Crude oil tops $133; Fed's outlook batters stocks

By Charley Blaine and Elizabeth Strott

Stocks suffered their worst losses in three months today as crude oil topped $133 a barrel for the first time and the Federal Reserve forecast higher inflation and rising joblessness.

At the same time, the minutes of the Fed's April 28-29 meeting signaled that the Fed is done cutting interest rates anytime soon.

Crude closed at $133.17 a barrel in New York, up 3.3% from Tuesday. Crude is up 17% this month and 39% this year alone. It was trading above $134 a barrel in after-hours trading.

The Dow Jones industrials tumbled 227 points, or 1.8%, to 12,601. The Standard & Poor's 500 Index was down 23 points, or 1.6%, to 1,391, and the Nasdaq Composite Index was down 44 points, or 1.8% to 2,448.

The Dow's loss today comes on top of a 199-point loss Tuesday. The 427-point decline for the blue-chip index in the last two days is the worst two-day loss since Feb. 28-29. All 30 stocks in the Dow were lower on the day, along with 436 S&P 500 stocks and 93 Nasdaq-100 ($NDX.X) stocks.

The 10 sectors of the S&P 500 were all lower today as well.

Crude's gains came as the dollar fell against the euro and the Japanese yen. Gold and silver prices were higher as well. Gold closed at $928.60 an ounce in New York, up 0.9% from Tuesday.

The big run-up in crude has precipitated a major financial crisis for U.S. airlines. AMR Corp.'s (AMR, news, msgs) American Airlines announced today it would cut its capacity by up to 12% this year, start charging to check in even one bag -- the first U.S. airline to do so -- and raise other fees. Result: AMR shares collapsed 24% to $6.20. United Airlines parent UAL (UAUA, news, msgs) fell 30% to $8.15, the worst performer among Nasdaq-100 stocks. The Amex Airline Index ($XAL.X) was off 12% to 18.71.

As crude soared, wholesale gasoline also finished at a new high of $3.384 a gallon today, up 2.4% from Tuesday. The price increases will eventually mean higher prices at the gas pump. The national average price of gasoline was $3.807 a gallon today, AAA's daily survey showed, up slightly from Tuesday.

Energy prices -- New York close

	Wed.	Tues.	Chg.	Month chg.	YTD chg.
Crude oil (NYMEX) (per barrel)	$133.17	$128.98	$4.19	17.37%	38.75%
Heating oil (per gallon)	$3.9084	$3.7750	$0.1334	23.02%	47.52%
Natural gas (per million BTU)	$11.6400	$11.3650	$0.2750	7.35%	55.55%
Unleaded gasoline (per gallon)	$3.3965	$3.3044	$0.0921	15.87%	36.36%

Oil's gain signals the end of an era

Although American's move was the latest by airlines to boost revenue and cut costs to cope with higher fuel costs, it may well prove a tipping point for U.S. business and consumers. It is an explicit concession that business as it has been done for years is done.

In addition, many Wall Street analysts believe the continued crude increases are casting doubt on the strength of the stock market this spring. Something has to give.

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"You have a slow holiday week, and the fact that oil keeps flirting with new highs makes for daunting headlines for the individual investor," said Chris Conefry, a trader at Madison Prop Trading. "You couple that with some unease over loan portfolios of midcap banks, and there's certainly an overall 'concerned' tone in the market."

Is oil's price justified?

Oil jumped Tuesday after oil tycoon T. Boone Pickens predicted that the commodity would hit $150 a barrel by the end of the year. Pickens told CNBC Tuesday that the surge in price is a legitimate consequence of an imbalance between supply and demand and that producers are "running out of oil."

"Eighty-five million barrels of oil a day is all the world can produce, and the demand is 87 million," Pickens said. "It's just that simple."

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The Bank of England this morning echoed Pickens' opinion. "Speculative purchases did not seem to be the prime cause of the recent increases in the oil price," the BOE said. "More fundamental demand and supply factors had probably been at the root of its steep rise during recent months."

Conefry agreed. "You simply have a global demand that is enormous. Asia alone is skyrocketing. So until someone comes up with a better, more efficient idea of an energy source and can implement it, the price is going to be dictated by demand."

But there has been active debate. Skeptics wonder whether oil above $100 a barrel may be as much a result of speculation and weakness in the dollar as legitimate supply-and-demand fundamentals.

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The skeptics blame soaring commodities prices partly on an increase in large institutional investors playing momentum in the commodities markets as the stock market struggles.

"The sharp recent rises in global commodities prices, particularly in the energy and agricultural sectors, is undoubtedly causing hardship for many Americans, and is indeed threatening the health of many millions in developing countries," Benn Steil, director of international economics with the Council on Foreign Relations, told a Senate panel Tuesday. "There is also no doubt that these price rises have been accompanied by a corresponding rise in interest from institutional investors in commodities as an asset class."

Others point to the weakness in the dollar. Crude oil futures are traded in U.S. dollars. When oil prices rise in tandem with a fall in the value of the dollar, Americans pay a lot more for oil, while other countries are shielded, to a great extent, by the strength of their currencies. The worst of the pain is in the U.S.

"Psychology now trumps fundamentals in this market," energy analyst Stephen Schork, editor of "The Schork Report," told CNBC this morning "Bottom-line, fundamentals do not justify the current run-up. But that does not mean we cannot go higher."

Time Warner outlines cable split

Time Warner (TWX, news, msgs) this morning gave details of its plan to separate from Time Warner Cable (TWC, news, msgs).

"We're bullish on Time Warner Cable's prospects, but its strategic goals and capital needs are increasingly different from those of our other businesses," said Jeff Bewkes, chief executive officer of Time Warner, in a statement. "After the transaction, each company will have greater strategic, financial and operational flexibility and will be better positioned to compete."

Time Warner will receive $9.25 billion from a $10.27-per-share one-time dividend from Time Warner Cable. Time Warner will unwind its 12.4% stake in an affiliate, New York Group, which will actually increase Time Warner's stake in Time Warner Cable to 85.2% from 84%.

Time Warner then plans to distribute its stake in Time Warner Cable to its own shareholders "in a tax-efficient manner," the company said.

The move will allow Bewkes to focus more on Time Warner's movie, television and magazine businesses.

Time Warner shares rose 0.6% to $16.24 today; Time Warner Cable shares were up 3.5% to to $31.27.

HP profit rises, stock falls

In theory, Hewlett-Packard (HPQ, news, msgs) gave investors some good news late Tuesday. But the stock was down 3.6% to $44.80 today, mostly because of concern of the cost of its planned $13.9-billion purchase of Electronic Data Systems (EDS, news, msgs).

The PC maker reported fiscal-second-quarter earnings of $2.1 billion, or 80 cents per share, a 16% increase from the $1.8 billion, or 65 cents per share, HP earned in the same period a year ago. Excluding charges, HP earned 87 cents, 2 cents above Wall Street's estimate.

HP pre-announced its earnings a week ago when it announced the EDS deal.

HP's overall revenue rose 11% to $28.3 billion, helped by strong sales in Brazil, China and India. HP said 70% of its revenue comes from outside of the U.S., where revenue grew a meager 2%.

Hewlett-Packard also said that, excluding acquisition costs, its operating profit margin rose 10% in the quarter, up from 9% last year.

ADI gives strong outlook

Chip maker Analog Devices (ADI, news, msgs) late Tuesday reported better-than-expected fiscal-second quarter profit, thanks to strong demand for its products.

Earnings were $133.1 million, or 45 cents per share, up 6% from the $125.4 million, or 37 cents per share, the company earned in the same period a year ago. Excluding one-time items, ADI's adjusted earnings were 44 cents per share, topping analysts' estimates by 3 cents.

The company said it expects to earn between 43 cents and 45 cents per share in its third quarter; the consensus estimate is 43 cents.

Shares of ADI fell 3.9% to $33.40.

Microsoft to offer cash incentives

In another effort to take on rival Google (GOOG, news, msgs), Microsoft (MSFT, news, msgs) is reportedly planning to offer cash incentives to customers who purchase certain products through its live.com Web search site.

The Wall Street Journal is reporting that it will announce the service, called "Live Search cashback," today at its annual event for online advertisers. (Microsoft is the publisher of MSN Money.)

Consumers would have to sign up for the free service before they can buy products ranging from Oakley sunglasses to Circuit City (CC, news, msgs) electronics, the paper reported.

Microsoft shares were down 1.8% to $28.25. Google was down 4.9% to $549.99.

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

	Wed.	Tues.	Chg.	Month chg.	YTD chg.
Treasurys
13-week Treasury bill	1.810%	1.825%	-0.015	35.07%	-42.36%
5-year Treasury note yield	3.085%	3.008%	0.077	1.71%	-10.71%
10-year Treasury note yield	3.822%	3.776%	0.046	1.68%	-5.28%
30-year Treasury bond yield	4.558%	4.532%	0.026	1.36%	2.22%
Currencies
U.S. Dollar Index	72.080	72.520	-0.440	-0.88%	-6.02%
British pound in dollars	$1.9716	$1.9728	-0.0012	-0.83%	-0.89%
Dollar in British pounds	£0.5072	£0.5069	0.0003	0.83%	0.90%
Euro in dollars	$1.5800	$1.5808	-0.0007	1.15%	8.11%
Dollar in euros	€ 0.6329	€ 0.6326	0.0003	-1.14%	-7.50%
Dollar in yen	¥103.00	¥102.98	0.02	-0.89%	-7.91%
Canadian dollar in U.S. dollars	$1.017	$1.018	-$0.0012	2.28%	2.38%
U.S. dollar in Canadian dollars	$0.984	$0.983	$0.0018	-2.16%	-2.32%
Commodities
Gold	$928.60	$882.10	$8.40	7.34%	10.81%
Copper	$3.7445	$3.7765	-$0.03	-4.10%	23.13%
Silver	$18.0500	$17.7250	$0.32	8.78%	20.98%
Corn	$6.0725	$5.8675	$0.21	1.17%	33.32%
Crude oil (NYMEX) (per barrel)	$133.17	$128.98	$4.19	17.37%	38.75%