Dow up 135; crude falls under $128

By Charley Blaine and Elizabeth Strott

Crude oil in New York fell to its lowest level in nearly seven weeks, giving some hope that oil prices have peaked for the year and consumers may get some relief at the gas pump.

Crude's drop and a big rally in financial stocks helped the stock market push higher in the late afternoon. And some market watchers believe that because the stock market has been so heavily influenced by oil prices, a drop on Wednesday could push stocks higher.

At the close, the Dow Jones industrials were up 135 points, or 1.2%, to 11,603. The Standard & Poor's 500 Index was up 17 points, or 1.4%, to 1,277.

The Nasdaq Composite Index was up 24 points, or 1.1%, to 2,304, despite a 24% decline to $13.62 in shares of chip maker SanDisk (SNDK, news, msgs) and a 2.6% drop in shares of Apple (AAPL, news, msgs) to $162.02. Apple had opened down 12% after issuing cautious guidance for its fourth-quarter earnings.

The rally in financials came as banking companies Wachovia (WB, news, msgs) reported an $8.9 billion second-quarter loss and Washington Mutual (WM, news, msgs) a $3.3 billion loss. They were the second and fourth largest quarterly losses for U.S. retail banks. (Citigroup's fourth-quarter 2007 loss of $9.8 billion is the largest ever; its $5.1 billion first quarter loss is the third largest.)

But the market treated the stocks differently. Wachovia soared 27% as investors liked its recovery plan. Washington Mutual reported after the close, and shares fell nearly 5% after hours because Moody's Investors Service said it may downgrade the company to junk status.

Meanwhile, shares of Yahoo (YHOO, news, msgs) were higher after CEO Jerry Yang said the company would consider "value-creating transactions." Second-quarter earnings missed Wall Street estimates.

Why oil pulled back

Crude for August delivery closed at $127.95, down 2.4% from Monday. It had been as low as $125.63 after it became clear Tropical Storm Dolly would not threaten oil and gas platforms in the western Gulf of Mexico. "It looks like Dolly will be a big rainmaker and nothing else," Kyle Cooper, an analyst at IAF Advisors in Houston, told Bloomberg News.

• Get free, real-time stock quotes on MSN Money

The August contract expires after today's trading. Crude for September delivery was at $128.42, down 2.6% from Monday.

Crude's decline was also helped by the dollar, which rose as Treasury Secretary Hank Paulson predicted lawmakers will pass a bill this week to shore up confidence in Fannie Mae (FNM, news, msgs) and Freddie Mac (FRE, news, msgs). And Charles Plosser, president of the Federal Reserve Bank of Philadelphia, said the Fed should raise interest rates "sooner rather than later'' to lower inflation.

The Amex Oil Index ($XOI.X) was down 1.6% to 1,340; the Amex Natural Gas Index ($XNG.X) was down 4% to 623. Chevron (CVX, news, msgs) was down 1.5% to $85.63; Devon Energy (DVN, news, msgs) fell 4.3% to $98.60.

Crude and gasoline are now down more than 13% from their July 11 intraday highs of $147.27 a a barrel and $3.631 a gallon, respectively. But consumers have felt little of the price breaks. The national average retail price of gasoline was $4.055 today, AAA's daily price survey reported, down from 4.069 a gallon on Monday and 5 cents from its all-time high of $4.114 on Thursday.

Experts believe crude oil needs to drop below $120 a barrel for gasoline to fall under $4.

Energy prices -- New York close

	Tues.	Mon.	Chg.	Month chg.	YTD chg.
Crude oil (NYMEX) (per barrel)	$127.95	$131.04	-$3.09	-8.61%	33.31%
Heating oil (per gallon)	$3.6782	$3.7479	-$0.0697	-5.76%	38.83%
Natural gas (per million BTU)	$10.0670	$10.5100	-$0.4430	-24.61%	34.53%
Unleaded gasoline (per gallon)	$3.1470	$3.2171	-$0.0701	-10.12%	26.34%

WaMu's rating may be cut to junk

Washington Mutual shares were down 3.8% to $5.60 late today after Moody's Investors Service said it may drop the company to junk status.

WaMu shares had jumped as much as 6% right after the company insisted it had the capital to withstand a $3.3 billion loss, or $3.34 a share, and a slumping housing market.

But the Moody's news stopped the rally in a hurry.

WaMu's loss was down from a profit of $830 million, or 92 cents, a year ago and triple the Wall Street estimate of a loss of $1.09 a share.

In regular trading, the stock had risen 6.2% to $5.82, thanks to the Wachovia rally.

Washington Mutual set aside $5.9 billion for loan losses. It said it expects its losses in residential loans to be "toward the upper end" of a $12 billion to $19 billion range it had projected in April.

Some analysts had thought the losses might be larger, Reuters said.

The company also said it has sufficient capital to manage through the current market and has no plans to raise new capital.

WaMu also said that CEO Kerry Killinger, Chief Operating Officer Steve Rotella and Chief Financial Officer Tom Casey wouldn't receive annual incentive payments this year.

Yahoo earnings lower than Street estimates

After the close, Yahoo shares were up 2.6% to $21.96 (from a regular close of $21.40) despite lower-than-expected earnings.

Yahoo said it earned $131 million, or 9 cents a share in the quarter, down 19% from $161 million, or 11 cents a share, a year ago. Analysts had projected earnings of 10 cents to 11 cents for the quarter.

Revenue, excluding traffic acquisition costs (what it pays to partners) was $1.35 billion, up 8% from a year ago but $27 million less than what Wall Street was expecting.

The earnings report came as the company agreed to put activist investor Carl Icahn and two more Icahn nominees on its board. Icahn had been campaigning to remove the Yahoo board and sell the company to Microsoft (MSFT, news, msgs). Microsoft is the publisher of MSN Money.

The report, said analyst Ross Sandler of RBC Capital Markets, was "better than everybody's worst fears."

"It was by means a great quarter," Martin Pyykkonen of Global Crown Capital told Reuters. "There's no reason for Yahoo to justify a price above what Microsoft was willing to pay before. "

But Chief Financial Officer Blake Jorgensen said the company won't change its outlook for the year. He did concede that the economy is hitting Yahoo's display advertising business -- brand-building ads preferred by corporate marketers -- but he said that performance-based display and search-related advertising are holding up better.

Wachovia sparks a rally -- honest

Financial stocks were buoyed when Robert Steel, Wachovia's new CEO, pledged to cut $2 billion in expenses by the end of 2009 and sell pieces of the bank. He also said the bank won't need to sell new common stock to boost capital. Wachovia shares fell nearly 12% right after reporting the second-biggest ever for a retail bank and much larger than expected. Then, the stock just plain took off, finishing up 27.4% to $16.79.

The company's loss of $8.86 billion, or $4.20 per share, was far worse than the profit of $2.3 billion, or $1.23 per share, a year ago. Excluding a one-time charge, Wachovia lost $2.67 billion, or $1.27 per share, missing analysts' estimates of a 78-cent per-share loss. (Citigroup's fourth-quarter loss $9.8 billion is still the biggest ever.)

The bank cut its quarterly dividend by 87%, to 5 cents a share, and said revenue fell nearly 14% to $7.5 billion in the quarter -- also missing Wall Street's estimate of $8.37 billion.

The stock's huge rally pushed shares of rival Bank of America (BAC, news, msgs) up 13.3% to $32.35 -- tops among the 30 Dow stocks. But American Express (AXP, news, msgs), whose second-quarter earnings Monday night badly missed Wall Street estimates, was down 7.1% to $37.99, taking about 24 points off the Dow.

The Select Sector SPDR-Financial (XLF, news, msgs) exchange-traded fund was up 5.6% to $21.91 this afternoon and is up nearly 28% in just five trading sessions.

At the same time, the Dow Jones Transportation Average ($DJT) was up 200 points, or 4.1% to 5,153, led by a 43.4% gain to $13.26 in Continental Airlines (CAL, news, msgs) and a 37.4% gain to $9.25 for American Airlines parent AMR Corp. (AMR, news, msgs)

Another winner from oil's drop: retailers. Wal-Mart Stores (WMT, news, msgs) was up 3.1% to $59.06, contributing 14 points to the Dow's gain this afternoon. The Standard & Poor's Retail Index ($RLX.X) was up 2.4% to 353.

Caterpillar tops estimates

Heavy-equipment maker Caterpillar (CAT, news, msgs) was helping the Dow with some good news this morning.

Caterpillar, a Dow stock, earned $1.11 billion, or $1.74 per share, in its second quarter, a 35% increase from the $823 million, or $1.24 per share, last year. Analysts were looking for $1.54 per share. Revenue rose 20% to $13.6 billion.

"While North America remains depressed and we've seen softening in Western Europe and Japan, Caterpillar continues to grow in emerging markets and in global industries like energy and mining . . . and we continue to see good growth in our integrated service businesses," CEO Jim Owens said in a statement.

Cat's shares rose 2.4% to $74.98, adding 14 points to the Dow.

Bailout price tag: $25 billion

It's not going to be cheap to rescue mortgage giants Fannie Mae and Freddie Mac.

The Congressional Budget Office estimated that the government's plan to save Fannie and Freddie will cost $25 billion over fiscal years 2009 and 2010.

The CBO also said there is a 50% chance the Treasury wouldn't need to step in to buy equity stakes in the companies to save them.

Separately, Treasury Secretary Paulson said today it is critical to support Fannie and Freddie. "Because of their size and scope, Fannie and Freddie's stability is critical to financial market stability," Paulson said in a speech in New York. "Their continued activity is central to the speed with which we emerge from this housing correction and remove the underlying uncertainty in our financial markets and financial institutions."

Freddie Mac, which had been down as much as 20% during the day, closed up 10.9% to $9.70. Fannie Mae, down as much as 17.8%, saw its loss trimmed to $13.41.

Apple's sour forecast

A 31% jump in profit wasn't good enough for Apple investors. The company late Monday said it earned $1.07 billion, or $1.19 per share, in its fiscal third quarter -- up from the $818 million, or 92 cents per share, it earned in the same period last year, and topping Wall Street's estimate of $1.08 per share.

But shares slumped 6.6% to $155.27 this afternoon, after the company said earnings for the current quarter would be $1 per share, well below the consensus estimate of $1.25 per share.

Still, at least one analyst wasn't worried about the outlook. Giving a weak forecast "is something they do every quarter," analyst Andy Hargreaves of Pacific Crest Securities told Bloomberg News. "It shouldn't surprise people, but it does."

• Top Stocks blog: 3 issues hanging over Apple

Apple said shipments of iPods rose 12%, to 11 million, in the most recent quarter, while Mac shipments jumped 41%, to 2.5 million. Sales of the iPhone more than doubled to 717,000 from the same quarter last year, when it first introduced the device.

Revenue for the fiscal third quarter rose 38% to $7.46 billion, shy of analysts' estimates of $8.3 billion.

"We had the highest June quarter store revenue and earnings in our history, and the U.S. played a big part in that," Chief Financial Officer Peter Oppenheimer said in a statement.

Some observers have voiced concerns about chief executive Steve Jobs' gaunt appearance, widely noted at the debut of the iPhone 3G on July 11, but Oppenheimer told analysts that Jobs' health was a "private matter" and that Jobs has no plans to leave the company.

Profit slumps at American Express

American Express shares were slumping after the credit-card company reported a 38% drop in second-quarter income.

AmEx said it earned $653 million, or 56 cents per share, down from $1.06 billion, or 88 cents per share, a year ago. Results were well below analysts' expectations of 83 cents per share.

"Consumer spending slowed during the latter part of the quarter and credit indicators deteriorated beyond our expectations," said CEO Kenneth Chenault in a press release. "We do not expect to meet or exceed our long-term financial targets until we see improvements in the economy."

American Express had previously forecast earnings growth between 4% and 6% for the full year.

One analyst blamed Amex's problems on the consumer slowdown. "With bad debt occurring even in the superprime card segment, AmEx's earnings clearly show that the credit crisis is going upscale, which does not bode well for the U.S. economy," Red Gillen, a senior analyst at consulting firm Celent, told MarketWatch.

Weakness in chips hits Texas Instruments, SanDisk

Texas Instruments (TXN, news, msgs) was also hurt by the economic slowdown in the second quarter.

The chipmaker reported earnings of 44 cents per share after the closing bell Monday -- a decline from the 43- to 47-cent range the company had forecast in June and below analysts' consensus estimate of 45 cents per share.

"We think customers are being very prudent right now. Nobody really wants to be caught by surprise" and holding too much inventory, TI Chief Financial Officer Kevin March told Reuters in an interview. "I'm talking about inventory broadly."

Texas Instruments shares fell 14.6% to $24.35.

Fellow chipmaker SanDisk was also hit by "rapid deterioration in consumer confidence," the company said late Monday, sending shares plunging 24% to $13.62.

The maker of flash-memory chips reported a loss of $68 million, or 30 cents per share, down from a profit of $28 million, or 12 cents per share, last year. Excluding items, SanDisk said it lost 10 cents per share, much worse than the expected profit of 13 cents per share.

"We are throwing in the towel on SanDisk shares for 2008, expecting industry fundamentals to get decidedly worse by late 2008 before potential improvement in mid-2009," wrote Citigroup analyst Craig Ellis in a note to clients this morning.

Ellis cut SanDisk to "sell" from "hold."

Because of SanDisk's and Texas Instruments' problems, the Philadelphia Semiconductor Index ($SOX.X) was down 4.5% to 345, with 16 of the 19 stocks in the index finishing lower.

Short hits from the markets -- 4 p.m.

	Tues.	Mon.	Chg.	Month chg.	YTD chg.
Treasurys
13-week Treasury bill	1.500%	1.380%	0.120	-12.02%	-52.23%
5-year Treasury note yield	3.449%	3.401%	0.048	3.23%	-0.17%
10-year Treasury note yield	4.097%	4.067%	0.030	2.97%	1.54%
30-year Treasury bond yield	4.663%	4.648%	0.015	2.91%	4.58%
Currencies
U.S. Dollar Index	72.675	72.220	0.455	-0.17%	-5.24%
British pound in dollars	$1.9916	$2.0044	-0.0128	-0.08%	0.12%
Dollar in British pounds	£0.5021	£0.4989	0.0032	0.08%	-0.12%
Euro in dollars	$1.5805	$1.5934	-0.0128	0.35%	8.14%
Dollar in euros	€ 0.6327	€ 0.6276	0.0051	-0.35%	-7.53%
Dollar in yen	107.27	106.41	0.86	1.02%	-4.09%
Canadian dollar in U.S. dollars	$0.993	$1.001	-$0.0081	1.30%	-0.03%
U.S. dollar in Canadian dollars	$1.008	$0.999	$0.0090	-1.26%	0.04%
Commodities
Gold	$947.70	$963.70	-$16.00	2.09%	13.09%
Copper	$3.6875	$3.6810	$0.01	-5.02%	21.26%
Silver	$18.0600	$18.4250	-$0.37	3.14%	21.05%
Corn	$5.7350	$5.8925	-$0.16	-20.87%	25.91%
Crude oil (NYMEX) (per barrel)	$127.95	$131.04	-$3.09	-8.61%	33.31%