Market Dispatches

Market Dispatches6/20/2008 6:40 PM ET

Dow off 220, hits lowest level since March

The market is gripped by broad selling. Worries that Israel will attack Iran's nuclear facilities drive crude oil above $134 a barrel, and few expect the weekend's oil summit in Saudi Arabia to bring relief. Financial stocks weaken; GM and Ford sag on a worsening outlook for auto sales.

By Charley Blaine and Elizabeth Strott

The stock market slumped badly on Friday after crude oil rebounded on the potential of expanded war in the Middle East and deepening worries about the health of financial and automotive companies.

The Dow Jones industrials closed down 220 points, or 1.8%, to 11,843. The Standard & Poor's 500 Index was down 25 points, or 1.9%, to 1,318, and the Nasdaq Composite Index was off 56 points, or 2.3%, to 2,406.

It was the Dow's lowest close since March 17, the day after investment bank Bear Stearns was sold to JPMorgan Chase (JPM, news, msgs) with the help of the Federal Reserve Board.

The losses were the biggest for the three indexes since June 6, when the Dow fell nearly 400 points. Markets generally fell about 3% on the week.

It's not clear what will restore confidence to a market badly shaken by weakening financial stocks and soaring oil prices.

Friday's close was exaggerated by quadruple witching, as contracts for stock-index futures, stock-index options, stock options and single-stock futures expired.

Crude oil jumped to as high as $136.80 a barrel before closing at $134.62, up 2% from Thursday. The catalyst was reports suggesting Israeli military forces were preparing for an attack on Iranian nuclear facilities. Production disruptions in Nigeria were also reported.

An attack might invite the Iranians to block the Strait of Hormuz, cutting off 25% of the world's oil supply.

Crude had fallen to $131.93 on Thursday after China said it was boosting gasoline and diesel prices to boost production and trim demand.

All 30 Dow stocks were lower on Friday. Only 44 S&P 500 stocks were higher, along with four stocks in the Nasdaq-100 Index ($NDX.X), which fell 54 points, or 2.7% to 1,928.

General Motors (GM, news, msgs) was the biggest Dow loser, falling 6.8% to $13.79, its lowest close since February 1982. GM was pulled down by rival Ford Motor (F, news, msgs), which said its outlook was worsening and it may delay the introduction of a new model of its F-150 pickup.

In addition, Standard & Poor's also put the debt of Ford, GM and Chrysler Group -- and their financial arms -- on credit watch with negative implications, meaning it expects the stocks to be downgraded.

The rating agency said it was concerned that business is getting so beaten up by higher oil prices that all three may run into serious liquidity problems in the second half of 2009.

Ford was down 8.1% to $5.81. Chrysler is controlled by buyout firm Cerberus Capital.

The growing fear that has clearly hit the stock market will almost certainly extend into next week.
There is a lot of interest in this weekend's meeting between oil producers and oil consumers in Saudi Arabia. The Saudis are expected to confirm a production increase of at least 200,000 barrels of oil a day. Whether that does anything for oil prices remains to be seen.
Global oil production is about 87 million barrels a day, and it's not clear the Saudis can put enough supply on the market to push prices lower.

Then, the world will turn its focus to the Federal Reserve's meeting Tuesday and Wednesday. The Central Bank is expected to leave its key federal funds rate at 2%, its level since April 30. The fed funds rate is what banks charge each other for overnight loans and is the foundation for most domestic interest rates.

In addition, the Commerce Department is expected to report new home sales for May on Wednesday, and the National Association of Realtors will report on May sales on Thursday.

Earnings reports are light but include Research In Motion (RIMM, news, msgs), Oracle (ORCL, news, msgs) and General Mills (GIS, news, msgs), all on Wednesday.

The markets for the week
Close for weekWk. ago close% chg.YTD. chg.
Dow Jones industrials11,842.6912,209.81-3.01%-10.72%
S&P 500 1,317.931,360.68-3.14%-10.24%
Nasdaq Composite2,406.092,474.56-2.77%-9.28%
Russell 2000725.73740.37-1.98%-5.26%
Crude oil per barrel$134.62$134.86-0.18%40.26%
10-yr. Treasury yield4.14%3.94%5.05%2.53%
Gold per troy ounce$903.70$873.103.50%7.84%

It was a painful week

General Motors was the Dow's worst stock, down 16.2%. Boeing (BA, news, msgs)and United Technologies (UTX, news, msgs) were the only Dow winners for the week, up 1% and 0.4%, respectively.

This was the fourth-worst week of the year for the Dow and S&P and seventh-worst for the Nasdaq. The Dow was off 3%, the S&P 500 fell 3.1% and the Nasdaq slid 2.8%.

For the year, the Dow is back to a loss of 10.7% and is off 16.4% from its October 2007 high. The S&P 500 is down 10.2% for the year and 15.8% from October. The Nasdaq's decline for 2008 is 9.3%; it's down 15.9% from its October high.

While crude oil is up 40% on the year and nearly a third this quarter, it finished the week basically unchanged.

Energy prices -- New York close
 Fri.Thur.Chg.Month chg.YTD chg.
Crude oil (NYMEX) (per barrel)$134.62$131.93$2.695.71%40.26%
Heating oil (per gallon)$3.7717$3.7135$0.05822.86%42.36%
Natural gas (per million BTU)$12.9940$12.8610$0.133011.03%73.65%
Unleaded gasoline (per gallon)$3.4392$3.3526$0.08662.72%38.08%

Financials under pressure

The financial sector, which has been in hot water for months, was battered again Friday.

Merrill Lynch (MER, news, msgs) expects Bank of America (BAC, news, msgs) and Regions Financial (RF, news, msgs) to cut their dividends in coming weeks. Merrill also said that Bank of America, Regions, Wachovia (WB, news, msgs) and SunTrust (STI, news, msgs) might need to raise capital in the second half of the year.

Merrill also lowered its 2008 earnings estimates for U.S. large-cap banks by an average of 22%.

Bank of America shares of fell 3.7% to $27.10 Friday; Wachovia shares were down 1.9% to $17.43. Regions Financial shares were up 4 cents, or 0.4%, to $11.22.

SunTrust, however, saw its shares jump 5.5% to $37.27 after it pointedly reaffirmed its outlook and said it did not envision cutting its dividend or selling new shares.

Meanwhile, Reuters reported that rumors are circulating that Merrill may issue a profit warning about its own quarterly results. Merrill denied the rumor, and CNBC's David Faber also said it's not true.

The real problem is that people assume rumors are true, Art Cashin, director of floor operations for UBS, told CNBC. "Nobody's safe. You can start a rumor on anybody in a negative sense, and it's almost universally believed."

At the first sign of trouble, added Madison Prop Trading's Chris Conefry, investors sell.

The denials did Merrill no good; shares were down 4.6% to $35.95.

Bond insurers get downgraded

Ambac Financial (ABK, news, msgs) and MBIA (MBI, news, msgs) shares plunged Friday after Moody's Investors Service downgraded their AAA ratings late Thursday.

Moody's downgraded MBIA because of its "limited financial flexibility and impaired franchise," said Moody's analyst Jack Dorer. Ambac has "significantly constrained new business prospects" and likely face more losses, Dorer said.

Stock Charts (Year)

Ambac Financial
Graphical chart for ABK
MBIA
Graphical chart for MBI
MBIA's "financial condition is very strong," Chief Executive Officer Jay Brown said in a statement. "We remain committed to maintaining capital strength for our policyholders and financial flexibility consistent with our goal of increasing shareholder value."

Bond insurers have been walloped amid the mortgage-market meltdown. Shares of MBIA fell 13.3% to $5.59; Ambac closed up 1% to $2.05 on the news.

Saudi summit this weekend

Oil's surge has become a global issue, and the world's biggest oil producer is hosting a meeting with other producers this weekend to consider a response to soaring oil prices.

Saudi Arabia is expected to announce plans to increase production by 200,000 barrels a day after previously boosting daily production by 300,000 barrels. But other members of the Organization of Petroleum Exporting Countries are opposed to Saudi Arabia's moves.

"If Saudi Arabia undertakes to raise output unilaterally, it will be a wrong action," said Mohammad Ali Khatibi, Iran's OPEC governor, in a statement posted on the Web site of the state television station.

The increase may do little to help ease prices, some analysts say. "If the Saudis could get that number up to an additional 400,000 to 500,000, then I think that would be a factor that could help push us down a few dollars," analyst Peter Beutel of Cameron Hanover told CNBC. "I think 200,000 is already factored into the markets."

"(Saudi Arabia) is seen as running out of options to regain control of the market," Antoine Halff, head of research at Newedge USA, told CNNMoney. "Failure to do so, it is assumed, could cause prices to leap even higher." Higher prices could mean a drop in demand, which in turn, would end up hurting Saudi Arabia.

Venezuela's president, Hugo Chàvez, and its energy minister, Rafael Ramirez, originally said Friday that they won't be attending. Later, however, Ramirez said he would appear.

Americans driving less

The rising price of oil has translated to soaring gas prices at the pump. That has resulted in changes in drivers' behavior.

Americans drove about 935 billion vehicle miles this year through the end of April, according to the Federal Highway Administration's monthly Travel Trends report. That's the lowest amount since 2003, when Americans drove 899 billion miles.

Americans drove 246 billion miles in April, 1.8% fewer than the 250 billion in April 2007.

The average price of regular gasoline Friday hit $4.08 a gallon, according to AAA's Fuel Gauge report. Gas prices have been hitting record after record in recent weeks.

Ford: More truck delays

Ford's stock was immediately pressured Friday when it said Friday that it will delay the introduction of its new F-150 pickup truck.

The F-150 pickup had been the best-selling vehicle in the world by monthly sales until May, when it was topped by Toyota Motor's (TM, news, msgs) Camry and Corolla, and Honda Motor's (HMC, news, msgs) Civic. The F-150 had held the top spot since October 1991. The rise of gas prices has many drivers turning to more fuel-efficient cars as opposed to bigger, gas-guzzling trucks, which has hurt Ford. Ford said it will increase its production of cars and crossovers.

Ford expects overall U.S. sales to fall to between 14.7 million and 15.2 million units, below a previous forecast of 15 million to 15.4 million units.

In late May, Ford said that it would not be profitable by 2009, a blow to CEO Alan Mulally, who had set the turnaround goal upon taking over in September 2006.

Ford also said that 2008 automotive results would be worse than 2007.

WaMu to cut jobs

Washington Mutual (WM, news, msgs) on Thursday announced plans to cut 1,200 jobs, or 2.6% of its work force.

The majority of the cuts are in California and Florida, two states that have been hit hard by the housing slump. WaMu already eliminated 3,000 jobs earlier this year.

The job cuts are part of the mortgage lender's plan to reduce costs by $500 million to $600 million. WaMu lost more than $1.1 billion in the first quarter of 2008 because of the mortgage-market meltdown and has lowered its quarterly dividend twice in recent months.

Shares of Washington Mutual closed up 0.5% to $6.38.

Yahoo to restructure

Yahoo (YHOO, news, msgs) is planning a massive overhaul to its executive ranks, The Wall Street Journal reported, after several key executives left the company in recent days. (Microsoft is the publisher of MSN Money.)

Yahoo President Susan Decker is pushing for plans to centralize some of its product groups into one global-product organization, the newspaper reported, and details of the plan could be announced as early as next week.

Yahoo shares fell 3.3% to $21.99 Friday. Since May 2, the day before Microsoft (MSFT, news, msgs) walked away from its original $44 billion bid for Yahoo, the stock is down 23%. The stock was down 15% for the week and is now down nearly 4% on the year.

Caterina Fake and Stewart Butterfield, who co-founded the Flickr photo-sharing site that Yahoo bought three years ago, recently said they will leave the company.

Stock Charts (Year)

Yahoo
Graphical chart for YHOO
They follow Jeff Weiner, executive president of Yahoo's network division, and Usama Fayyad, Yahoo's chief data officer.

Qi Lu, executive vice president for search and advertising technology, will leave Yahoo at the end of August, and Vish Makhijani, senior vice president of search, is also leaving.

Yahoo investor wants Microsoft back

Meanwhile, Mark Nelson, partner at Mithras Capital, which owns 1.7 million Yahoo shares, wants Microsoft to take its case to Yahoo shareholders.

In a letter to Microsoft CEO Steve Ballmer, Nelson said that taking the offer straight to shareholders would give Microsoft the chance to "credibly and convingly" spell out why a Microsoft merger makes more sense for Yahoo shareholders and why they should vote for activist shareholder Carl Icahn's slate of directors at Yahoo's Aug.1 annual meeting.

Microsoft but recently proposed a deal to buy a 16% stake in Yahoo and an acquisition of its search business for $9 billion.

Yahoo last week announced an advertising deal with mutual rival Google (GOOG, news, msgs).

Short hits from the markets -- 4 p.m.
 Fri.Thur.Chg.Month chg.YTD chg.
Treasurys
13-week Treasury bill1.800%1.860%-0.060-2.70%-42.68%
5-year Treasury note yield3.548%3.651%-0.1034.14%2.69%
10-year Treasury note yield4.137%4.199%-0.0622.25%2.53%
30-year Treasury bond yield4.702%4.751%-0.049-0.11%5.45%
Currencies
U.S. Dollar Index73.38073.870-0.4900.59%-4.32%
British pound in dollars$1.9763$1.97320.0031-0.35%-0.65%
Dollar in British pounds £0.5060£0.5068-0.00080.35%0.66%
Euro in dollars$1.5613$1.55110.01020.35%6.82%
Dollar in euros€ 0.6405€ 0.6447-0.0042-0.34%-6.39%
Dollar in yen 107.31107.93-0.620.87%-4.06%
Canadian dollar in U.S. dollars$0.984$0.986-$0.0015-2.29%-0.90%
U.S. dollar in Canadian dollars$1.017$1.015$0.00232.35%0.92%
Commodities
Gold$903.70$893.50$10.201.85%7.84%
Copper$3.8305$3.7475$0.086.23%25.96%
Silver$17.3970$17.3400$0.063.15%16.60%
Corn$7.2125$7.4625-$0.2520.36%58.34%
Crude oil (NYMEX) (per barrel)$134.62$131.93$2.695.71%40.26%

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