Fear rules markets as Dow falls 316

By Charley Blaine and Elizabeth Strott

Stock suffered their worst one-day losses in more than three weeks on Friday on weakness in financial stocks, worries about the economy and the prospect of higher oil prices.

The Dow Jones industrials fell about 316 points, or 2.5%, to 12,266, its biggest point loss since the blue chips fell 370 points on Feb. 5. The Standard & Poor's 500 Index fell 37 points, or 2.7%, to 1,331, and the Nasdaq Composite Index was off 60 points, or 2.6%, to 2,271.

All three indexes ended February with a fourth consecutive monthly loss, something last seen when the market was plunging in the summer and early fall of 2002.

The stock market has now opened the year with two months of losses. History suggests that it will be a bit of a miracle if the market ends 2008 with a gain.

While Friday's selling was very broad, it didn't mean that selling pressure was going to end any time soon. Market bears believe stocks are headed lower. And many bulls may spend the weekend wondering how to deal with the markets next week.

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

The day's selling was set off by the first-ever quarterly loss from American International Group (AIG, news, msgs), the world's largest insurance company. AIG was the biggest loser among the 30 Dow stocks, falling 6.6% to $46.86. That contributed nearly 30 points to the Dow's loss.

Adding to the stress was a weak report on consumer spending in January and the market's reaction to a weak earnings report from personal computer maker Dell Inc. (DELL, news, msgs). Dell fell 4.7% to $19.60 and looks as if it may test $19, which was its low over the last 12 months.

While crude oil fell 75 cents to $101.84 a barrel in New York, precipitating selling in energy stocks, just about all traders believe the trend for crude oil is higher with $110 a barrel often tossed out as a possible top.

The Amex Oil Index ($XOI.X) was off 2.6% to 1,421. The Philadelphia Oil Service Sector Index ($OSX.X) fell 4% to 280. ExxonMobil (XOM, news, msgs) fell 2.7% to $87.01. Schlumberger (SLB, news, msgs) slumped 3.6% to $86.45, and Tidewater (TDW, news, msgs), the largest operator of offshore oil boats, fell 3% to $56.15.

The sell-off wasn't limited to stocks. There was also a bout of selling in the municipal bond market on reports that several hedge funds were forced to sell assets to meet margin calls. As a result, there was heavy buying of short-term Treasury securities, and interest rates moved lower overall.

• Top Stocks Blog:A crummy two months for stocks

Five issues investors will be thinking about

Many investors may well give up the ghost and decide to wait on the sidelines until the market turmoil eases.

It's a rational way to look at the market, which faces a number of problems going forward, including:

• Lack of confidence. The U.S. financial markets have been buffeted by a number of problems, including a badly slumping housing market, the inability to quantify the losses that financial institutions from banks to insurance companies face from the housing problem, a softening economy overall and resurgent inflation.

• The trend is down. One can't list all the ways to view the trend. But a good way to see the issue is to look at a three-month chart for the Dow with the 50-day and 200-moving averages. The trend has been negative since mid-December. Moreover, the moving averages are way above the index itself. And they're acting as strong resistance points. One reason the market fell back this week came when the Dow and the S&P 500 both hit their 50-day moving averages but could not bust through.

• How hard higher oil prices will hit the economy. Crude oil finished the week with a 3.1% gain and ended February up 11% from January. AAA's daily survey of retail gasoline prices showed regular unleaded averaging $3.164 a gallon, up slightly from Thursday and up 31% from a year ago. The rapid run-up will eat into the tax rebate the government plans to send out this spring.

• Softening employment. The national unemployment rate has been rising, and job growth has slowed in recent months. The government will report on payrolls next Friday, and markets will focus on that report intensely.

• Tech weakness. While news reports have emphasized the problems in financial stocks, technology shares have suffered the most since the end of 2007. Apple (AAPL, news, msgs), down 3.8% to $125.02 on Friday, is down 37% this year. Microsoft (MSFT, news, msgs) lost 17% during the month and is down 24% on the year. The big question is whether the market can rebound without tech. (Microsoft is the publisher of MSN Money.)

Dow Jones industrials	12,582.18	12,381.02	1.62%	-5.15%
S&P 500	1,367.68	1,353.11	1.08%	-6.86%
Nasdaq Composite	2,331.57	2,303.35	1.23%	-12.09%
Russell 2000	705.72	695.43	1.48%	-7.87%
Crude oil per barrel	$97.91	$98.81	3.83%	6.89%
10-yr. Treasury yield	3.72%	3.79%	-1.98%	-7.93%
Gold per troy ounce	$967.50	$947.80	2.08%	15.45%

A really weak market

None of the 30 Dow stocks were showing gains Friday. The stocks with the smallest losses were McDonald's (MCD, news, msgs), down 0.9% to $54.11, and Walt Disney (DIS, news, msgs), down 0.4% to $32.41. After AIG, the Dow's biggest losers were Alcoa (AA, news, msgs), down 5.1% to $37.14, and General Motors (GM, news, msgs), down 5% to $23.28.

Only 15 S&P 500 stocks were higher, along with just six stocks in the Nasdaq-100 Index ($NDX.X). The index finished down 49 points, or 2.7%, to 1,745.

The Dow finished the week down just under 1%. The Dow had climbed for four consecutive days only to drop 112 points on Thursday. The S&P 500 fell 1.7% for the week, and the Nasdaq had a 1.4% loss.

February proved a loser for the major indexes, with the Dow down 3%, the S&P 500 down 3.5% and the Nasdaq off 5%.

Northrop Grumman, EADS win tanker contract from Air Force

In a stunning upset that may pressure the Dow on Monday, the U.S. Air Force on Friday awarded Northrop Grumman (NOC, news, msgs) and Airbus parent EADS a multibillion-dollar contract for 179 refueling aircraft, rejecting a rival bid by Dow component Boeing (BA, news, msgs).

Loren Thompson, a defense analyst with the Lexington Institute, said Northrop earned the contract, valued at up to $40 billion, by winning four out of the five criteria set by the Air Force for the work.

The win for Northrop Grumman sent its shares up 6.1% to $83.40 in after-hours trading. The stock had fallen 1.7% to $78.61 in regular New York Stock Exchange trading.

Boeing shares had fallen 2.4% to $82.79 in regular trading and slid an additional 3.7% to $79.75 in after-hours trading.

Until now, Boeing has had a monopoly on the supply of large air tankers to the U.S. military. Northrop Grumman and EADS will build the next generation tankers using a modified Airbus A330 instead of the 767 Boeing had put forward.

In 2001, Boeing was awarded the Air Force contract, but that was later canceled after a procurement scandal that followed close scrutiny of the deal by Sen. John McCain, R-Ariz.

Energy prices -- New York close

	Fri.	Thur.	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%

The credit crunch clobbers AIG

Jumbo insurer American International Group late Thursday reported a $5.3 billion fourth-quarter loss, the worst in the company's 89-year history. The Dow component lost $2.08 per share, far worse than the profit of 60 cents per share analysts had expected.

• Video: AIG's first quarterly loss

AIG earned $3.44 billion, or $1.31 per share, in the fourth quarter of 2006.

The insurance giant also said that it took an $11.12 billion pretax charge because of losses related to subprime mortgages.

It doesn't look like things will get better for AIG anytime soon.

"During 2008, we expect the U.S. housing market to remain weak, and credit-market uncertainty will likely persist," Chief Executive Officer Martin Sullivan said in a statement. "Continuing market deterioration would cause AIG to report additional unrealized market valuation losses and impairment charges."

The big insurer also said that it does not expect to buy back any of its outstanding shares "for the foreseeable future." AIG repurchased 21.2 million shares in the fourth quarter.

Dell's reliance on U.S. sales may hurt

Dell (DELL, news, msgs) disappointed analysts and investors late Thursday when the company reported a drop in profit for the fourth quarter.

Dell said it earned $679 million, or 31 cents per share, down from $726 million, or 32 cents per share, a year ago.

Excluding charges, Dell earned 34 cents per share, 2 cents shy of analysts' expectations.

Revenue rose to $16 billion from $14.5 billion but also missed Wall Street's forecast of $16.3 billion.

Dell also cautioned that the U.S. economic slowdown will likely hurt the company's results in the next several quarters. Dell's reliance on the U.S. for about half of its sales is part of the problem, according to analysts.

• Top Stocks Blog:Dell disappoints again

Rival Hewlett-Packard (HPQ, news, msgs) generates about one-third of its revenue from the U.S.; its shares were down 1% to $48.07.

Dell has been struggling to catch up with rival Hewlett-Packard, which took over as the No. 1 PC maker in 2006.

Continued: The losses from the credit crunch get bigger

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