Crude hits new high as traders await Fed

Stocks ended the day basically unchanged from Friday, but crude oil closed at a new high and set the stage for a potentially dramatic day on Tuesday.

At the close, the Dow Jones industrials were down about 39 points to 13,403. The Standard & Poor's 500 Index was off 7.6 points to just under 1,477, and the Nasdaq Composite Index was down about 21 points to 2,582.

Crude oil closed at a record $80.57 a barrel in New York, up 1.9% from Friday and up 8.8% for the month. Natural gas jumped nearly 6% to $6.653 per million British thermal units. Traders are betting on short supplies this fall and winter.

The major indexes didn't do much because investors around the world were marking time for what should be a huge day on Tuesday with three big events.

By far the biggest will be the Federal Reserve's decision on interest rates, due at 2:15 p.m. ET. The Fed is widely expected to cut its key federal funds rate from 5.25% to 5%. The fed funds rate is the rate that banks to charge each other for overnight loans and is a key rate used to price everything from corporate loans to credit card rates.

Also closely examined will be third-quarter earnings from investment bank Lehman Bros. (LEH, news, msgs), which has been a major player in bundling and selling mortgage securities to investors around the world. Since the subprime mortgage crisis began to emerge last winter, the stock has fallen more around 30%. Shares were down 1.5% today to $58.62.

Lehman's earnings will be followed by earnings from Morgan Stanley (MS, news, msgs) on Wednesday and Bear Stearns (BSC, news, msgs) and Goldman Sachs (GS, news, msgs) on Thursday.

Also tomorrow, the Labor Department will issue its Producer Price Index report for August. That will offer investors a glimpse of whether inflation is easing.

If the Fed doesn't cut rates and Lehman's earnings disappoint, the day could be ugly. Complicating matters are the sudden rise in energy prices in the last few weeks and the financial crisis in Britain set off when Northern Rock (GB:NRK, news, msgs), a big British mortgage lender, suddenly had problems financing its operations.

E*Trade, Bank of America warn

A nasty hint of what investors might see from Lehman Bros. came from E*Trade Financial (ETFC, news, msgs) and banking giant Bank of America (BAC, news, msgs) late today.

Joe Price, Bank of America's chief financial officer, told a San Francisco conference today that recent volatility in financial credit markets would have a "meaningful impact" on third-quarter results in its corporate and investment banking units, but it shouldn't effect the bank's overall growth.

Price, however, didn't quantify what he meant by "meaningful impact." The stock, down nearly 1% to $49.51 in regular trading, was off an additional 7 cents to $49.44 in after-hours trading.

Meanwhile, E*Trade, best known as an online brokerage, stunned Wall Street when it announced its profit for 2007 will be a third less than previously expected because of the mortgage crisis.

Down 1.3% to $14.21 in regular trading, the shares fell an additional 8% to $13.05 in after-hours trading.

E*Trade has been a buyer of mortgages from investment houses and others. It is setting aside $245 million to cover related losses over the next four quarters, The Wall Street Journal reported, up from an earlier estimate of $70 million.

• Banks' dark off-balance-sheet world

The $245 million will cover losses on mortgages the company has made and bought from third parties as well as home-equity lines, a trouble spot for E*Trade. At the end of August, the company said, 2% of its $17 billion mortgage portfolio were delinquent loans, and 2.8% of its $12.6 billion home equity portfolio is at increased risk.

The company now expects 2007 earnings to range from $1.05 a share to $1.15. Prior guidance had been for earnings of $1.53 to $1.63.

Other brokerage stocks were little affected by the E*Trade announcement in after-hours trading. But they had been weak most of the day. The Amex Securities Broker/Dealer Index ($XBD.X) fell 1.1% to 224.22. The index is off 16.4% since peaking on June 1.

E*Trade's problem offers a good idea how nervous the credit markets are these days.

Earlier today, mortgage lender PHH Corp. (PHH, news, msgs), which had agreed to be bought by General Electric (GE, news, msgs) and Blackstone (BX, news, msgs), said the $1.8 billion deal may fall apart because lenders are backing away from some leveraged buyouts.

JPMorgan Chase (JPM, news, msgs) and Lehman Bros. told Blackstone they may come up $750 million short in funding its part of the deal, PHH said in a statement. GE, which plans to keep the company's vehicle leasing unit, may pull out if Blackstone can't get financing. PHH's shares fell nearly 15% to $24.24, the most since it went public in January 2005.

Bloomberg News said that PHH is the second company in a week to warn that an LBO may be derailed as banks seek to renege on lending commitments for smaller buyouts while sticking with big deals such as Kohlberg Kravis Roberts' $26 billion takeover of First Data (FDC, news, msgs).

Reddy Ice Holdings (FRZ, news, msgs), a big packager of ice, said Sept. 12 that Morgan Stanley may back out of selling debt for GSO Capital Partners' $1.1 billion purchase of the company. Reddy, which fell 1.5% to $27.08 today, is off 13.5% since peaking in mid-July.

Why crude jumped

One reason for crude's march above $80 today was that traders assume that stronger domestic economic growth boosts demand. As important was a Goldman Sachs report over the weekend that projected that crude may end the year at $85 a barrel and could hit $90 a barrel in 2008. The investment bank blamed tight global supplies. Its last year-end projection was for crude to move to $72.

Goldman said the Organization of Petroleum Exporting Countries' decision last week to boost its production quotas by 500,000 over current levels will prove to be "too little, too late." Goldman expects domestic inventories of oil, heating oil and natural gas to fall to critical levels this winter.

Energy prices have been rising recently because of a number of factors, analyst Peter Beutel of Cameron Hanover said in a note to clients today, including: continuing operating problems for refineries in the two years since Katrina and Rita, the fear of a quickly developing hurricane, a falling U.S. dollar and pure momentum. The last is being fed by heavy speculative buying.

Despite the increases for energy commodities, energy stocks, especially oil service stocks, were mostly lower. One reason: Standard & Poor's Corp. said that turmoil in the credit market may negatively affect ratings down the line.

Oil driller Noble (NE, news, msgs) fell more than 3.7% to $46.51. But Apache (APA, news, msgs) finished up 1.2% to $84.20.

Energy prices -- New York close

	Mon.	Fri.	Chg.	Month chg.	YTD chg.
Crude oil (NYMEX) (per barrel)	$80.57	$79.10	$1.47	8.82%	31.97%
Heating oil (per gallon)	$2.2287	$2.2078	$0.0209	9.13%	39.48%
Natural gas (per million BTU)	$6.6530	$6.2790	$0.3740	21.67%	5.62%
Unleaded gasoline (per gallon)	$2.0442	$2.0364	$0.0078	-0.38%	27.60%

How much will the Fed cut?

The guessing game on what the Fed will do was in full force today. The real question is how big the rate cut might be.

The central bank is widely expected to cut its federal funds rate to 5% from 5.25%, its level for nearly 15 months. It may also cut its discount rate -- what it charges member institutions for short-term loans -- from 5.75% to 5% or lower.

No one in the financial market sees the Fed holding rates at current levels. If rates remain at current levels, the stock market might well see a very ugly sell-off.

• Video: Will the Fed cut rates?

The betting is for a quarter-point cut in each rate.

Fed Chairman Ben Bernanke "is picking his way through an immensely complicated and uncharted economic landscape," BusinessWeek magazine said in its Sept. 24 issue. "Unless the bottom suddenly falls out of the job market or some other economic calamity unfolds, he's likely to show great restraint in the coming months."

A calamity could include an explosion in oil prices thanks to, say, an attack on Iran's nuclear facilities. It could also include a collapse of a financial institution such as Britain's Northern Rock, whose shares have fallen more than 50% in the past two trading sessions.

After the British stock market closed, Chancellor of the Exchequer Alistair Darling said his government will guarantee all deposits held with Northern Rock if necessary.

Small but broad overall losses

While the indexes were modestly lower, the losses were still broad. Decliners were ahead of gainers by 2-to-1 on the New York Stock Exchange and on Nasdaq. Volume was also light: a bit over 1 billion shares on the NYSE and 1.4 billion shares on Nasdaq.

Only six of the 30 Dow stocks were higher on the day, led by General Motors (GM, news, msgs), up nearly 3% to $35.23 on hopes a new contract is about to be successfully negotiated. Second was Hewlett-Packard (HPQ, news, msgs), up 1.6% to $49.14. The laggard was Coca-Cola (KO, news, msgs), down 2% to $55.28.

Software giant Microsoft (MSFT, news, msgs) was off 1.1% to $28.73 after the European Court of First Instance, Europe's second-highest court, upheld today a 2004 antitrust ruling that found the software company had abused its dominance in operating systems.

Software and legal experts told The New York Times that the court’s decision might signal problems for companies such as Apple (AAPL, news, msgs), Intel (INTC, news, msgs) and Qualcomm (QCOM, news, msgs), whose market dominance in online music downloads, computer chips and mobile phone technology is also being scrutinized by the commission.

(Microsoft is the publisher of MSN Money.)

Only 130 S&P 500 stocks were higher, led by Newell Rubbermaid (NWL, news, msgs), up 8.8% to $28.04. The consumer products company raised guidance for both the third quarter and the year. Right behind were Ford Motor (F, news, msgs), up 3.2% to $8.29; GM; and railroad CSX Corp. (CSX, news, msgs), up 2.9% to $39.20. CSX and Ford moved higher thanks to analyst upgrades. Agribusiness giant Monsanto (MON, news, msgs) was up 2.6% to $75.44 after boosting profit guidance.

Greenspan wary about the economy

Alan Greenspan is no longer chief of the Federal Reserve, but he still likes to be heard.

Greenspan told CBS' (CBS, news, msgs) "60 Minutes" that he thinks the economy looks "pretty gloomy" and said "it's not clear yet" whether the recent turmoil will have a lasting negative impact on the economy.

What makes him gloomy is that he sees inflation starting to be a problem, and, he told CNBC's Steve Liesman, that will translate into higher interest rates. The 10-year Treasury note, now at just under 4.5%, could jump to 8%

Greenspan also told "60 Minutes" that Democratic presidential candidate Hillary Clinton is "very smart," but his "tendency would be to vote Republican." Meanwhile, the former Fed boss -- who has been hitting the media trail to promote his new book, "The Age of Turbulence" -- told The Wall Street Journal that he "just may not vote" because he's so dismayed with both political parties.

• Video: Greenspan speaks

And he told CNBC's Maria Bartiromo in an interview that the recent jitters in the markets reminded him of the crash of 1987 but on a lesser scale. "There are very serious questions currently about a lot of the structured products that have gotten so sophisticated and so technical and so driven in price by internal models as distinct from market prices," Greenspan said, adding that "in certain areas, I think we have gone too far."

However, the former Fed chief said, "the market will figure it out."

Greenspan was Fed chief from 1987 through early 2006, when he passed the torch to Bernanke.

GM and UAW resume talking

General Motors shares moved higher after the auto giant and the United Auto Workers began talking again today about a new contract. The existing bargaining agreement expired Friday. The two sides had made some steps Sunday night and have so far averted a labor strike.

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

One of the biggest sticking points has been health-care expenses for retired workers -- GM's medical costs for retirees add up to a whopping $50 billion.

The UAW is hoping to hammer out a deal with GM and then use that agreement as a model as it moves on to Ford and DaimlerChrysler (DAI, news, msgs).

Throughout the U.S. auto industry, UAW contracts cover more than 180,000 autoworkers and nearly 420,000 retired workers.

Leap rejects offer

Apparently, $4.7 billion is not good enough for wireless service provider Leap Wireless International (LEAP, news, msgs).

Leap late Sunday rejected a $4.7 billion unsolicited offer from rival provider MetroPCS Communications (PCS, news, msgs), saying the offer was too low. MetroPCS made its bid earlier this month, in a move to create a nationwide service provider.

"The contacts we have had with a number of Leap's shareholders indicate that they want to see a combination of our two companies happen without unnecessary delay," MetroPCS Chief Executive Officer Roger Linquist said in a news release Sunday. "It appears that Leap's board is ignoring the will of its shareholder base."

Leap CEO S. Douglas Hutchenson wrote in a letter to Linquist that MetroPCS' offer was "completely inadequate."

MetroPCS shares closed up 0.4% to $25.19. Shares of Leap were off slightly to $74.27.

Qatar in deal with Nasdaq?

Nasdaq Stock Market (NDAQ, news, msgs) might have an answer to its London Stock Exchange dilemma.

• Video: Cantor Fitzgerald six years after 9/11

The country of Qatar is interested in buying Nasdaq's 30% stake in the London Stock Exchange, according to The Wall Street Journal, which would allow Nasdaq to focus on its bid for Nordic stock exchange OMX.

Nasdaq is in a bidding war for OMX with Bourse Dubai, and a sale of its LSE stake would provide much-needed funds for a sweetened bid. Nasdaq has had trouble unloading its stake in the London exchange, because it is only a minority interest.

Nasdaq's stake in the LSE is worth approximately $1.72 billion, the paper reported. Nasdaq shares were down 1.4% to $34.41.

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

	Mon.	Fri.	Chg.	Month chg.	YTD chg.
Treasurys
13-week Treasury bill	3.990%	3.880%	0.110	0.00%	-18.32%
5-year Treasury note yield	4.202%	4.177%	0.025	-1.15%	-10.61%
10-year Treasury note yield	4.470%	4.462%	0.008	-1.48%	-5.10%
30-year Treasury bond yield	4.714%	4.724%	-0.010	-2.42%	-2.16%
Currencies
U.S. Dollar Index	79.54	79.46	0.08	-1.59%	-4.76%
British pound in dollars	$1.9964	$2.0076	-0.0112	-1.08%	1.88%
Dollar in British pounds	£0.5009	£0.4981	0.0028	1.09%	-1.84%
Euro in dollars	1.3873	1.3877	-0.0004	1.76%	5.11%
Dollar in euros	€ 0.7208	€ 0.7206	0.0002	-1.73%	-4.86%
Dollar in yen	¥115.15	¥115.25	-0.10	-0.52%	-3.25%
Commodities
Gold	$723.80	$717.80	$6.00	6.14%	13.45%
Copper	$3.4200	$3.3925	$0.027	0.68%	19.12%
Silver	$12.9000	$12.7050	$0.20	5.48%	-1.78%
Crude oil (NYMEX) (per barrel)	$80.57	$79.10	$1.47	8.82%	31.97%

By Charley Blaine and Elizabeth Strott