Dow falls 167 on record oil, GM fears

By Charley Blaine and Elizabeth Strott

The Dow Jones industrials entered bear market territory today after crude oil hit a new closing high and shares of General Motors (GM, news, msgs) shares slumped below $10 today -- a level not seen since 1954.

GM slumped more than 15% to $9.98 after an analyst suggested the automaker may need to seek bankruptcy protection to survive slumping sales.

The Dow fell nearly 167 points, or 1.5%, to 11,215. The blue-chip index is now down 20% from its highs of last October; a loss of 20% is the popular definition of a bear market. The Standard & Poor's 500 Index was off 23 points, or 1.8%, to 1,262. And the Nasdaq Composite Index was off 54 points, or 2.3%, to 2,251.

Crude oil, meanwhile, closed at a new high of $143.57 a barrel in New York, up $2.60 from Tuesday, and hit $144.19 a barrel in electronic trading late in the day. Crude is up nearly 50% this year.

Trading will close at 1 p.m. ET Thursday for the July Fourth holiday, but investors will have much to chew on. First is the probability the European Central Bank will raise its key interest rate to 4.25% from 4% now. That would put pressure on the U.S. dollar and oil prices.

Then, the Labor Department will report on unemployment and payroll employment trends for June just before the market opens.

GM may need $15 billion

GM closed down 15.1% to $9.98 after Merrill Lynch analyst John Murphy said the company might need to raise up to $15 billion in new capital to get through 2008 and 2009. The company insisted it had enough to cash to get through 2008 and could sell assets and make other moves in 2009.

Bankruptcy is "not impossible" if the U.S. auto market continues to slump, wrote Murphy, who has a good track record covering automobile companies. A GM bankruptcy would put all labor contracts at risk and take years to resolve and could cause problems for thousands of suppliers.

• Bankruptcy fears batter GM shares

Murphy cut GM to "underperform" from "buy" and lowered his price target for the largest U.S. automaker to $7 a share.

He also lowered his forecast for 2008 U.S. industrywide light vehicle sales for the third time this year and said the recent drastic decline in sales would likely to continue through 2009. He expects 14.3 million U.S. auto sales this year and 14 million units for next year. That compares with 16.15 million units in 2007.

• Top stocks blog: GM sales up everywhere but here

On Tuesday, GM surprised investors with a June sales report that wasn't nearly as bad as feared and sparked a dramatic recovery for the U.S. stock market. The stock was up more than 15% at one point before fading to a 2.3% gain.

But sales overall were at 15-year lows as high gas prices are causing buyers to shun gas-guzzling trucks and sport utility vehicles for more fuel-efficient vehicles.

The national average price of gasoline was $4.092 a gallon, AAA's Fuel Gauge Survey showed today, up from $4.087 Tuesday and up 39% from a year ago.

• Video: Catch the latest news on General Motors

Although analysts have said GM will need to raise capital to cover continued losses before 2010, $15 billion is a higher estimate than any other analysts have suggested. Murphy insisted the number is realistic because of the possibility his estimates of industry sales declines might be too low.

GM is being forced to use much of its cash to finance incentives to get customers to buy cars. A drop of 1 million industrywide sales, he added, will drop GM's cash position by $3 billion.

The woes for GM's stock also hurt shares of its rivals. Ford Motor (F, news, msgs) was down 7.4% to $4.36. Toyota Motor (TM, news, msgs) was off 2.4% to $91.40. Honda Motor (HMC, news, msgs) was down 2.2% to $33.29, and Nissan (NSANY, news, msgs) was off 3% to $15.80.

Values of GM bonds were also falling, and yields were soaring. The yield on a bond due in July 2033 with a coupon or stated rate of 8.375% was up to 15.3% this afternoon, according to TRACE, the market-tracking service of the Financial Industry Regulatory Authority. That translates into a price of about $55.70, down from about $95 in October.

A big sell-off; even energy shares fall

GM was the biggest loser among the 30 stocks in the Dow, but it was hardly alone.

Twenty-four of the 30 Dow stocks were lower, as were 415 S&P 500 stocks and 88 stocks in the Nasdaq-100 Index ($NDX.X), which tracks large Nasdaq stocks.

The Dow also wasn't alone in reaching bear market levels. The Nasdaq, the Standard & Poor's 100 Index ($OEX.X) and the Russell 2000 Index ($RUT.X), which tracks small-cap stocks -- are all down at least 21% from their highs of 2007.

The S&P 500 finished the day down 19.4% from its all-time high last October. It also closed above 1,256.98, its 2008 intraday low on March 17.

Japan's Nikkei 225 Index ($N225) and Germany's Dax Index ($DE:DAX) are also down more than 20% from their 2007 highs.

JPMorgan Chase (JPM, news, msgs) was the Dow leader, up 1.7%, to $34.60, followed by Procter & Gamble (PG, news, msgs), up 1.2% to $62.69, and Coca-Cola (KO, news, msgs), up 0.7% to $51.37. The latter two are classic defensive stocks. They do well in bad markets because people will buy detergents and other household products and continue to drink sodas.

Caterpillar (CAT, news, msgs) and Alcoa (AA, news, msgs) were the biggest losers after GM. Metals, industrials and coal stocks were battered badly today as profit-taking and short-selling combined to knock these stocks lower. Caterpillar had been one of the Dow's stars for much of the year.

Steel makers Nucor (NUE, news, msgs), U.S. Steel (X, news, msgs) and Steel Dynamics (STLD, news, msgs) all fell 10% or more. Steel stocks had their steepest decline since 2002 as concern grew that the auto slump will cut demand and the government said metals orders decreased. The Dow Jones U.S. Steel Index ($DJUSST) fell 13%, its first loss of more than 10% since Sept. 23, 2002.

Caterpillar fell 5% to $70.42. Alcoa, which reports second-quarter earnings on Tuesday, fell 6.8% to $32.11. Caterpillar, Alcoa and GM alone contributed 63 points -- or more than a third -- to the Dow's loss.

Coal producers Massey Energy (MEE, news, msgs) and Arch Coal (ACI, news, msgs) were off 18.9% to $74.87 and 17.2% to $62.21, respectively, after coal prices dropped sharply in South Africa and Europe.

Energy prices -- New York close

	Wed.	Tues.	Chg.	Month chg.	YTD chg.
Crude oil (NYMEX) (per barrel)	$143.57	$140.97	$2.60	2.55%	49.58%
Heating oil (per gallon)	$4.0715	$3.9435	$0.1280	4.32%	53.68%
Natural gas (per million BTU)	$13.3890	$13.5050	-$0.1160	0.27%	78.93%
Unleaded gasoline (per gallon)	$3.5494	$3.5134	$0.0360	1.37%	42.50%

Why crude moved higher

Crude surged to new highs after the government reported a decline in crude supplies and the dollar fell again.

Oil's appeal as a hedge against inflation may rise if the European Central Bank increases interest rates Thursday, as forecast by economists, causing the dollar to fall. Supplies dropped 1.98 million barrels to 299.8 million last week, the lowest since January, the Energy Department said.

"As the dollar falls, oil becomes cheaper to foreign countries," James Cordier, president of Liberty Trading Group in Tampa, told Bloomberg News.

Heating oil futures -- a proxy for diesel fuel -- closed at a record $4.0715 a gallon, its first close over $4.

Despite oil's gains, energy shares were lower. ExxonMobil (XOM, news, msgs) was off 1% to $87.41. Chevron (CVX, news, msgs) fell 1.7% to $97.42. The Philadelphia Oil Service Index($OSX.X) dropped 4.4% to 341. Schlumberger (SLB, news, msgs) dropped 5.9% to $103.36.

Airline stocks also fell. The Amex Airline Index($XAL.X) was down 6.7% to 14.57; Continental Airlines (CAL, news, msgs) fell 11.2% to $8.84.

Deutsche Bank, UBS give financials a lift

For once, the losses in the stock imarket weren't due to weakness in financial stocks.

Deutsche Bank (DB, news, msgs), Germany's biggest bank, this morning said that it expects to report a profit in the second quarter. The bank also said that its capital position is in good condition and that it doesn't need to raise more.

Swiss bank UBS (UBS, news, msgs) also said it wouldn't be seeking new capital from outside investors, and JPMorgan Chase analysts said that the worst of the mortgage-market-related write-downs is past for European banks.

"This is comforting news," Konrad Becker, a Merck Finck & Co. analyst, told Bloomberg News.

Deutsche shares closed up 2.4% to $85.64 in New York, although shares are down 35% since the beginning of the year. UBS shares fell 2.6% to $19.83.

More jobs lost in June?

The economy shed 79,000 private-sector jobs in June, according to a report from ADP Employer Services. That's the biggest drop in more than five years and much worse than economists' expectations of a decline of 20,000.

The manufacturing sector was hit the hardest, with 44,000 jobs lost last month, according to ADP.

The ADP report comes one day ahead of the Labor Department's June jobs report, which will be released Thursday. Wall Street expects the department's report to show a loss of 60,000 nonfarm jobs.

The ADP report took the wind out of the markets' sails a bit this morning, but many economists take the ADP report with a large grain of salt. It often varies greatly from the government's report.

The government report, normally released on the first Friday of the month, will come a day early because of the Independence Day holiday.

Meanwhile, a separate report from the Commerce Department this morning showed a slight gain in factory orders in May. Orders rose 0.6% in May from April, better than the 0.5% increase that economists had expected. April orders were revised higher to a 1.3% gain.

Changing vacation plans hurt Avis Budget

The soaring price of gasoline has taken a toll on Americans, forcing many to change their summer vacation plans.

That has slammed car rental company Avis Budget (CAR, news, msgs), which today said profit would fall this quarter and for the whole year.

• Read more: Gas prices crimping vacation plans?

The third-biggest car rental company said second-quarter and full-year profit will fall short of last year's results: The company earned $24 million, or 23 cents per share, in the second quarter of 2007 and reported a fiscal 2007 loss of $916 million, or $8.88 per share.

Shares of Avis Budget slumped 22% to $5.69 on the news.

Microsoft still interested in Yahoo

It seems Microsoft (MSFT, news, msgs) can't get over its crush on Yahoo (YHOO, news, msgs). According to The Wall Street Journal, the software giant has reached out to other media companies to discuss joining forces in a deal to break up Yahoo. (Microsoft is the publisher of MSN Money.)

Microsoft has talked with Time Warner (TWX, news, msgs) and News Corp. (NWS, news, msgs) about a deal in which Microsoft would buy Yahoo's search business and the other partner would take the rest of Yahoo, the newspaper reported.

The news comes just a day after Yahoo shares traded below $20 for the first time since Microsoft made its initial $31-per-share offer for the company on Feb. 1. In May, Microsoft withdrew a sweetened $33-per-share offer for Yahoo.

Yahoo shares rose 3.4% to $20.88 on the day; yesterday, it briefly fell under $20 for the first time since Microsoft launched its original offer. Microsoft fell 3.7% to $25.88.

Microsoft has also reached out to billionaire investor Carl Icahn, the report said, encouraging him to continue his proxy fight with Yahoo's board of directors.

"It's clear that they're still interested," money manager Jack Neele of Robeco told Bloomberg News. "Microsoft still has this tiny problem in search: They're losing market share to Google (GOOG, news, msgs). If they want to deal with that seriously, they need to buy market share or invest in it themselves, and that hasn't been successful so far."

In early June, Yahoo announced an advertising partnership with Google, by far the dominant force in search advertising. More recently, Yahoo announced a reorganization plan.

Yahoo shares have slumped 25% over the past year.

Google, meanwhile, fell 1.4% to $527.04.

Blockbuster bails on Circuit City bid

Video rental chain Blockbuster (BBI, news, msgs) late Tuesday said it is withdrawing its offer of up to $1.35 billion for electronics retailer Circuit City (CC, news, msgs).

Blockbuster, which made its offer for Circuit City in April, cited market conditions and the completion of its due diligence examination of Circuit City -- a polite way of saying Blockbuster didn't like the look of Circuit City's books.

Shares of Blockbuster, up more than 10% earlier in the day, finished up 5.6% to $2.65. Circuit City shares tumbled 9% to $2.32.

UnitedHealth cuts outlook

UnitedHealth Group (UNH, news, msgs) is lowering guidance because of the slowing economy.

The health insurance giant said it expects adjusted earnings for 2008 to be between $2.95 and $3.05 per share, well below a previous forecast of between $3.55 and $3.60 per share.

UnitedHealth shares fell 2% to $25.12.

Separately, the company said it will pay $895 million to settle a class-action lawsuit regarding the backdating of stock options.

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

	Wed.	Tues.	Chg.	Month chg.	YTD chg.
Treasurys
13-week Treasury bill	1.790%	1.825%	-0.035	4.99%	-42.99%
5-year Treasury note yield	3.293%	3.341%	-0.048	-1.44%	-4.69%
10-year Treasury note yield	3.959%	3.992%	-0.033	-0.50%	-1.88%
30-year Treasury bond yield	4.503%	4.544%	-0.041	-0.62%	0.99%
Currencies
U.S. Dollar Index	72.335	72.670	-0.335	-0.64%	-5.68%
British pound in dollars	$1.9932	$1.9944	-0.0012	0.00%	0.20%
Dollar in British pounds	£0.5017	£0.5014	0.0003	0.00%	-0.20%
Euro in dollars	$1.5896	$1.5896	0.0000	0.92%	8.76%
Dollar in euros	€ 0.6291	€ 0.6291	0.0000	-0.91%	-8.05%
Dollar in yen	105.91	105.81	0.10	-0.26%	-5.31%
Canadian dollar in U.S. dollars	$0.987	$0.989	-$0.0021	0.76%	-0.56%
U.S. dollar in Canadian dollars	$1.014	$1.011	$0.0029	-0.73%	0.58%
Commodities
Gold	$946.50	$928.30	$18.20	1.96%	12.95%
Copper	$4.0635	$3.8825	$0.18	4.66%	33.62%
Silver	$18.4250	$17.5100	$0.91	5.23%	23.49%
Corn	$7.4875	$7.1950	$0.29	3.31%	64.38%
Crude oil (NYMEX) (per barrel)	$143.57	$140.97	$2.60	2.55%	49.58%