Stocks fall as oil tops $110

By MSN Money staff with wire reports

Wall Street's euphoria over a $200 billion plan from the Federal Reserve turned to caution today, leading stocks to retreat a day after their biggest rally in more than five years.

After a morning rally, stocks turned down. The Dow Jones Industrial Average fell 47 points to 12,110. On Tuesday, the blue-chip index had soared 417 points, or 3.5%, in its biggest one-day point gain since July 24, 2002, and biggest percentage gain since March 2003.

Today, the Nasdaq Composite Index dropped 12 points to 2,243, and the Standard & Poor's 500 Index lost 12 to 1,308.

Investors largely regard the plan the Fed's plan to lend Treasurys in exchange for debt tied to mortgages as an innovative way to bring some relief to the tight credit markets. But they are hesitant to pour more money into stocks without signs that the decision will help turn around the economy -- particularly with data on retail sales and consumer prices scheduled to arrive later this week.

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"Does it address the main concern, and that's weaker housing? That has not been resolved just yet," said Steven Goldman, the chief market strategist at Weeden & Co. "If we are in the midst of a recession and only a couple months into the recession, we might need a couple more months to plod our way through this."

After shooting higher Tuesday, most bank stocks declined again today. Even if the credit markets ease up a bit, banks and other lenders still face a deteriorating climate for consumer credit, and many are low on cash.

"We're still in a great deal of flux here. The fact that the Fed has gone from lender of last resort to lender of first resort worries me," said John O'Donoghue, a co-head of equities at Cowen & Co.

Oil and gas soar

Volatile energy prices added to the market's anxiety. Oil prices initially fell after the Energy Department said crude and gasoline supplies had risen by unexpectedly large amounts last week, but then they returned on their record-setting streak to surpass $110 a barrel. If oil keeps hitting record levels, inflation pressures could rise and limit the Fed's ability to reduce interest rates further and boost lending efforts to spur the economy.

Today, light, sweet crude oil rose $1.17 to $109.92 a barrel after trading above $110 for the first time.

Still some analysts were cautious about rising oil prices.

"If the Fed can continue along this new line, the continuous rise in commodities prices may have reached an end," Cameron Hanover oil analyst Peter Beutel wrote in a note to clients this morning. "We may be seeing a major change under way" in all of the markets, Beutel wrote.

Meanwhile, prices at the pump also reached record highs Tuesday, according to AAA's Fuel Gauge Report. The national average for a gallon of regular unleaded gas was $3.227, more than 68 cents above gas prices this time last year.

Drivers in Gorda, Calif., are certainly feeling the pressure at the pump. There, the price of a gallon of regular gasoline is $5.20, The New York Times reported.

James Willman, who pumps gas in Gorda, told the newspaper, "That's the reason I walk to work."

The Energy Department on Tuesday said it expected the average price of gas to rise to $3.50 a gallon in the next few weeks.

The data for the AAA survey are provided by the Oil Price Information Service.

Spitzer resigns

New York Gov. Eliot Spitzer announced his resignation this morning, two days after apologizing for personal indiscretion.

"I sincerely apologize," Spitzer said in a news conference. Spitzer said that he has always encouraged people to take accountability for their actions and that he was doing the same.

Spitzer was allegedly linked to a high-end prostitution ring.

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Many on Wall Street cheered Spitzer's downfall. During his eight years as New York's attorney general, Spitzer went after former New York Stock Exchange chief Dick Grasso, attacking Grasso's lucrative severance package, as well as former American International Group (AIG, news, msgs) CEO Hank Greenberg. Spitzer targeted financial analysts and executives in the mutual fund industry, too, before becoming governor last year.

Lt. Gov. David Paterson will succeed Spitzer when his resignation takes effect March 17.

Caterpillar boosts outlook

Heavy-equipment maker Caterpillar (CAT, news, msgs) expects sales in 2010 to reach $60 billion, above a previous forecast of $50 billion and 33% more than the $44.95 billion the company earned in 2007.

Cat said today that it expects earnings per share to grow between 15% and 20% through 2012.

"There are significant new infrastructure growth opportunities in the world's emerging markets and a need for infrastructure reinvestment in North America and Europe. Over the next decade, that should translate into increased sales of Caterpillar machinery, engines and related services," CEO Jim Owens said in a statement.

The company's shares rose $2.64, or 3.6%, to $75.25.

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Caterpillar's economic health is often considered a gauge of how the U.S. economy is faring. But in recent years Caterpillar and many other American companies have been relying more on international growth.

"While we expect anemic growth in the U.S. economy, we continue to see positive conditions for our sales in most of the rest of the world," Owens said Jan. 25, when the company reported fourth-quarter and full-year earnings.

Caterpillar was trading at $62.47 in mid-January, when recession fears started to bombard the markets.

Airlines fall on downgrade

One sector that relies heavily on oil struggled today.

Airline stocks fell after JPMorgan Chase (JPM, news, msgs) analyst Jamie Baker downgraded United Airlines parent UAL (UAUA, news, msgs), US Airways (LCC, news, msgs), American Airlines parent AMR Corp. (AMR, news, msgs), Northwest Airlines (NWA, news, msgs) and Alaska Air Group (ALK, news, msgs) to "underweight" from "overweight," citing higher fuel costs. "The rapid increase in jet fuel prices will add substantially to airline costs at a time when a weakening U.S. economy will make it more difficult to offset those costs with higher fares," Baker wrote in a note to clients. Airlines will spend $25 billion more on jet fuel this year than they did in 2002, Baker wrote.

Baker also cut Continental Airlines (CAL, news, msgs) and Delta Air Lines (DAL, news, msgs) to "neutral" from "overweight."

The Amex Airline Index ($XAL.X) fell 10% to 25.65 today.

Freddie Mac: Home prices will keep falling

Mortgage-finance company Freddie Mac (FRE, news, msgs) had a gloomy forecast for the housing market.

CEO Richard Syron told analysts on a conference call that he thinks U.S. housing prices have fallen only one-third of how far they're going to fall.

The company also said that it has enough capital on hand to continue to grow its business. Freddie Mac had raised $6 billion in the fourth quarter of 2007 but reported a $2.5 billion loss.

Shares of Freddie Mac fell 12 cents, or nearly 1%, to $20.04.

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In related news, the Mortgage Bankers Association this morning said filings for mortgage applications fell 1.9% last week. Applications to refinances current mortgages also fell, down 4.7%. The average interest rate for 30-year fixed rate mortgages jumped last week to 6.37% from 5.98%.

On a year-over-year basis, mortgage applications were down 3.4% from the same week in 2007.

Fed reaction

Many on Wall Street had positive comments about the Fed's move Tuesday.

"Central banks around the world have made it clear they are willing and able to use every weapon in their arsenal to return credit markets back to normal," said Barclays Stockbrokers money manager Henk Potts to Bloomberg News. "This is great news for the financials, banks and commodity companies, those sectors that require a stronger economic background."

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"This helps supply money directly to the banks and may take some of the need for aggressive rate-cutting off the table," Peter Dunay, the chief investment strategist at Meridian Equity Partners, told The Associated Press. "The Fed is basically going to take the bad loans off the banks' books, and the market seems to be loving that idea."

"The Fed's action . . . is important and demonstrates that the FOMC is willing to get increasingly creative to solve the credit logjam," wrote MKM Partners Chief Economist Michael Darda in a note to clients. The FOMC, or Federal Open Market Committee, is the arm of the Federal Reserve that manages monetary policy. "The point is that the Fed still has tools to employ aside from rate cuts, which we believe will come at an increasingly inflationary price."

Most analysts expect the Fed to lower interest rates by three-quarters of a percentage point to 2.25% at next week's FOMC meeting.

Humana cuts forecast

Humana (HUM, news, msgs) is the second HMO company to lower earnings guidance in two days.

The company said this morning that it expects first-quarter earnings between 44 cents and 46 cents per share, far lower than a previous forecast of between 80 cents and 85 cents per share. Humana also said full-year earnings would be $4.00 to $4.25 per share, down from prior expectations of $5.35 to $5.55 per share.

Analysts had expected $5.50 per share for the full year.

Shares of Humana slumped $6.50, or 13.7%, to $40.88 today after losing $15.32, or 24.4% in trading Tuesday.

The HMO group, one of few sectors that didn't rally on the Fed's move, was battered Tuesday after WellPoint Health (WLP, news, msgs), the biggest U.S. health insurer by membership, cut its 2008 profit forecast.

"Higher than expected medical costs, lower than expected fully insured enrollment and, to a lesser extent, the changing economic environment in which we are operating" were the reasons for the lowered forecast, CEO Angela Braly said in a statement Tuesday.

Shares of WellPoint fell 83 cents, or 1.8%, to $46.43 today after shedding $18.66, or 28.3%, on Tuesday.