching for other China-related information.

"His record is impressive," said Byron R. Wien, vice chairman of Blackstone Advisory Services. "He's no fly-by-night charlatan. And I'm bullish on China."

Mr. Chanos grew up in Milwaukee, one of three sons born to the owners of a chain of dry cleaners. At Yale, he was a pre-med student before switching to economics because of what he described as a passionate interest in the way markets operate.

His guiding philosophy was discovered in a book called "The Contrarian Investor," according to an account of his life in "The Smartest Guys in the Room," a book that chronicled Enron's rise and downfall.

After college, he went to Wall Street, where he worked at a series of brokerage houses before starting his own firm in 1985, out of what he later said was frustration with the way Wall Street brokers promoted stocks.

At Kynikos Associates, he created a firm focused on betting on falling stock prices. His theories are summed up in testimony he gave to the House Committee on Energy and Commerce in 2002, after the Enron debacle. His firm, he said, looks for companies that appear to have overstated earnings, like Enron; were victims of a flawed business plan, like many Internet firms; or have been engaged in "outright fraud."

That short-sellers are held in low regard by some on Wall Street, as well as Main Street, has long troubled him.

Short-sellers were blamed for intensifying market sell-offs in the fall 2008, before the practice was temporarily banned. Regulators are now trying to decide whether to restrict the practice.

Mr. Chanos often responds to critics of short-selling by pointing to the critical role they played in identifying problems at Enron, Boston Market and other "financial disasters" over the years.

"They are often the ones wearing the white hats when it comes to looking for and identifying the bad guys," he has said