Oil tops $102; Dow falls 112

By Charley Blaine and Elizabeth Strott

Hopes that four days of gains in the stock market were a signal of good times ahead were dashed today as crude oil closed over $102 a barrel for the first time and financial stocks slumped on growing economic worries.

The Dow Jones Industrial Average fell 112 points, or 1%, to 12,582. The Standard & Poor's 500 Index was off 12 points, or 1%, to 1,368, and the Nasdaq Composite Index fell 22 points, or 0.9%, to 2,332.

It was the Dow's first one-day loss of 100 points or more in a week and its 13th of the year. The loss for the Dow and the S&P 500 put both indexes back into negative territory for February; both had gone into the black on Tuesday. The Dow, S&P 500 and Nasdaq are all down for the year.

After the close, earnings reports from personal-computer maker Dell Inc. (DELL, news, msgs) and insurance giant American International Group (AIG, news, msgs) disappointed investors. Shares of Dell and AIG shares fell in after-hours trading and could pressure Friday's market.

AIG lost more than $5 billion after writing off a whopping $11 billion from insurance contracts tied to subprime mortgages. The company said more write-downs could come in 2008.

A whole lot of gloom

The market was weighed down by crude oil's jump to $102.59 a barrel, up 3% from Wednesday. Crude was actually pulled higher by a 5.7% gain in the price of natural gas, which closed at $9.443 per million British thermal units, as cold weather spread across the Northeast.

Also pushing crude higher was a decline in the dollar. The U.S. Dollar Index was down 0.6% to 73.795.

While energy stocks moved higher with energy prices, financial, home-building and retailing stocks, which had led the market in the past few days, fell back.

The catalyst for all that gloom, aside from crude oil, was a government report showing the economy barely grew at all in the fourth quarter. The Commerce Department said gross domestic product, its best snapshot of the health of the economy, grew 0.6% in the quarter, unchanged from the government's first estimate.

Plus, Federal Reserve Chairman Ben Bernanke startled the markets today when he predicted the credit crunch may cause a number of bank failures in the next year. But the failures would be limited to small institutions in economies especially vulnerable to the housing slump, he said. Big banks, he told the Senate Banking Committee, had adequate capital to withstand the current slowdown.

Nonetheless, most banks and other financial companies saw their shares slump. Citigroup (C, news, msgs) fell 2.8% to $25.01. JPMorgan Chase (JPM, news, msgs) fell 4.4% to $42.44. Wells Fargo (WFC, news, msgs) fell 3.7% to $30.56.

The Standard & Poor's Banking Index ($BIX.X) was down 3.3% to just under 258. The Amex Securities Broker/Dealer Index ($XBD.X) was off 3.2% to 192.

It was hard to find strength in the market. Only four of the 30 Dow stocks were higher on the day, led by Verizon Communications (VZ, news, msgs) and AT&T (T, news, msgs). Fewer than 100 of the S&P 500's stocks had gains, along with just 25 stocks in the Nasdaq-100 Index ($NDX.X).

Energy shares were among the best performers in the S&P 500. Oil and natural-gas producer EOG Resources (EOG, news, msgs) was the top stock in the index, with an 18% gain to $124.73.

The Nasdaq-100 finished down 0.3% to 1,794 in part because several big tech stocks had decent gains. Apple (AAPL, news, msgs) was the fourth-best S&P performer and second-best among Nasdaq-100 stocks with a 5.7% gain to $129.91. On Wednesday, the company's chief operating officer predicted iPhone sales would top 10 million this year. Google (GOOG, news, msgs) rose 0.5% to $475.39.

The market was buffeted by weak earnings from such companies as Freddie Mac (FRE, news, msgs), down 2.4% to $24.49; Sprint Nextel (S, news, msgs), down 9.6% to $8.09; and Thornburg Mortgage (TMA, news, msgs), down 15.4% $9.76.

Thornburg, a big lender specializing in jumbo mortgages, slumped after it said it had received margin calls -- calls for immediate repayment of debt -- on a portfolio of securities backed by alt-A mortgages. Alt-A mortgages are those given to customers with little credit history or minor credit problems.

Sprint tumbled after the company essentially wrote off its entire investment in Nextel, which it acquired in 2005 for $35 billion. It also suspended its dividend.

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Energy prices -- New York close

	Thurs.	Wed.	Chg.	Month chg.	YTD chg.
Crude oil (NYMEX) (per barrel)	$102.59	$99.64	$2.95	11.81%	6.89%
Heating oil (per gallon)	$2.8456	$2.7711	$0.0745	12.27%	7.41%
Natural gas (per million BTU)	$9.4430	$8.9300	$0.5130	16.96%	26.19%
Unleaded gasoline (per gallon)	$2.4957	$2.4777	$0.0180	8.08%	0.20%

Dell worries customers may trim spending

Dell shares were off 1.6% to $20.53 in after-hours trading after fiscal-fourth-quarter earnings of 31 cents a share missed Wall Street estimates by 5 cents. The price was an improvement; the shares had fallen 4% right after the earnings report came out. (In regular trading, the stock had closed up 10 cents to $20.87.)

What sparked the selling was Dell's warning that a softening economy may cause customers to rein in spending.

Net income in the three months that ended Feb. 1 fell to $679 million, or 31 cents per share, from $726 million, or 32 cents per share, a year earlier. Revenue rose to $15.99 billion from $14.5 billion.

Earnings were 34 cents per share excluding costs for jobs cuts, research, legal expenses and other items. Reuters said analysts, on average, had expected Dell to report a profit on that basis of 36 cents per share and revenue of $16.3 billion.

In a news release, Dell said it would "continue to incur costs as it realigns its business to improve growth and profitability," efforts that may "adversely impact" near-term results.

The company said revenue from laptop computers rose 24% in the fourth quarter from a year ago, and revenue from server computers and data storage gear each advanced 2%. Desktop computer revenue rose 2%.

Gross profit margin widened to 18.8% from 18.5% in Dell's fiscal third quarter. But operating margin narrowed to 4.9% from the third quarter's 5.3%, as costs rose.

Dell is more dependent than Hewlett-Packard (HPQ, news, msgs) and IBM Corp. (IBM, news, msgs) on the United States, which many economists believe is in or near a recession and where consumer and corporate spending on technology is expected to slow this year.

Analysts were disappointed with the revenue but thought gross profit margins were better than expected. Non-North American business showed better-than-expected growth.

AIG's huge loss could get bigger -- or smaller

Shares of AIG, the world's biggest insurance company, fell 4% to $50.15 during regular trading and dropped an additional 2.7% to $48.80 in after-hours trading.

The pummeling came as the company, a Dow component, reported a fourth-quarter loss of $5.29 billion, or $2.08 a share, down from $3.44 billion, or $1.31 a share, a year earlier.

AIG expects the housing market to be weak in 2008 and credit tightness to persist. If that occurs, AIG may have to report more write-downs, CEO Martin Sullivan said in a statement.

The biggest part of the quarterly loss stemmed from the $11.1 billion write-down of insurance contracts it sold that were tied to securities backed by subprime mortgages.

Excluding one-time items, such as the $11.12 billion write-down, the company lost $3.2 billion, or $1.25 a share, compared with earnings of $1.47 a year earlier.

Analysts on average had expected AIG to report a loss of 15 cents a share for the quarter, Reuters said.

AIG disclosed in an Securities and Exchange Commission filing earlier this month that its outside accountants had found "material weakness" in its accounting systems and were forcing it to boost its fourth-quarter write-down of the value of insurance contracts.

While AIG agreed to the move, the company said in its earnings statement today that it doesn't believe that the actual losses over time will prove to be that large.

Is Bernanke risking a civil war?

Bernanke repeated much of the testimony he gave to the House Financial Services Committee on Wednesday. The key point: He sees an economy that is weakening and needs so much help that he's willing to let inflationary pressures build for now.

He conceded high oil prices are hurting consumers. In contrast, business bore the brunt in the 2000-01 pullback, after the dot-com bust and the Sept. 11 terrorist attacks, he said.

And he repeated his assurance that the Fed will continue to take action to help stimulate the economy.

• Video: Economic data analysis

But Bernanke's insistence that preserving economic growth was his and the Fed's highest priority may be increasing tensions among the Fed governors and the presidents of the 12 Federal Reserve banks.

"Bernanke has really over-weighted the economic risks relative to inflation,'' John Silvia, the chief economist at Wachovia, told Bloomberg News. Silvia suggested Bernanke "may get some disagreement" from other members of the Federal Open Market Committee, the central bank's rate-making body.

The next Fed meeting is set for March 18. The Federal Open Market Committee is expected to cut the key federal funds rate, the rate banks charge each other for overnight loans, from 3% to 2.5%. The Fed has cut the rate from 5.25% over the past five months.

Sears slammed by slowdown

Sears Holdings (SHLD, news, msgs) this morning reported a 48% drop in profit for the fourth quarter.

The retailer said it earned $426 million, or $3.17 per share, down from the $811 million, or $5.27 per share, the company earned in the same period a year ago.

The results topped Wall Street's estimates of $3.10 per share, but revenue fell nearly 7% to $15.07 billion, missing the consensus estimate of $15.26 billion.

• Video: Inside Sears' earnings

"Given the challenging retail environment, we will work to improve and tighten management of costs and inventory levels in 2008," said interim Chief Executive Officer W. Bruce Johnson in a statement.

In a letter to Sears Holdings shareholders, controlling owner Eddie Lampert likened the company to the New York Giants football team, which went into the playoffs as underdogs but went on to win the Super Bowl.

"Like Eli Manning, we know what it's like to be underestimated and questioned,'' Lampert wrote.

• Read Sears Chairman Edward Lampert's letter

Shares of Sears, which operates Sears and Kmart stores, closed down 20 cents to $101.40.

Continued: Freddie Mac has a big loss

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