Market Dispatches

Market Dispatches7/10/2008 7:15 PM ET

Dow gains 82; oil tops $141

Crude oil jumps on reports of more Iranian missile tests. Stocks manage gains as Alcoa jumps nearly 10%, but GM falls to $9.69. Rohm and Haas sells out to Dow Chemical for $18 billion. GE will sell its consumer and industrial business; its earnings are due Friday.

By Charley Blaine and Elizabeth Strott

Stocks ended higher today after volatile trading that saw weakness in some key financial stocks and oil closing above $141 a barrel.

The Dow Jones industrials saw a 122-point gain disappear in 30 minutes as crude abruptly shot up $5.60 from Wednesday to close at $141.65. The blue chips then recovered to a gain of 82 points to 11,229.

The Standard & Poor's 500 Index was up 9 points to 1,253. The Nasdaq Composite Index was up 23 points to 2,258.

General Motors (GM, news, msgs) was the Dow loser as investors pushed the stock down 6.2% to $9.69, a 54-year low.

Friday could be as volatile because of oil prices and the worries about the financial system. Plus, Dow component General Electric (GE, news, msgs) reports second-quarter profits. The company said today that it may spin off its consumer and industrial business.

Crude pushed higher on reports of additional Iranian missile testing. In addition, a Nigerian insurgent group announced it would end a cease-fire on Saturday, saying it doesn't want the British government to help in negotiations.

Nigerian oil is critical to U.S. refiners because most U.S. refineries are set up to handle crudes with low sulfur content. Nigerian crude contains very little sulfur.

Investors, however, seemed interested in buying a day after the Dow lost 237 points. They liked energy, metals and chemical, and chip stocks. The S&P 500's big winner was Rohm and Haas (ROH, news, msgs), which agreed to be bought by Dow Chemical (DOW, news, msgs) for $18 billion, or $78 a share.

The all-cash deal includes $3 billion in financing from Warren Buffett's Berkshire Hathaway and $1 billion from the Kuwait Investment Authority.

Alcoa (AA, news, msgs) climbed 9.7% to $34.60, two days after the company beat Wall Street estimate on its second-quarter earnings. Steel stocks moved higher, too, with U.S. Steel (X, news, msgs) rising 4.6% to $165.39 -- on top of a 5.1% gain on Wednesday.

Intel (INTC, news, msgs) jumped 4.1% to $20.62 after CEO Paul Otellini told Bloomberg News that the company is not suffering from a slowing domestic economy. Moreover, he said in Sun Valley, Idaho, that Intel's non-U.S. business -- 75% of the total -- "seems very strong still."

The Dow's oil components -- Chevron (CVX, news, msgs) and ExxonMobil (XOM, news, msgs) -- were up 2.5% to $96.25 and 2.1% to $86.06, respectively.

But investors did by a few financial stocks, including Fifth Third Bank (FITB, news, msgs), which jumped 6.7% to $11.84 and the fifth-best S&P 500 performer.

Energy prices -- New York close
 Thur.Wed.Chg.Month chg.YTD chg.
Crude oil (NYMEX) (per barrel)$141.65$136.05$5.601.18%47.58%
Heating oil (per gallon)$4.0374$3.8516$0.18583.45%52.39%
Natural gas (per million BTU)$12.3000$12.0060$0.2940-7.89%64.37%
Unleaded gasoline (per gallon)$3.5109$3.3808$0.13010.27%40.95%

Are Fannie and Freddie insolvent?

Investors were definitely not buying mortgage capital providers Fannie Mae (FNM, news, msgs) and Freddie Mac (FRE, news, msgs) amid worries about whether the mortgage giants will survive the housing slump. Freddie Mac was down 22% to $8, after falling nearly 24% on Wednesday. Fannie Mae was off 13.8% to $13.20 after falling 13% on Wednesday.

At the same time, shares of Lehman Bros. (LEH, news, msgs) were down nearly 21% on rumors that key partners such as bond investors Pimco were pulling money from the investment bank. But Bill Gross, who manages Pimco's biggest bond funds, said the company wasn't pulling money out of Lehman. The stock closed down 12.4% to $17.30.

The worries about Fannie Mae and Freddie Mac were heightened today by William Poole, the former president of the St. Louis Federal Reserve Bank.

"Congress ought to recognize that these firms are insolvent, that it is allowing these firms to continue to exist as bastions of privilege, financed by the taxpayer," Poole told Bloomberg News Wednesday.

Not so fast, Treasury Secretary Hank Paulson said later.

"Their regulator has made clear that they are adequately capitalized," Paulson said in comments to the House Financial Services Committee. "They play an important role in our housing markets today and need to continue to play an important role in the future."

Although the Bush administration has been discussing the plight of the mortgage giants, it doesn't expect them to fail, The Wall Street Journal reported today. Sources close to the talks told The Journal that the government reportedly does not have any rescue plans in the works, should things start to look even uglier.

Stock Charts (Year)

Fannie Mae
Graphical chart for FNM
Freddie Mac
Graphical chart for FRE
Shares of Fannie Mae have plunged 61% since the beginning of the year as of Wednesday's close; Freddie Mac has plummeted 69% this year.

"They can't be allowed to fail," Peter Wallison, a former Treasury Department general counsel, told The Journal. "The losses would extend through so much of our economy, and so much of the world economy. There is simply no way that the United States government can let it happen."

Fannie and Freddie will most likely end up raising capital from private investors, Graham Fisher & Co. analyst Josh Rosner told the paper.

As their shares sink, it becomes more difficult for them to raise much-needed capital. The companies said today to say they are sufficiently capitalized, and White House spokesman Tony Fratto said that boosting confidence in the companies now is "the single most important thing we need to accomplish."

Fannie Mae was created by Congress in 1938 to promote home buying to Americans; Freddie Mac was created in 1970 to expand the secondary market for mortgages. Together, the two own or guarantee approximately $5 trillion of mortgages -- nearly 50% of all outstanding mortgages in the U.S.

Insolvency is "a very remote possibility" for the two companies, wrote Howard Shapiro, an analyst with Fox-Pitt Kelton Cochran Caronia Waller, in a note today. In order for the companies to go under, Fannie would have to immediately lose $40 billion and Freddie would have to lose $37 billion, neither of which is likely, Shapiro wrote.

While the government doesn't officially guarantee the mortgages backed by them, there is an implicit understanding that the government would step in should a true disaster occur.

The Bear Market scoreboard
ThursdayChange from closing peak Date of peak
Dow Jones Industrial Average

11,229.02

-20.72%

Oct. 9, 2007

S&P 500 Index

1,253.39

-19.92%

Oct. 9, 2007

S&P 100 Index

573.81

-21.37%

Oct. 9, 2007

Nasdaq Composite Index

2,257.85

-21.03%

Oct. 31, 2007

Nasdaq-100 Index

1,839.57

-17.84%

Oct. 31, 2007

S&P Midcap 400 Index

790.75

-13.78%

Oct. 9, 2007

Russell 2000 Index

670.44

-21.66%

July 13, 2007

Dow Jones Utilities Average

520.95

-5.75%

Dec. 10, 2007

Dow Jones Transportation Average

4,816.79

-12.31%

June 5, 2008

Nikkei 225 Index (Japan)

13,067.21

-25.15%

Oct. 11, 2007

FTSE 100 Index (Britain)

5,406.80

-19.67%

Oct. 12, 2007

Dax Index (Germany)

6,305.00

-21.59%

Oct. 12, 2007

Wal-Mart gets stimulus boost, but will it last?

With the economy slowing and prices of food and gas soaring, consumers turned to discount retailer Wal-Mart Stores (WMT, news, msgs) for their shopping needs in June.

But the shares were off 0.8% to $57.21 because there's skepticism that the June results can be duplicated.

Wal-Mart said sales at stores open at least one year rose 6.4% last month, thanks in part to economic stimulus checks that have hit many Americans' mailboxes. Excluding gasoline, sales rose 5.8%. Analysts had expected an increase of 3.8% in June same-store sales.

Wal-Mart said its underlying business remains strong but that it can't gauge the benefit from the economic stimulus rebates throughout the rest of the year.

The retailer also boosted its earnings guidance, saying that it now expects second-quarter earnings to be between 82 and 84 cents per share, up from a previous forecast of between 78 and 81 cents per share.

Retail stocks generally were lower today -- even luxury retailers -- because of worries consumers are increasingly strapped by higher fuel and food costs. Costco (COST, news, msgs) was down 1.8% to $70.86. Macy's (M, news, msgs) fell 9.2% to $16.39. Target (TGT, news, msgs) fell 5.1% to $44.89, and J.C. Penney (JCP, news, msgs) tumbled 10.1% to $31.93.

In the upcoming back-to-school shopping season, in fact, parents are expected to stick to the basics like notebooks and jeans.

"I don't think people are looking for the luxuries -- expensive pens or fancy new computers," said Janet Hoffman, managing partner of the North American retail practice of Accenture. "They are going for the basics and they are on a treasure hunt for value."

GE considers spinoff of unit

General Electric's announcement today that it may spin off its Consumer & Industrial division entirely is an expansion of previously announced plans to sell its 120-year-old appliance unit.

"As we explored our options for Appliances, it became clear that the fastest, most efficient step we could take in completing the transformation of our Industrial portfolio would be to focus on a possible spin-off of the entire unit," said GE CEO Jeff Immelt in a statement.

The division had $13.3 billion in sales last year.

In May, GE said it was considering a sale of its appliance division -- part of the overall Consumer & Industrial unit -- which analysts said could fetch between $5 billion and $8 billion.

GE shares rose 1.7% to $27.64 on the day.

The conglomerate will report second-quarter earnings Friday before the opening bell.

Wachovia's new CEO

One bank that has been hit particularly hard amid the mortgage-market meltdown now has a new chief executive officer.

Wachovia (WB, news, msgs) named former Treasury Undersecretary Robert Steel to the post, after ousting Kennedy Thompson on June 2.

"Clearly, there are challenges ahead in our current climate, but I am encouraged that most areas of the company continue to perform well," Steel said during the announcement.

Wachovia also said it expects to report a loss of between $2.6 billion and $2.8 billion, or $1.23 to $1.33 per share, in the second quarter. The loss will exclude a write-down of goodwill; Wachovia is setting aside $4.2 billion to cover that write-down. The consensus estimate is for profit of 19 cents per share.

Stock Charts (Year)

Wachovia
Graphical chart for WB
Bank of America
Graphical chart for BAC
Wachovia bought Golden West Financial, a mortgage-services company, in May 2006, for $25.5 billion, when housing was hot. A year later, the housing market was slumping and the beginning of the mortgage-market meltdown was around the corner.

Shares of Wachovia fell 8.1% to $13.13. The stock has lost nearly 78% of its value over the past year.

Bank of America to keep dividend

Bank of America (BAC, news, msgs), also hammered by the mortgage mess, offered some encouragement to investors about its financial position late Wednesday.

"Our goal is to keep as many families in their homes as possible," said CEO Kenneth Lewis at a speech in Los Angeles. "We see no reason to cut the dividend and no reason to raise any more capital."

Lewis also said he expects the economy to slowly get back on its feet by the middle of next year.

Bank of America shares rose 1.4% to $22.36 today.

The company completed its acquisition of mortgage-lending giant Countrywide Financial last week.

Short hits from the markets -- 4 p.m.
 Thur.Wed.Chg.Month chg.YTD chg.
Treasurys
13-week Treasury bill1.630%1.790%-0.160-4.40%-48.09%
5-year Treasury note yield3.091%3.107%-0.016-7.48%-10.54%
10-year Treasury note yield3.811%3.834%-0.023-4.22%-5.55%
30-year Treasury bond yield4.421%4.428%-0.007-2.43%-0.85%
Currencies
U.S. Dollar Index72.76573.315-0.550-0.05%-5.12%
British pound in dollars$1.9786$1.9845-0.0059-0.73%-0.53%
Dollar in British pounds £0.5054£0.50390.00150.74%0.54%
Euro in dollars$1.5793$1.57430.00500.27%8.05%
Dollar in euros€ 0.6332€ 0.6352-0.0020-0.27%-7.45%
Dollar in yen 107.04106.790.250.80%-4.30%
Canadian dollar in U.S. dollars$0.992$0.989$0.00301.22%-0.11%
U.S. dollar in Canadian dollars$1.009$1.011-$0.0024-1.19%0.11%
Commodities
Gold$942.00$928.60$13.401.48%12.41%
Copper$3.7185$3.7390-$0.02-4.22%22.28%
Silver$18.3200$18.1750$0.154.63%22.79%
Corn$6.8650$6.9475-$0.08-5.28%50.71%
Crude oil (NYMEX) (per barrel)$141.65$136.05$5.601.18%47.58%

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