Market Dispatches

Market Dispatches6/18/2008 8:10 PM ET

Dow falls 131 as crude jumps over $136

Slumping financial stocks also hurt the market after Morgan Stanley's big earnings drop. Surging fuel costs slam FedEx and force Northwest and United to make more cuts.  Boeing gets a big win in its appeal of an Air Force tanker contract.

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By Charley Blaine and Elizabeth Strott

Stocks tumbled again today, weakened by struggling financial companies and increasing evidence that soaring oil prices are disrupting the economy.

The Dow Jones industrials fell 131 points, or 1.1%, to 12,029 after briefly dropping under 12,000 for the first time since March. It was the third straight loss for the blue-chip index and second loss of 100 points or more in two days.

The Standard & Poor's 500 Index was off 13 points, or 1%, to 1,338, and the Nasdaq Composite Index was down 28 points, or 1.1%, to 2,430. It was the second consecutive loss for each of the indexes.

Crude oil closed at $136.68 a barrel, up 2% on the day, as the dollar moved lower against major currencies. Crude had rebounded strongly after falling to $131.14 earlier in the day. That rise will pressure retail gasoline prices. AAA's daily Fuel Gauge Survey put the national retail price of gasoline at $4.075 a gallon, unchanged from Tuesday. Coal stocks were among the market's strongest performers.

The market's poor performance today probably ensures that June will end with losses for the major indexes.

The Dow is down 4.8% this month. If the loss holds, the index will have fallen in five out of six months in 2008 and in seven of the last eight months.

The S&P 500, down 4.5% this month, and Nasdaq, down 3.7%, are looking at their fourth monthly losses in the past half-year. Three indexes are each down about 9% this year.

If one can identify any good news from today's selling, it was that the Dow bounced back over 12,000 after hitting 11,993 in the middle of the afternoon.

Many investors see 12,000 as psychologically important. When the Dow breached that level, enough buying came back in to push the index higher.

The Dow last fell under 12,000 in early March as stocks were staggered by the collapse of investment bank Bear Stearns, which was sold to JPMorgan Chase (JPM, news, msgs).

Investors face a limited but interesting set of earnings reports on Thursday.

Watch how cruise line operator Carnival (CCL, news, msgs) discusses how fuel costs and the economy are affecting its business. The stock is down 33% since January 2007; it was off 1.5% to $34.97 today.

J.N. Smucker (SJM, news, msgs), best known as for its jams and jellies, will probably have some comments about how higher corn prices are affecting its profits. The stock, which fell 2% today to $49.94, is off 22% in the last year.

FedEx, Morgan Stanley lead market lower

Today's market had to contend with a loss for shipping giant FedEx (FDX, news, msgs) after the company said it is getting battered by high fuel costs. FedEx fell 2.1% to $82.60, and airline stocks were also weak.

Financial stocks fell back on weak earnings from investment bank Morgan Stanley (MS, news, msgs). In addition, regional Fifth Third Bancorp (FITB, news, msgs) fell 27.3% to $9.26 after announcing it was raising $2 billion in capital and slashing its dividend to 15 cents from 44 cents.

Stock Charts (Year)

Fifth Third Bancorp
Graphical chart for FITB
CarMax
Graphical chart for KMX
The Select Sector SPDR-Financial (XLF, news, msgs) exchange-traded fund, which mirrors the financial sector of the S&P 500, was down 1.7% to $22.53; it had been down as much as 2.8% earlier in the session.

Ironically, Morgan Stanley, which was down nearly 8% right after the open, ended the day with a 0.3% gain to $40.69. But the five financial stocks in the Dow were lower today. Bank of America (BAC, news, msgs) was the worst of the group, down 3% to $28.37.

Meanwhile, auto dealer CarMax (KMX, news, msgs) said gasoline prices and tightening credit were hitting its sales. Worse, the prices it gets for used vehicles are falling because no one wants to buy trucks and SUVs. CarMax shares fell 10.9% to $16.34. The stock also hit Ford Motor (F, news, msgs) and General Motors (GM, news, msgs), which fell 5.8% to $6.22 and 5.9% to $14.89, respectively. GM was the weakest Dow stock today.

Only four Dow stocks finished with gains on the day, led by drug giant Merck (MRK, news, msgs), up 0.5% to $34.86. Fellow Dow component Pfizer (PFE, news, msgs) ended up 0.3% to $17.77. The drug maker said it had settled a patent dispute with India's Ranbaxy Laboratories that will leave patents for Pfizer's cholesterol treatment Lipitor in place until December 2011.

At the same time, only 93 S&P 500 stocks showed gains, led by coal miner and natural gas producer CONSOL Energy (CNX, news, msgs), up 7.3% to $117.34. Just 10 stocks in the Nasdaq-100 Index ($NDXL.X) were higher. The index was off 22 points, or 1.1% to 1,951, with BlackBerry maker Research In Motion (RIMM, news, msgs) the leader with a 1.6% gain to $144.45.

Energy prices -- New York close
 Wed.Tues.Chg.Month chg.YTD chg.
Crude oil (NYMEX) (per barrel)$136.68$134.01$2.677.33%42.40%
Heating oil (per gallon)$3.8600$3.8222$0.03785.27%45.69%
Natural gas (per million BTU)$13.2100$12.9520$0.258012.88%76.53%
Unleaded gasoline (per gallon)$3.4667$3.4179$0.04883.54%39.18%

Boeing's tanker appeal is sustained

Boeing (BA, news, msgs) shares were up 0.4% to $74.65 in heavy trading after the General Accounting Office said the Air Force had made "significant errors" in awarding a $35 billion tanker contract to a partnership of Northrop-Grumman (NOC, news, msgs) and Airbus parent EADS. The GAO said the process was so badly flawed that the contract should be rebid.

Northrop-Grumman was down 1.5% to $70.01.

Douglas Harned, an analyst at Sanford C. Bernstein, was surprised by the GAO's ruling. "It is a big positive for Boeing," he said.

Fuel costs slap FedEx

FedEx said soaring jet fuel costs caused a loss in its most recent quarter, and things won't get much better anytime soon.

FedEx reported a fiscal-fourth-quarter loss of 78 cents per share, down from a profit of $1.96 per share in the same period a year ago. Excluding charges, FedEx earned $1.45 per share, down from $1.90 per share a year ago. Analysts had expected earnings of $1.47 per share.

FedEx's near-term outlook is pretty grim. The company said it expects fiscal-first-quarter earnings of between 80 cents and $1 per share, well below a previous forecast of $1.25 per share. The company also forecast fiscal 2009 earnings of between $4.75 and $5.25 per share, far lower than a previous forecast of $5.84 per share.

"Record high fuel prices and the weak U.S. economy dampened volume growth and substantially affected our bottom line," said Chief Executive Officer Frederick Smith in a press release.

United, Northwest to cut capacity, jobs

UAL's (UAUA, news, msgs) United Airlines said today that 1,400 to 1,600 jobs will be eliminated. The airline, which estimated its fuel bill for the year would rise nearly 60% to $9.5 billion, also said it is reducing fourth-quarter domestic capacity by 13.5% to 14.5%. It will also permanently ground 100 aircraft.

United made the comments at a Merrill Lynch Global Transportation Conference.

The airline said it is trying to create new revenue streams to help offset pressure from oil prices. Shares fell 6.4% to $6.55.

And Northwest Airlines (NWA, news, msgs) said late Tuesday that it plans to cut capacity by 8.5% to 9.5% because of soaring fuel costs.

"In response to these extraordinary fuel costs, we are taking prudent actions to reduce our capacity and right-size the airline," said Doug Steenland, Northwest's chief executive officer. The cuts include some measures the company announced in April.

The airline said it will cut its work force but did not give a specific number of job cuts.

Stock Charts (Year)

Northwest Airlines
Graphical chart for NWA
Southwest Airlines
Graphical chart for LUV
Northwest is following similar moves by AMR Corp.'s (AMR, news, msgs) American Airlines, United Airlines and Delta Air Lines (DAL, news, msgs).

Shares of Northwest fell 4.4% to $6.48. The Amex Airline Index ($XAL.X) was down 3.4% to 17.63.

Airlines to lose billions

Meanwhile, a trade group said that U.S. airlines could lose as much as $13 billion this year, because of the increase in fuel costs. Air Transport Association CEO James May said losses would likely be at least $7 billion. The worst year on record for the industry was 2002, when the airlines lost $11 billion.

Jet fuel has jumped 81% in the past year. May predicted that the airlines would spend a total of $61 billion on fuel costs this year, topping last year's record of $41.2 billion.

The only airline to hedge against the increase in fuel prices is actually considering boosting its fleet of planes. Southwest Airlines (LUV, news, msgs) may keep 10 planes it had planned to retire from its fleet and may also add 14 new jets, according to Bloomberg News.

Southwest locked in about three-quarters of the fuel it needs for 2008 at prices equivalent to crude oil at $51 a barrel. It has hedges on fuel costs through 2012. The airline also told Bloomberg that it has no plans to start charging for checked bags or sodas. S0uthwest fell 1.1% to $14.14.

American recently announced plans to charge $15 for a first checked bag, and US Airways (LCC, news, msgs) said it will charge $2 for bottled water and soft drinks, both moves designed to help offset the huge increase in oil and fuel prices.

Bush calls for more drilling

President Bush called on Congress to lift the ban on offshore drilling. The ban has in place since 1981.

"There is no excuse for delay," Bush said. "We will meet the energy challenges we face" and keep the economy vibrant, the president said.

Nearly 60% of Americans believe that the U.S. should drill for more domestic oil, according to a Reuters/Zogby poll. Most experts believe, however, it would take 10 years before any discoveries made off the coasts could be turned into production.

Meanwhile, crude oil supplies fell by 1.2 million barrels last week, according to the Energy Department. Oil supplies have fallen by nearly 25 million barrels in five weeks.

As important, demand for gasoline is slowly coming down in the United. States. Over the last four weeks, demand has averaged about 9.3 million barrels per day, down 1.8% from a year ago.

Morgan Stanley profit plunges

Morgan Stanley reported second-quarter earnings of $1.01 billion, or 95 cents per share, a 61% decline from last year's profit of $2.57 billion, or $2.45 per share.

Analysts had expected the company to earn 92 cents per share.

"They made about $700 million from selling a Spanish wealth-management business. If you have to go all the way to Spain to make numbers, it's not good," analyst Matt McCormick of Bahl & Gaynor Investment Counsel, told Reuters. "How many more rabbits do they have in their hat? What's going to be the driver of earnings growth going forward?"

Another analyst was less skeptical. "It seems like it's generally par for the course," Ben Wallace, of Grimes & Company, told Reuters. "The big decline is in fixed income, which is what you'd expect."

Revenue for the quarter fell 38% to $6.51 billion, missing analysts' estimates of $7.05 billion.

Morgan Stanley, like many other financial-services companies, has suffered in recent months because of bad bets related to the subprime-mortgage mess.

On Tuesday, Goldman Sachs (GS, news, msgs) reported better-than-expected earnings of $2.1 billion, but profit at Goldman declined 10% from a year ago. On Monday, Lehman Bros. (LEH, news, msgs) confirmed a previously announced $2.8 billion loss, its first since going public in 1994.

Lehman was down 1.4% to $24.78 today; Goldman Sachs was one of the few winners among financial stocks, rising 1.9% to $182.77.

Fifth Third cuts dividend

Regional bank Fifth Third Bancorp said it is cutting its quarterly dividend to 15 cents from 44 cents, a 66% reduction, to raise capital.

Fifth Third also said it will raise $1 billion by selling convertible preferred shares and that it will sell noncore assets. The bank did not specify which parts of its business it might sell.

The bank also said it expects to earn between a penny and a nickel a share in the second quarter; the Street's estimate is 42 cents a share.

"Our bottom-line results won't meet our expectations," said Chief Executive Kevin Kabat in a statement. "We are not satisfied with these results and know that they are disappointing to investors as well."

Kabat was also named chairman, replacing George Schaefer, Jr., who retired from the board Tuesday.

BOE keeps rates on hold

The Bank of England decided this morning to keep interest rates steady at 5%.

Inflation has been a major concern for the United Kingdom, prompting speculation that the BOE would raise rates.

"If there were a serious threat to medium-term inflation expectations then a pre-emptive rise in rates would be appropriate," the BOE stated, in explaining today's decision. "Delay would only increase the eventual costs of bringing inflation back to target."

The BOE lowered rates three times during the winter and early spring.

In the U.S., forecasters continue to predict that the Federal Reserve will keep rates steady when it meets Tuesday and Wednesday. While some American economists have grown increasingly worried about inflation in food and energy prices, several published reports have suggested that the Fed will hold its key federal funds rate, the banks charge each other for overnight loans, at 2%.

The Fed lowered rates from 5% to 2% between September 2007 and April 30.

Short hits from the markets -- 4 p.m.
 Wed.Tues.Chg.Month chg.YTD chg.
Treasurys
13-week Treasury bill1.880%1.955%-0.0751.62%-40.13%
5-year Treasury note yield3.564%3.665%-0.1014.61%3.15%
10-year Treasury note yield4.154%4.225%-0.0712.67%2.95%
30-year Treasury bond yield4.730%4.790%-0.0600.49%6.08%
Currencies
U.S. Dollar Index73.84073.925-0.0851.22%-3.72%
British pound in dollars$1.9585$1.95730.0012-1.25%-1.55%
Dollar in British pounds £0.5106£0.5109-0.00031.27%1.57%
Euro in dollars$1.5533$1.55130.0019-0.17%6.28%
Dollar in euros€ 0.6438€ 0.6446-0.00080.17%-5.90%
Dollar in yen 107.83107.95-0.121.36%-3.59%
Canadian dollar in U.S. dollars$0.983$0.982$0.0016-2.36%-0.97%
U.S. dollar in Canadian dollars$1.018$1.019-$0.00102.43%0.99%
Commodities
Gold$893.50$886.90$6.600.70%6.62%
Copper$3.7475$3.6505$0.103.92%23.23%
Silver$17.3400$17.0750$0.272.82%16.22%
Corn$7.4625$7.4225$0.0424.53%63.83%
Crude oil (NYMEX) (per barrel)$136.68$134.01$2.677.33%42.40%

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