Dow off 199 as crude tops $129

By Charley Blaine and Elizabeth Strott

Crude oil closed above $129 a barrel for the first time today, pushing stocks lower and threatening the rally that began in mid-March.

Crude peaked at $129.60 in electronic trading overnight and finished at $129.07 on the day. So far in 2008, crude oil is up 34%. The price gain will put more pressure on retail gasoline prices. AAA's daily survey today showed the national average retail price of gasoline at $3.80 a gallon, up a penny from Monday and 19% from a year ago.

At the same time, financial and technology stocks weakened, and investors were selling shares of Hewlett-Packard (HPQ, news, msgs) in after-hours trading, despite a strong earnings report. HP's stock was down 0.8% to $46.11 from a regular close of $46.46.

The oil turmoil pushed the Dow Jones industrials down about 199 points, or 1.5%, to 12,829. The Standard & Poor's 500 Index was off 13 points, or 0.9%, to 1,413, and the Nasdaq Composite Index fell 24 points, or 1%, to 2,492.

The Nasdaq-100Index ($NDX.X), which tracks big-cap Nasdaq stocks, was off 16 points, or 0.8% to 2,001.

The losses were the worst for the major averages since May 7.

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Crude jumped in part because oil investor T. Boone Pickens -- the latest expert to see crude moving higher -- said crude would hit $150 a barrel this year. Goldman Sachs analysts had said last week crude could hit $141 to $200 over the next six months to two years.

At the same time, the June contract for crude oil expired today. A contract expiration tends to generate more activity than average.

Crude's big gain hit investor confidence, but four other factors also bothered the markets:

• The dollar was lower for most of the day against the euro, British pound and Japanese yen, although it rallied late in the day. The tumble was attributed to news that European Central Bank won't cut interest rates.

• Financial stocks slid after analysts at Oppenheimer & Co. said they see the turmoil in credit markets lingering at least into next year. Goldman Sachs (GS, news, msgs) fell 1.1% to $182.43. Morgan Stanley (MS, news, msgs) dropped 3% to $44.80, and JPMorgan Chase (JPM, news, msgs) fell 5% to $43.70.

• The government reported a larger-than-expected gain in core producer prices.

• Home improvement retailer Home Depot (HD, news, msgs) reported a 66% profit decline. Home Depot was off 5.2% to $27.37 on the day. It was the worst performer among the 30 Dow stocks and subtracted 12 points from the blue-chip index.

The threat to the rally stems from the S&P 500's topping its 200-day moving average briefly on Monday and then falling back. That suggests some investor skepticism on how much higher the market can rise with energy prices rising so quickly.

The S&P 500 had risen nearly 15% between the low on March 17 and Monday's high of 1440.20.

In addition, attention must be paid to financial stocks, which started to weaken at the beginning of the month.

The Select Sector SPDR Financial (XLF, news, msgs) exchange-traded fund is down 3.3% this week and more than 4% this month. The financial sector of the S&P 500 represents a bit under 20% of the market capitalization of the index.

Crude's jump, meanwhile, pushed the Amex Airline Index ($XAL.X) down 3.3% to 21.25. The Dow Jones Transportation Average ($DJT) fell 0.8% to 5,353.

The Philadelphia Semiconductor Index ($SOX.X) was down 2.8% to just under 407, continuing a decline from Monday when SanDisk (SNDK, news, msgs), one of the biggest makers of flash-memory chips, fell 7.5%. Chief Executive Officer Eli Harari said rising oil prices have prompted consumers to tighten their budgets. SanDisk's memory cards are used in consumer electronics such as digital cameras and media players. SanDisk was down an additional 3.4% to $29.01 this afternoon.

Energy and utility stocks were the market leaders. The only Dow stocks with gains on the day were Chevron (CVX, news, msgs), up 0.9% to $103.09, and ExxonMobil (XOM, news, msgs) up 0.2% to $94.56.

Only 108 S&P 500 stocks were higher, along with 26 Nasdaq-100 stocks.

Energy prices -- New York close

	Tues.	Mon.	Chg.	Month chg.	YTD chg.
Crude oil (NYMEX) (per barrel)	$129.07	$127.05	$2.02	13.76%	34.48%
Heating oil (per gallon)	$3.7750	$3.6751	$0.0999	18.82%	42.49%
Natural gas (per million BTU)	$11.3650	$10.9540	$0.4110	4.81%	51.88%
Unleaded gasoline (per gallon)	$3.3044	$3.2366	$0.0678	12.73%	32.66%

Non-U.S. business powers Hewlett-Packard results

Strong demand outside the United States for Hewlett-Packard's computers, printers and other products widened its profit margin in its second quarter, but shares fell in after-hours trading because investors appeared to worry the trend will break as HP digests Electronic Data Systems (EDS, news, msgs) this year.

In its second quarter, HP earned $2.06 billion, or 80 cents, per share, up 16% from a year ago. Revenue rose 11% to $28.3 billion -- in line with Wall Street estimates. Excluding acquisition costs, HP said its operating profit margin rose to 10% in the quarter, up from 9% a year ago, and the company forecast cost-cutting to add to profit growth in the future.

HP also confirmed its earlier forecast for third-quarter earnings of 82 cents to 83 cents a share, excluding special items, on revenue of $27.3 billion to $27.4 billion.

International markets accounted for 70% of revenue. Revenue from Europe, the Middle East and Asia grew 16% from a year ago to $11.1 billion; revenue from Brazil, Russia, India and China grew 26%. Adjusted for a declining dollar, which inflates sales converted into dollars, European, Middle East and African sales increases would have been 6%; sales growth in the Asia-Pacific region would have

Housing weighs on Home Depot

The weak housing market continues to take a toll on Home Depot.

Home Depot said it earned $356 million, or 21 cents a share, from $1 billion, or 53 cents a share, a year ago.

The bad news wasn't quite as bad as Wall Street had expected. Excluding charges, Home Depot earned 41 cents per share, topping analysts' estimate by 4 cents.

Earlier this month, Home Depot said it will close 15 U.S. stores. The chain has canceled plans to open 50 new stores to focus on its current stores.

The depressed housing sector has cast a shadow on home improvement retailers.

"The housing and home improvement markets remained difficult in the first quarter; in fact, conditions worsened in many areas of the country," CEO Frank Blake said in a statement.

Soaring fuel and food prices have kept consumers from making discretionary purchases, a category critical to Home Depot's sales.

Rival Lowe's (LOW, news, msgs) on Monday reported a similar earnings decline and cautioned that the current quarter would come in lower than analysts' expectations. Lowe's was down 2% to $23.76 today.

Core producer prices jump

Producer prices rose 0.2% in April, the Labor Department reported this morning. Economists had expected a 0.4% increase in April. Producer prices soared 1.1% in March.

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Core prices, which exclude volatile food and energy prices, rose 0.4% last month, double what economists had expected.

Year over year, the PPI is up 6.5%; core prices are up 3% since last year, which is outside of the Federal Reserve's comfort level of 1% to 2%. The jump in core prices is also the biggest year-over-year increase since December 1991.

"Back in the producer pipeline, there's still a lot of inflationary pressures from materials," Stuart Hoffman, chief economist at PNC Financial in Pittsburgh, told Bloomberg News. The rising cost of materials could force companies to boost prices to offset those costs.

The Consumer Price Index rose 0.2% in April, a smaller increase than economists had expected.

Higher forecast for food prices

Consumers should expect continued higher prices at the grocery store, the Agriculture Department said, predicting that food prices will rise by 5% this year, the biggest increase in 18 years.

The USDA's forecast on food prices started with a prediction of a 3.5% rise at the beginning of the year. The prediction went to 4.5% a month ago.

Higher grocery bills reflect the rising prices of basic agricultural commodities. Wheat, corn and soybeans have all been hitting record highs. Wheat prices are up nearly 70% over the past year. Corn has risen 31% so far this year, and soybean futures have jumped 12%.

The pressure on commodities comes from several sources. There is increased demand from rapidly growing economies such as China and India, as populations in those countries upgrade their diets. There have been poor harvests outside the U.S., and that, too, has increased demand abroad. Foreign demand has been reinforced by the fall in the value of the dollar. Finally, high oil prices have increased demand for corn to make ethanol as a substitute fuel.

At the end of the chain, getting slammed, is the U.S. consumer. Americans spend more than $1 trillion a year on groceries, dining out and fast-food meals.

Fed's Kohn upbeat on economy

Despite the surge in oil, rising food prices and inflation worries, Federal Reserve Vice Chairman Donald Kohn is optimistic.

"Monetary policy appears to be appropriately calibrated for now to promote both rising employment and moderating inflation over the medium term," Kohn said in a speech to the National Conference on Public Employee Retirement Systems in New Orleans. "I expect further, but gradual, improvement in financial markets." Kohn said the economy will start to recover by the end of this year and through next year, but cautioned that the recovery "could be relatively moderate."

The Federal Reserve's next meeting is June 24-25. Most analysts expect the Fed to leave interest rates steady at 2% after a series of rate cuts since September.

Kohn also commented on the rise in commodity prices, saying that it presents "particular challenges for monetary policy because such increases both add to near-term inflationary pressures and damp demand."

Target profit falls; Staples and Medtronic see gains

Target (TGT, news, msgs) also had a difficult first quarter, and shares fell 1.2% to $54.29.

The retailer said net income fell 7.5% to $602 million, or 74 cents per share, down from $651 million, or 75 cents per share, in the first quarter of last year. Earnings beat the consensus estimate of 71 cents per share.

"The current economic environment remains challenging," CEO Gregg Steinhafel said in a statement.

Staples (SPLS, news, msgs), on the other hand, reported a rise in profit in the first quarter. Earnings rose to $212.3 million, or 30 cents a share, up from $209.1 million, or 29 cents a share, last year. Results were in line with expectations.

The company said it expects the "weak economic climate to continue throughout 2008." Staples shares were up 0.2% to $23.61.

Medical parts maker Medtronic (MDT, news, msgs) reported flat income of $812 million, or 72 cents per share. Excluding items, Medtronic earned 78 cents per share, topping Wall Street's estimate of 73 cents.

Shares were up 2.3%, to $48.96.

AIG to raise billions

Dow component American International Group (AIG, news, msgs) late Monday said it will raise $20 billion in capital, including the $12.5 billion the insurance giant raised through last week.

AIG last week reported a first-quarter loss of nearly $8 billion and said it would raise $12.5 billion by selling new shares.

Shares fell 2.1% to $38.12 on the day. It was the worst close for the stock since October 1998.

Microsoft eyes Yahoo's search-ad business

Microsoft (MSFT, news, msgs) now wants to buy Yahoo's (YHOO, news, msgs) search-advertising business, according to Reuters. The software giant's new proposal competes with a deal Google (GOOG, news, msgs) has offered Yahoo. Either deal would preserve Yahoo as an independent company, at least for now.

Talks between Microsoft and Yahoo resumed over the weekend, Reuters said. Yahoo executives are said to be less than enthused. Microsoft pulled a $33-per-share bid for all of Yahoo earlier this month. Although Microsoft said it isn't currently interested in making a full acquisition of Yahoo, the company "reserves the right" to reconsider the option later. (Microsoft is the publisher of MSN Money.)

Some analysts saw the Microsoft proposal as an effective counter to Google's gradually increasing dominance of Internet advertising and, in particular, to the prospect of a Yahoo-Google combination.

"It does mean you don't get swallowed by Google, and Google doesn't effectively become 90% of the market," Keith Hylton, a Boston University Law School professor, told MarketWatch.com. "The whole business of tying up with Google meant advertisers there would shift to Google over time."

In March, Google had about 58% of the search market, according to Nielsen Online; Yahoo had 18% and Microsoft trailed with 12%.

Billionaire Carl Icahn may have played a part in the resumption of the talks. Icahn last week announced that he owns 10 million Yahoo shares and options to buy 49 million more. He has proposed a slate of board nominees to replace Yahoo's current board. The election of directors will take place at Yahoo's annual shareholder meeting on July 3.

Yahoo shares fell 0.7% to $27.48 on the day; Microsoft was off 2.4% to $28.76.

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

	Tues.	Mon.	Chg.	Month chg.	YTD chg.
Treasurys
13-week Treasury bill	1.825%	1.805%	0.020	36.19%	-41.88%
5-year Treasury note yield	3.008%	3.090%	-0.082	-0.82%	-12.94%
10-year Treasury note yield	3.776%	3.839%	-0.063	0.45%	-6.42%
30-year Treasury bond yield	4.532%	4.575%	-0.043	0.78%	1.64%
Currencies
U.S. Dollar Index	72.520	73.175	-0.655	-0.28%	-5.44%
British pound in dollars	$1.9681	$1.9677	0.0004	-1.00%	-1.06%
Dollar in British pounds	£0.5081	£0.5082	-0.0001	1.01%	1.07%
Euro in dollars	$1.5659	$1.5662	-0.0002	0.25%	7.14%
Dollar in euros	€ 0.6386	€ 0.6385	0.0001	-0.25%	-6.66%
Dollar in yen	103.56	103.61	-0.05	-0.36%	-7.41%
Canadian dollar in U.S. dollars	$1.009	$1.009	-$0.0003	1.47%	1.57%
U.S. dollar in Canadian dollars	$0.992	$0.991	$0.0010	-1.39%	-1.55%
Commodities
Gold	$920.20	$882.10	$14.40	6.37%	9.81%
Copper	$3.7765	$3.7755	$0.00	-3.28%	24.19%
Silver	$17.7250	$17.0280	$0.70	6.82%	18.80%
Corn	$5.8975	$5.8675	$0.03	-1.75%	29.47%
Crude oil (NYMEX) (per barrel)	$129.07	$127.05	$2.02	13.76%	34.48%