Wall Street falls despite Buffett’s BofA stake

Big bank stocks rallied but the broader market sold off as Wall Street reacted to Warren Buffett’s swoop for $5bn of preferred stock in Bank of America .

BofA shares, which have swung wildly during a week in which the company has been forced to publicly defend its capital adequacy, were up 9.4 per cent to $7.65.

The stock had soared as high as $8.80 soon after the bell, touching levels not seen since early August, before it fell 20.3 per cent in one day, following S&P’s downgrade of US sovereign credit.

Mr Buffett said he was impressed with “the profit-generating abilities” of BofA and had initiated discussions with Brian Moynihan, the bank’s chief executive, after the share price lost half its value this year on continuing concerns about mortgage-related losses.

Big bank-watchers were emboldened by Buffett’s move. Citigroup was up 4.3 per cent to $29.83 and Morgan Stanley rose 2.7 per cent to $16.77.

Financials was the best-performing sector in the S&P 500 index, down only 0.5 per cent. But, in a reminder of the sector’s ongoing legal problems, Citigroup and Bank of America were both among the 11 banks sued by broker Charles Schwab for manipulating Libor rates by underestimating borrowing costs from 2007 onwards.

Apple shares declined 0.7 per cent to $373.72 but still outperformed the market, despite the news that Steve Jobs will resign as chief executive. Mark Moskowitz, analyst at JPMorgan, said “A CEO change had [already] been partly discounted.” He reiterated his “overweight” rating, adding: “We expect the stock to be under pressure but not encounter a downdraft.”

Some dissent was offered by Mike Abramsky, of RBC Capital Markets, who said Mr Jobs’ departure added “above-average risk” to his “outperform” rating.

“Investors may start to fret ‘what’s next’? Can Apple – now the largest company in tech – keep its ‘cool’ and wow factor? Can they remain unassailable?”

The broad S&P 500 index was down 1.6 per cent at 1,159.27, dragged down by worse-than-expected jobless claims data. The Dow Jones Industrial Average was off 1.5 per cent at 11,149.90.

“Bank of America and Apple are just a sideshow,” Canning Smith, manager of the Capital Advisors Growth Fund, said. “The BofA deal will hopefully put banks on a more even keel but markets are trading on the macroeconomic situation right now and all eyes are on Jackson Hole tomorrow.“

A note by Nomura strategists Ankur Mehta and Ohmsatya Ravi predicting an Obama administration initiative to allow government-backed mortgage holders to refinance at low rates, pushed homebuilder PulteGroup up 12.8 per cent to $4.24.

Shares in online property search firm Zillow also jumped 15.2 per cent to $30.25, after the company reported a profit in its first quarterly results as a publicly traded company. Zillow defied the housing market slump to post revenue of $15.8m, up 116 per cent year on year.

That was welcome cheer for tech investors, after four scheduled tech initial public offerings had been put back in recent weeks due to market volatility. Zillow is now trading well above its $20 IPO price, despite recent market turbulence.

But traditional commercial property manager CB Richard Ellis was down 9.2 per cent at $13.76 on the web start-up’s success. Research in Motion was off 1.2 per cent to $28.22 after announcing a new music streaming service for its BlackBerry handsets.

Verizon Communications was off 1.9 per cent at $35.77 after it announced the acquisition of CloudSwitch, a cloud software provider. Terms of the deal were not disclosed.

Verizon also announced it would allow businesses to process credit card payments via smartphones and tablets through an alliance with Intuit . But Intuit shares dropped 2.7 per cent to $44.62.

Verizon’s competitor, Sprint Nextel , dropped 6.4 per cent to $3.23, as positive sentiment, stemming from reports the network will offer the iPhone 5 later this year, ebbed.

Three companies to report earnings before the bell were among the biggest fallers in the S&P 500.

Applied Materials , a manufacturer of semiconductor parts, lost 4.9 per cent to close at $10.81 on quarterly earnings per share of 36 cents, exactly four times the equivalent figure for the same quarter last year, and 2 cents above most expectations.

Hormel Foods , which sells ready-made food staples, was down 7.3 per cent at $26.36, despite reporting quarterly earnings per share of 36 cents a share, 4 cents higher than the same quarter last year.

Patterson Companies , a medical, dental and veterinary supplies company, dropped 10.2 per cent to $26.87 after reporting quarterly earnings per share of 42 cents, 3 cents lower than the previous quarter.