Rally fades despite big gain for WaMu

By Charley Blaine and Elizabeth Strott

A big rally set off on hopes that the worst of the subprime mortgage crisis is over faded this afternoon after a major coal producer warned of lower-than-expected profits.

The market turned lower when Arch Coal (ACI, news, msgs) said it expected to earn $2 to $2.50 a share this year. Analysts have expected $2.40 a share.

Arch Coal shares fell 1.5% to $48.22 and were a big reason why materials stocks fell back on the day.

At the close, the Dow Jones industrials were up 3 points to 12,612; the blue-chip index had been up as many as 133 points in the early afternoon. The Standard & Poor's 500 Index finished with a 2-point gain to 1,373, and the Nasdaq Composite Index was down 6 points to 2,365.

The market's strength effectively gave way when the Arch Coal news hit the markets. Metals stocks were also lower. Freeport-McMoRan Copper & Gold (FCX, news, msgs) was off 0.6% to $107.02.

Dow component Alcoa (AA, news, msgs) fell 4% in regular trading to $37.44 before issuing its first-quarter earnings report. A big decline in profit sent the shares an additional 0.6% to $37.23 in after-hours trading.

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While analysts may have been overly optimistic, the fact is Arch Coal is still looking at a terrific year, with earnings per share up at least 65% and possibly up more than 100%. The company earned $1.21 a share in 2007 on revenue of $2.4 billion. Still, the company 's guidance hit other coal stocks; Peabody Energy (BTU, news, msgs) fell 8 cents to $56.99.

The warning also served as a reminder that first-quarter earnings disappoint many investors who have looked at the stock market's recent rebound off January and March lows as reason to get bullish again.

The Dow is up 8.4% from its 2008 intraday low on Jan. 22. The S&P 500 and the Nasdaq are up 9.2% and 9.7% off their March 17 intraday lows, respectively.

Sixteen of the 30 Dow stocks were higher today, led by Citigroup (C, news, msgs), up 2.2% to $24.60. While the S&P 500 enjoyed its fifth gain in six sessions, only 236 stocks in the index were higher. In addition, only 46 of the stocks in the Nasdaq-100 Index ($NDX.X) were higher on the day, led by KLA-Tencor (KLAC, news, msgs), up 7% to $42.81. The index, however, was down 5 points, 0.3%, to 1,861.

WaMu's gain gives the market a strong start

The market's strong rally at the open had been set off by news that troubled mortgage lender Washington Mutual (WM, news, msgs) was close to winning $5 billion in new capital. WaMu’s shares soared more than 37% before falling back to a 29% gain to $13.15. The percentage was gain the best among S&P 500 stocks.

The Wall Street Journal said the lender is close to receiving a cash infusion from the giant private-equity firm TPG, formerly known as Texas Pacific Group, which would remove the threat of a takeover by JPMorgan Chase (JPM, news, msgs) or another bank.

WaMu shares had stock had plunged 70% over the past six months, as of Friday's closing price. TPG is one of the biggest private-equity firms.

• Top Stocks blog: Why should WaMu investors stick around?

But then the news on Arch Coal hit, and a Federal Reserve report said that growth in consumer credit fell back in February from January. The Fed said consumer borrowing in February was up 2.4% or $5.2 billion to $2.5 trillion outstanding. Economists had expected growth of $6 billion.

Tuesday doesn't offer a big lineup of closely followed earnings. But the National Association of Realtors' monthly report on pending home sales may give a clue on whether the housing market is stabilizing.

The Federal Reserve will release the minutes of the March 18 meeting of the Federal Open Market Committee, the central bank's rate-making body. Investors will study the minutes for indications of what the FOMC may do with interest rates at its April 29-30 meeting. The Fed cut its key federal funds rate to 2.25% on March 18, which sent the Dow up 420 points that afternoon.

• Video: What to expect on Tuesday

Alcoa shares up despite profit decline

Initially, investors seemed to shrug off Alcoa's lower first-quarter profits. Shares were higher in after-hours trading but then fell back.

The aluminum giant said it earned $303 million, or 37 cents a share, in the quarter, down from $632 million, or 75 cents a share, a year ago.

A big problem is the falling dollar, which has forced the company to pay more for bauxite, the raw material from which aluminum is made.

Excluding restructuring and tax-related items, Alcoa reported $361 million, or 44 cents a share, in income from continuing operations. Analysts had expected 49 cents. When accounting for the currency impact, Alcoa said profit came to 52 cents a share. Revenue fell to $7.4 billion, down from $7.9 billion a year earlier due to the sale of its packaging and consumer business.

Profit margins were squeezed by higher energy costs and a weaker U.S. dollar, the company said. But supply is tight, and demand is strong, especially from China, the company said.

Alcoa is forecasting 8.5% growth in worldwide primary aluminum consumption this year, down from a January estimate of 9% growth, Dow Jones said, with the biggest change coming in North America. In January, Alcoa forecast 0.8% growth in North America consumption this year; it now projects a 5% dip.

Alcoa now expects consumption in Europe to climb 1.1% this year, off from a January estimate of 2.1%.

Alcoa is the first Dow component to report first-quarter earnings. Overall, analysts expect weak first-quarter earnings for companies in the S&P 500. Thomson Financial expects profits will fall 12.2%. As bad as that sounds, the estimate is nothing compared with results from the fourth quarter of 2007, which were the worst in more than a decade.

Aggregate earnings slumped more than 25% in the last quarter of 2007, Thomson says.

While energy stocks will likely a 28% profit gain in the first quarter, Thomson said, financial-company profits should fall by 60%.

AMD to cut work force by 10%

Battered by product delays and acquisition costs, beleaguered chip maker Advanced Micro Devices (AMD, news, msgs) said late today that it will jettison 10% of its work force and warned investors that first-quarter sales were lower than expected across all business lines.

The company's job cuts, which amount to 1,600 workers out of roughly 16,000 worldwide, were expected.

But the sales miss surprised Wall Street. Analysts polled by Thomson Financial were expecting AMD to ring up $1.61 billion in sales; the company says sales were closer to $1.5 billion, a 15% percent drop from a year ago.

AMD had risen 1.8% to $6.34 in regular trading but slumped more than 3% to $6.15 in after-hours trading.

The stock has fallen about 85% since a peak in March 2006.

Crude moves higher; OPEC won't boost supply

Crude oil in New York jumped $2.86 a barrel, or 2.7%, to $109.09 this afternoon on news that the Organization of Petroleum Exporting Countries believes there is ample supply in the marketplace.

"High oil prices are not due to a shortage of crude but rather it is because of the decrease in the dollar's value, shortage of refinery capacity and some political tensions in the world," OPEC Secretary-General Abdullah al-Badri told Iran's IRNA news agency, according to Reuters.

OPEC pumped an average of 32.35 million barrels of oil per day in March, a decline of 85,000 barrels from the daily average for February, the first decline in seven months.

A bottom in sight?

WaMu was the top performer among S&P 500 stocks.

Other financials jumped on WaMu's news. Citigroup (C, news, msgs) rose 2.2%, to $24.60 on the day, tops among the 30 Dow stocks. But fellow Dow component JPMorgan Chase fell slightly to $45.54. Brokerages were also doing well: Merrill Lynch (MER, news, msgs) added 2.8% to $47.55, and Lehman Bros. (LEH, news, msgs) was up 1.3% to $44.60.

• Top Stocks blog: Has the market bottomed?

The Amex Securities Broker/Dealer Index ($XBD.X) was up 1.3% to 168. The Philadelphia KBW Banking Index ($BKX) added 1.6% to 83.75.

At least 14 financial institutions have turned to outside investors for capital infusions in the past year, as the mortgage meltdown forced them to accept more than $230 billion in write-downs on mortgage-related investments, Bloomberg statistics show.

• Video: Investing for the long term

Many are hoping that last week's stock market rally and Friday's reaction to the dismal jobs report are signals that things are starting to turn around.

"The market has pretty much priced in a pretty good portion of the recession scenario," said Owen Fitzpatrick, head of U.S. equity trading at Deutsche Bank, to MarketWatch. "Given that the Fed is doing what it can to pull us out of this, the market is expecting a shallow and short recession, not a deep and extended one."

Energy prices -- New York close

	Mon.	Fri.	Chg.	Month chg.	YTD chg.
Crude oil (NYMEX) (per barrel)	$109.09	$106.23	$2.86	7.39%	13.66%
Heating oil (per gallon)	$3.0843	$2.9921	$0.0922	1.15%	16.42%
Natural gas (per million BTU)	$9.7910	$9.3220	$0.4690	-3.07%	30.84%
Unleaded gasoline (per gallon)	$2.7835	$2.7567	$0.0268	6.39%	11.75%

Yahoo to Microsoft: 'Show us the money'

For now, Yahoo (YHOO, news, msgs) is continuing to fight Microsoft's (MSFT, news, msgs) takeover bid. And investors did not appear thrilled. Yahoo shares fell 2.3% to $27.70 on the day. The shares were up slightly to $27.79 in after-hours trading.

Yahoo today rejected Microsoft CEO Steve Ballmer's demand that the company start negotiating or face a proxy fight -- unless Microsoft boosts its offer.

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Ballmer gave Yahoo three weeks to decide on the $44.6 billion offer Microsoft made for Yahoo on Feb. 1. Yahoo's response said that although it is not ruling out a possible merger, the company believes it is still worth more than $31 a share. (Microsoft is the publisher of MSN Money.)

"We are open to all alternatives that maximize stockholder value," Yahoo Chairman Roy Bostock and CEO Jerry Yang said in a letter to Microsoft. "This includes a transaction with Microsoft if it represents a price that fully recognizes the value of Yahoo on a standalone basis and to Microsoft, is superior to our other alternatives, and provides certainty of value and certainty of closing."

Though addressed to Microsoft, the Yahoo letter seemed to have Yahoo stockholders in mind, as well.

"As a result of the decrease in your own stock price," the letter to Microsoft said, "the value of your proposal today is significantly lower than it was when you made your initial proposal."

Microsoft shares finished the day unchanged at $29.16.

Microsoft made its negotiation demand in a letter sent to Yahoo's directors over the weekend.

"If we have not concluded an agreement within the next three weeks, we will be compelled to take our case directly to your shareholders, including the initiation of a proxy contest to elect an alternative slate of directors for the Yahoo board," Ballmer wrote.

• Video: Microsoft, Yahoo take the gloves off

Ballmer also warned that a revised offer from Microsoft would likely be lower than the original $31-per-share bid.

Yahoo rejected Microsoft's initial offer, calling it too low, but no competing bids have surfaced.

Many analysts are convinced a merger will occur despite Yahoo's resistance.

"It's only a question of time before Microsoft takes them over," said Sanford C. Bernstein analyst Jeffrey Lindsay, in a recent interview with Bloomberg News. "It's just unfortunate that Yahoo has dragged it out so long because they are probably going to miss a few dollars that they could have obtained if they had negotiated immediately."

Motorola, Icahn shake

Meanwhile, the battle between Motorola (MOT, news, msgs) and billionaire investor Carl Icahn is over.

Motorola said this morning that it will add two of Icahn's nominees to its board of directors, settling a long-standing dispute. Icahn, who owns a 6.4% stake in the company, had been threatening a proxy fight.

Icahn had been pushing Motorola to break apart its cell-phone business as the company has been struggling with earnings and sales.

Motorola shares added 1.8% to $9.84 today.

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

	Mon.	Fri.	Chg.	Month chg.	YTD chg.
Treasurys
13-week Treasury bill	1.360%	1.320%	0.040	0.74%	-56.69%
5-year Treasury note yield	2.743%	2.633%	0.110	8.21%	-20.61%
10-year Treasury note yield	3.556%	3.481%	0.075	2.60%	-11.87%
30-year Treasury bond yield	4.369%	4.318%	0.051	0.55%	-2.02%
Currencies
U.S. Dollar Index	72.500	72.360	0.140	0.46%	-5.47%
British pound in dollars	$1.9893	$1.9952	-0.0060	0.28%	0.00%
Dollar in British pounds	£0.5027	£0.5012	0.0015	-0.28%	0.00%
Euro in dollars	1.5713	1.5741	-0.0027	-0.24%	7.51%
Dollar in euros	€ 0.6364	€ 0.6353	0.0011	0.24%	-6.99%
Dollar in yen	102.39	101.70	0.69	2.58%	-8.46%
Canadian dollar in U.S. dollars	$0.986	$0.991	-$0.0059	0.81%	-0.74%
U.S. dollar in Canadian dollars	$1.015	$1.009	$0.0060	-0.88%	0.68%
Commodities
Gold	$926.80	$913.20	$13.60	0.74%	10.60%
Copper	$3.9795	$3.9545	$0.02	11.36%	30.86%
Silver	$18.1200	$17.7550	$0.37	7.54%	21.45%
Crude oil (NYMEX) (per barrel)	$109.09	$106.23	$2.86	7.12%	13.66%