Oil falls to $122; markets break even

By Charley Blaine and Elizabeth Strott

Crude oil fell to $122.30 a barrel today, its lowest close in a month, but increasing worries about inflation and the financial health of the two big bond insurance companies stalled the stock market.

Crude finished down 1.6% on the day, and wholesale gasoline fell 4.7% to $3.1951 after a government report showed larger-than-expected gasoline supplies and offered a strong hint that high prices are forcing consumers to cut back.

It's unclear when -- or if -- the drop will translate into lower prices at the gas pump. AAA said the national average retail price of gasoline was at $3.983 today, up from $3.978 on Tuesday.

But many traders think crude could break below $120 a barrel in the next week or so. Crude was at about $121.90 a barrel in electronic trading late today.

Crude has fallen 9.5% from its intraday high of $135.09 set on May 22 as consumers cut back and other countries ease subsidies in an effort to curb gasoline use.

"Refiners are making the fuel but nobody wants to buy it," Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Mass., told Bloomberg News.

The stock market, meanwhile, saw a big rally in the morning stall out on news that bond insurers MBIA (MBI, news, msgs) and Ambac Financial (ABK, news, msgs) are facing possible downgrades. But stocks managed to end basically unchanged after two days of sizable losses.

The Dow Jones industrials, down as much as 64 points at 2:55 p.m., ended down 12 points at 12,390 at the end of a volatile day of trading. The blue-chip index had been up as much as 93 points earlier in the day. The Standard & Poor's 500 Index was down slightly at 1,377 and the Nasdaq Composite Index climbed 23 points to 2,503.

In addition to concerns about Ambac and MBIA, traders were spooked for a short time when Federal Reserve Chairman Ben Bernanke said inflation was "significantly higher" than what the central bank wants. But he said the inflation he sees is nothing like what the United States experienced in the 1970s.

Energy prices -- New York close

	Wed.	Tues.	Chg.	Month chg.	YTD chg.
Crude oil (NYMEX) (per barrel)	$122.30	$124.31	-$2.01	-3.82%	27.42%
Heating oil (per gallon)	$3.5458	$3.6396	-$0.0938	-3.13%	33.83%
Natural gas (per million BTU)	$12.3790	$12.2210	$0.1580	5.70%	65.43%
Unleaded gasoline (per gallon)	$3.1951	$3.3525	-$0.1574	-4.51%	28.28%

The biggest cellphone company?

Late in the session, reports from CNBC's David Faber, followed by Reuters, said that Verizon Communications (VZ, news, msgs) was in talks to acquire Alltel, its smaller rival, for perhaps as much as $27 billion.

The deal would create the nation's biggest cellphone company and "a more potent rival" to AT&T (T, news, msgs), The Wall Street Journal said. The deal remains at a sensitive stage and may well fall through in the next few days, sources told The Journal.

It is a complicated negotiation because Alltel went private last year, bought out for $27.5 billion by Goldman Sachs' (GS, news, msgs) buyout arm and TPG Capital, as well as a group of banks.

A deal would also have to get past a number of antitrust hurdles. But it would solve a big problem for the banks that still have $24 billion in loans and bonds that they would like to get off their books.

In addition to Goldman Sachs, the banks include Citigroup (C, news, msgs), Barclay's (BCS, news, msgs) and Royal Bank of Scotland (RBS, news, msgs).

Verizon closed down 1% to $36.98. AT&T was off 0.7% to $38.50. Goldman Sachs was up 0.9% to $172.10.

Bond insurers pull market lower; techs are strong

The market had opened strongly in part because of confidence that the financial condition of investment bank Lehman Bros (LEH, news, msgs) wasn't as bad as feared on Tuesday, when the stock fell nearly 10%.

Lehman closed up 2.6% to $31.40, in part because Merrill Lynch analyst Guy Moszkowski upgraded the stock, saying the this week's selling has been overdone.

But the Dow and S&P fell back on news that MBIA and Ambac face possible downgrades from Moody's Investor's Service because of their involvement in guaranteeing securities backed by subprime mortgages. MBIA shares were down 16% to $5.63. Ambac shares were off 17% to $2.49.

MBIA, which has a AAA rating, said it disagreed with the decision. Since February, when Moody's reaffirmed MBIA's rating, the company said, "There have been no material adverse changes in the environment, and we believe our capital position has improved."

In addition, Standard & Poor's said it was replacing the bond insurer in the S&P 500 with Lorillard next week. Lorillard is the tobacco arm of Loews (LTR, news, msgs). Lorillard is being spun off and will trade under the symbol LO.

The Nasdaq, meanwhile, was stronger on strength in big technology stocks after two days of weakness. Chips stocks led the rebound. Intel (INTC, news, msgs) jumped 2.4% to $23.48. Advanced Micro Devices (AMD, news, msgs) jumped 5.6% to $7.19 on investor excitement about a new line of chips for laptop computers.

Meanwhile, Qualcomm (QCOM, news, msgs) was up 3.1% to $48.45. Google (GOOG, news, msgs) added 0.9% to $572.22.

Yahoo exec says company is talking to Microsoft

Yahoo (YHOO, news, msgs) jumped 2.7% to $26.85 after president Sue Decker said the company was discussing options with Microsoft (MSFT, news, msgs). Microsoft was up 0.8% to $27.54. (Microsoft is the publisher of MSN Money.)Decker's comments were made at a conference in New York.

It came as shareholder activist Carl Icahn accused Yahoo CEO Jerry Yang of going to "inordinate lengths" to sabotage Microsoft's bid for Yahoo and called on the Yahoo board to rescind a companywide severance plan.

Icahn is waging a proxy fight for Yahoo because he thinks the company should merge with Microsoft.

Lehman may be looking abroad for cash?

For much of the day, Lehman Bros. was the talk of Wall Street, after The Wall Street Journal reported that the finance company is turning to international investors for new capital.

Lehman shares fell 9.5% to $30.61 Tuesday on reports that Lehman might need to boost its capital position. The tumble erased $1.7 billion from the company's market value, with shares hitting their lowest level in five years; Lehman also took the market down with it, as it stirred broader fears about financial stocks.

Lehman may turn to South Korea, where potential investors include the Korea Development Bank and Woori Financial Group, the paper reported.

The Journal also reported that Lehman was buying its own shares on Tuesday.

Options traders are taking the other side of that trade, betting that Lehman shares have further to fall, Bloomberg News reported. Trading of Lehman put options rose to 283,676 contracts, or four times the 20-day average. A put option gives the holder the right -- although not the obligation -- to sell a specified amount of stock for a specific price, within a specific period.

A separate report from CNBC suggested that Lehman is considering selling some of its riskier assets. Lehman has reportedly met with companies including Blackrock (BLK, news, msgs) to discuss a purchase of some of its mortgage-backed bonds.

Late Tuesday, Lehman strongly denied it had it borrowed from the Federal Reserve's discount window to boost its capital position.

Decent economic reports offer early boost

Bulls got more ammunition today from decent economic news.

The Institute of Supply Management's index on the nonmanufacturing service sector came in at 51.7. Although the reading was a decline from the 52 level seen in April, it still indicates that the sector is growing, albeit slowly. (Readings over 50 indicate expansion.)

A revised report on U.S. productivity showed an annual growth rate of 2.6% in the first quarter, up from a previous reading of 2.3%. Unit labor costs -- employer labor costs divided by added output -- were revised down to a 2.2% annualized rate from a 2.3% rate.

Another report from ADP Employer Services showed a gain of 40,000 jobs in May, following a revised increase of 13,000 in April.

"Businesses really didn't hire a lot more when demand was strong," Mark Vitner, a senior economist at Wachovia, told Bloomberg News. "And they haven't had much need to slash jobs."

The government's monthly jobs report comes out on Friday.

United cuts flights, jobs

Shares of United Airlines' parent UAL (UAUA, news, msgs) jumped more than 7% today on news that the company is chopping flights and jobs to help offset soaring fuel costs. UAL closed at $9.14, up 61 cents from Tuesday, after the company said it is cutting 100 aircraft from its fleet and between 1,400 and 1,600 jobs (including 500 previously announced cuts).

Included in the decision: UAL will halt operations of Ted, its discount carrier, in 2009

• Readers talk: Why I'll never fly United again

On Tuesday, the International Air Transport Association estimated that the surge in fuel prices could result in airlines losing as much as $6.1 billion at a crude oil price of$135 a barrel. That was a huge swing from April, when the trade group forecast the industry would see a profit of $4.5 billion for the year.

Airline shares were also rising because of lower oil prices today. The Amex Airline Index ($XAL.X) was up 2% to 19.42 on the day.

JM Smucker to buy Folgers

Grape jelly and a cup of Joe might make a nice breakfast for JM Smucker (SJM, news, msgs).

Smucker announced today an all-stock deal to buy the Folgers coffee business from Procter & Gamble (PG, news, msgs). Smucker is paying nearly $3 billion for Folgers.

Investors liked the deal: Smucker rose 0.2% to $53.87 on the day; Procter & Gamble shares rose 1.6% to $66.45.

P&G last year said it was reviewing its businesses. Analysts have speculated that the conglomerate was planning to spin off the Folgers business.

Procter & Gamble has owned Folgers, the nation's top-selling ground coffee brand since 1963.

In 2002, Smucker acquired Jif peanut butter and Crisco shortening from P&G in an all-stock deal worth about $1 billion.

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

	Wed.	Tues.	Chg.	Month chg.	YTD chg.
Treasurys
13-week Treasury bill	1.805%	1.810%	-0.005	-2.43%	-42.52%
5-year Treasury note yield	3.213%	3.191%	0.022	-5.69%	-7.00%
10-year Treasury note yield	3.940%	3.898%	0.042	-2.62%	-2.35%
30-year Treasury bond yield	4.685%	4.622%	0.063	-0.47%	5.07%
Currencies
U.S. Dollar Index	73.505	73.300	0.205	0.77%	-4.16%
British pound in dollars	$1.9550	$1.9631	-0.0081	-1.43%	-1.72%
Dollar in British pounds	£0.5115	£0.5094	0.0021	1.44%	1.75%
Euro in dollars	$1.5434	$1.5442	-0.0007	-0.79%	5.60%
Dollar in euros	€ 0.6479	€ 0.6476	0.0003	0.82%	-5.31%
Dollar in yen	105.27	105.13	0.14	-1.08%	-5.88%
Canadian dollar in U.S. dollars	$0.983	$0.991	-$0.0075	-2.34%	-0.95%
U.S. dollar in Canadian dollars	$1.017	$1.009	$0.0083	2.40%	0.96%
Commodities
Gold	$883.80	$882.10	-$1.70	-0.38%	5.47%
Copper	$3.5450	$3.5780	-$0.03	-1.63%	16.57%
Silver	$16.9400	$16.8350	$0.11	0.41%	13.54%
Corn	$6.1575	$6.0800	$0.08	2.75%	35.18%
Crude oil (NYMEX) (per barrel)	$122.30	$124.31	-$2.01	-3.82%	27.42%