Crude oil tops $122; stocks rally

By Charley Blaine and Elizabeth Strott

Crude oil hit nearly $123 a barrel today, and, if that wasn't bad enough, a Goldman Sachs analyst said oil could reach $150 to $200 in the next six to 24 months.

Oil's latest rise actually helped the stock market, however, because energy stocks surged today. At the same time, investors saw terrible news from Fannie Mae (FNM, news, msgs) as a buying opportunity and pushed financial shares higher.

Wednesday's market should open higher, thanks to decent earnings from Cisco Systems (CSCO, news, msgs) and Walt Disney (DIS, news, msgs).

At the close, the Dow Jones industrials were up 51 points, or 0.4%, to 13,021. The Standard & Poor's 500 Index was up 11 points, or 0.8%, to 1,418, and the Nasdaq Composite Index was up 19 points, or 0.8%, to 2,483.

The market moved up late in the day as optimism grew about the Cisco and Disney reports, and both delivered. Cisco shares were up 1.4% to $26.70 in after-hours trading from a regular close of $26.33. Disney climbed 2.6% to $34.60 from a regular close of $33.73.

$7 a gallon for gasoline?

Crude jumped in part because of continuing reports of supply threats in Nigeria and Iraq and growing Asian fuel consumption. Bloomberg News reported that China is now projecting that economic growth will hit 10.8% this quarter.

But speculators piled into crude after Goldman Sachs analyst Arjun Murti said crude could hit $150 to $200 a barrel. Murti first attracted attention three years ago when he predicted crude oil would hit $105 as barrel.

Using a rule of thumb that a $1 increase in crude means an additional 5 cents a gallon as the gas pump, the retail price of gasoline could easily top $5 a gallon and might even hit $7.

That would certainly hit consumer spending.

Murti first came to prominence in 2005 when he predicted crude oil could hit $105.

"Until the fundamental supply and demand levers start to shift and the psychology changes, we will continue to see new records," Adam Sieminski, Deutsche Bank's chief energy economist in Washington, told Bloomberg.

Crude oil is up 27% this year and has doubled in price since the end of 2005.

Energy stocks powered the market, with additional strength coming from technology, financials and metals stocks. Alcoa (AA, news, msgs) was the leader among the 30 Dow stocks with a 3% gain to $38.

The Select Sector SPDR-Energy (XLE, news, msgs) exchange-traded fund, which mimics the energy sector of the S&P 500, was up 2.5% to $84.72, the best performer among ETFs that track the index.

The Select Sector SPDR-Technology (XLK, news, msgs) ETF was up 0.9% to $24.89.

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Energy prices -- New York close

	Tues.	Mon.	Chg.	Month chg.	YTD chg.
Crude oil (NYMEX) (per barrel)	$121.84	$119.97	$1.87	7.39%	26.94%
Heating oil (per gallon)	$3.3535	$3.3065	$0.0470	5.56%	26.58%
Natural gas (per million BTU)	$11.1500	$11.1780	-$0.0280	2.83%	49.00%
Unleaded gasoline (per gallon)	$3.1055	$3.0529	$0.0526	5.95%	24.68%

Disney's theme parks have a good quarter

Dow component Walt Disney said its better-than-expected 22% rise in fiscal-second-quarter earnings was due in part to strong DVD sales and foreign-theater performance of the film "Enchanted." Meanwhile, a weak U.S. economy failed to dampen spirits at its theme parks.

Disney shares rose 2.7% in after-hours trading to $34.65 from a regular close of $33.73. The company said its media networks, which include ABC and ESPN, also showed improvement despite the effect of the Hollywood writers strike, which ended in February.

"If you didn't know that the consumer was under tremendous pressure, you would think we were in a boom if you looked at their results," Larry Haverty, an associate portfolio manager at Gabelli Global Multimedia Trust, told Reuters.

• Top Stocks blog: Disney: A national treasure

Disney earned $1.1 billion, or 58 cents a share, compared with $931 million, or 44 cents a share, a year ago. Revenue rose nearly 10% to $8.7 billion. Wall Street had expected 51 cents a share and revenue of $8.5 billion, Reuters reported.

Cisco: Customers are cautious

Cisco Systems said third-quarter net income had declined to $1.77 billion, or 29 cents a share, from $1.87 billion, or 30 cents a share, a year earlier. Revenue rose 10% to $9.79 billion in the period ending April 26.

But adjusted for one-time expenses, the company earned 38 cents a share, better than the consensus Wall Street estimate of 36 cents a share and up 12% from 34 cents a year ago.

Customers in the U.S. and Europe continue to be cautious, CEO John Chambers said on a conference call today. Cisco has lost 20% of its market value since Nov. 7, when Chambers said orders from some big U.S. companies were slowing. Fourth-quarter sales will rise 9% to 10%, Chambers said, in line with the 9.1% predicted by analysts. The Wall Street consensus estimate is for revenue to reach $10.3 billion.

Cisco's earnings are considered an indicator of economic growth. Its products are bought by telecommunications companies and other large businesses that scale back technology investments in a weakening economy.

Last week, Sun Microsystems (JAVA, news, msgs) blamed the faltering economy for its swing back into the red in the March quarter.

Mortgage mess slams Fannie Mae

Fannie Mae reported its third quarterly loss in a row this morning, as the mortgage-market meltdown continued to take a toll.

The troubled company said it lost $2.19 billion, or $2.57 a share, in the first quarter, down from a profit of $961 million, or 85 cents per share, a year ago. Analysts had expected a loss of 81 cents a share.

• Video: Fannie Mae disappoints

But shares jumped 8.9% to $30.81 this afternoon after CEO Daniel Mudd made reassuring comments on a call with analysts. Fannie Mae is improving the quality of its portfolio, he said, and will adjust fees to reflect mortgage-market risk. The company will also benefit from a recovery in the housing market, Mudd said.

"As the market correction continues, we will continue to play both offense and defense," Mudd said in a statement.

While Fannie Mae's loss was ugly, it did show some improvement from the $3.6 billion net loss it reported in the fourth quarter of 2007.

Fannie Mae said it plans to raise $6 billion in capital and is cutting its quarterly dividend by 28%, to 25 cents per share, beginning in the third quarter. The company also said it expects home prices to fall between 7% and 9% nationally this year.

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Fannie Mae and its sibling company, Freddie Mac (FRE, news, msgs), guarantee or own approximately 40% of the $12 trillion in outstanding U.S. home loans.

Yahoo still open to talks with Microsoft

Yahoo (YHOO, news, msgs) shares rose 5.5% to $25.72 today as investors hoped that a deal with Microsoft (MSFT, news, msgs) could still happen. (Microsoft is the publisher of MSN Money.)

Microsoft shares rose 2.1% to $29.70, the second-best Dow performance after Alcoa.

Yahoo CEO Jerry Yang told The New York Times that Microsoft was the difficult party in negotiating a deal. "They chose to walk away after we put a price on the table, and they didn't want to negotiate," Yang said. "From my perspective, we were open all along to selling to Microsoft. We just feel Yahoo, either stand-alone or with Microsoft, is worth more than what they put on the table."

"If they have anything new to say, we would be open . . . I am more than willing to listen," Yang said to Reuters today.

On Saturday, Microsoft walked away from talks with Yahoo, capping three months of fruitless negotiations.

Microsoft first offered $31 per share on Feb. 1, but Yahoo rejected the bid as too low. Microsoft later increased its bid to $33 a share, but Yahoo President Sue Decker today told Yahoo Finance that the company never received that offer in writing.

Yahoo had been pushing for a sweetened bid of $37 per share.

In an apparent effort to contain a shareholder revolt, Yahoo on Monday set its annual meeting for July 3. It said May 15 is the deadline to nominate board candidates, giving dissident investors just over a week to launch a proxy fight.

• Top Stocks blog: Yahoo legal exposure: $6 billion

"If you lose the goodwill of some of the largest shareholders, which seems to have happened, we would expect a bloodless coup with Jerry being invited to step aside," Sanford C. Bernstein analyst Jeffrey Lindsay told Reuters.

Microsoft, meanwhile, has come to the "end of the story" with Yahoo and will now focus on its own, clear strategy of evolving as a leading provider of Internet services, Jean-Philippe Courtois, president of Microsoft International, told Reuters today in London.

UBS posts loss, sells assets

Swiss bank UBS AG (UBS, news, msgs) is getting some help with its subprime mortgage assets.

• Video: Is the worst of the credit mess over?

The stock fell 1.6% to $33.77 today after the company reported a $10.9 billion quarterly loss today. The bank said it will sell $15 billion worth of subprime-related mortgage-backed securities to asset manager BlackRock (BLK, news, msgs). The assets have a book value of about $22 billion.

UBS also said it will slash 5,500 jobs by the middle of 2009, including 2,600 jobs in its London and New York investment-banking divisions. UBS cut 1,500 jobs in 2007.

"We expect this difficult environment to remain and be characterized by a continuing unfavorable global economic climate," UBS Chief Executive Officer Marcel Rohner said on a conference call with analysts. But the bank said it would not have to raise any new capital.

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At least one analyst was cheered that UBS is finally getting rid of sub-performing assets. "It's tremendous news for the economy once the banks are willing to seriously start shedding these assets," Roger Kormendi of investment bank Kormendi\Gardner Partners told Bloomberg News.

UBS also said it is exiting its municipal bond business.

Merck to cut jobs

Under pressure from recent setbacks for some of its key drugs, pharmaceutical giant Merck (MRK, news, msgs) late Monday announced that it will cut 1,200 jobs.

"With eight successful launches of Merck products approved in the U.S. since 2006 now behind us, and with an unexpected delay in a new product approval, we decided to accelerate the achievement of efficiencies we anticipate gaining as we transition to our new commercial model in the U.S.," said Kenneth Frazier, Merck's president of global human health, in a statement.

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Merck shares were off 0.4% to $38.83 on the day.

"It isn't a message that you want to send," said WBB Securities analyst Steve Brozak. "If they didn't have a morale problem now, they certainly will." Merck employs about 60,000 people around the world.

The shares had fallen 10% on April 29, after the Food and Drug Administration issued a "not approvable" action letter for the company's anti-cholesterol drug. The FDA also rejected the name "Cordaptive" for the drug.

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

	Mon.	Fri.	Chg.	Month chg.	YTD chg.
Treasurys
13-week Treasury bill	1.595%	1.550%	0.045	19.03%	-49.20%
5-year Treasury note yield	3.145%	3.135%	0.010	3.69%	-8.97%
10-year Treasury note yield	3.893%	3.845%	0.048	3.56%	-3.52%
30-year Treasury bond yield	4.642%	4.581%	0.061	3.22%	4.10%
Currencies
U.S. Dollar Index	73.175	73.375	-0.200	0.63%	-4.59%
British pound in dollars	$1.9743	$1.9732	0.0012	-0.69%	-0.75%
Dollar in British pounds	£0.5065	£0.5068	-0.0003	0.70%	0.76%
Euro in dollars	$1.5542	$1.5506	0.0036	-0.50%	6.34%
Dollar in euros	€ 0.6434	€ 0.6449	-0.0015	0.50%	-5.96%
Dollar in yen	104.75	104.91	-0.16	0.79%	-6.35%
Canadian dollar in U.S. dollars	$0.998	$0.988	$0.0098	0.41%	0.51%
U.S. dollar in Canadian dollars	$1.003	$1.012	-$0.0092	-0.34%	-0.50%
Commodities
Gold	$877.70	$874.10	$3.60	2.30%	4.74%
Copper	$3.8785	$3.9475	-$0.07	1.52%	27.54%
Silver	$16.8600	$16.8300	$0.03	2.40%	13.00%
Corn	$6.0625	$5.9400	$0.12	1.00%	33.10%
Crude oil (NYMEX) (per barrel)	$121.84	$119.97	$1.87	4.75%	26.94%