Dow falls 93 despite oil's big fall

By Charley Blaine and Elizabeth Strott

In another sign of market weakness, stocks couldn't sustain a big rebound off early selling, and the Dow Jones industrials closed under 11,000 for the first time in two years.

The pullback came despite a big drop in oil prices. Fears about the health of financial stocks reappeared in the last hour of trading.

The Dow fell 93 points to 10,963. The blue-chip index had been down as many as 227 points early in the session. The Standard & Poor's 500 Index closed down 13 points to 1,215.

The Nasdaq Composite Index was up 3 points to 2,216. Pushing the index was strength in semiconductor stocks. The Nasdaq-100 Index ($NDX.X), which tracks the largest Nasdaq stocks, was up slightly to 1,798.

Chip giant Intel (INTC, news, msgs), up 1.2% to $20.71 in regular trading, was slightly higher in after-hours trading after reporting 28 cents a share in second-quarter earnings, two cents better than analyst estimates. Revenue was higher as well, thanks to strong gains in chips used in notebook computers.

Software giant Microsoft (MSFT, news, msgs) was up 4% to $26.15 as investors loaded up on the stock ahead of the company's fiscal-fourth-quarter report on Thursday. (Microsoft is the publisher of MSN Money.)

The late-day selling suggests a weak open on Wednesday. The Labor Department will issue its Consumer Price Index report for June, which is likely to show a large gain because of rising gasoline and food costs. In addition, several important banks will report earnings from a number of banks, including Wells Fargo (WFC, news, msgs) and Northern Trust (NTRS, news, msgs).

And oil prices may be pushed around by the Energy Department's weekly report on inventories.

The end-of-day swoon came after the Dow was sporting a 68-point gain at 3:11 p.m. But, as happened regularly in the past few months, any gains in the U.S. stock market often give way to quick profit-taking.

Stocks had opened sharply lower on general economic gloom. Financial stocks were weak on worries that as many as 150 banks could fail this year and ongoing concerns about mortgage-capital providers Fannie Mae (FNM, news, msgs) and Freddie Mac (FRE, news, msgs).

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But crude oil abruptly fell under $138 a barrel on worries that a slowing U.S. economy would sharply curtail demand for gasoline. A similar concern was raised in a new forecast from the Organization of Petroleum Exporting Countries.

Crude finished at $138.74, down 4.4% from Monday. The dollar drop was the largest in 17 years; the percentage decline was the biggest since April 2005. Oil is still up nearly 45% this year.

"Traders are looking at this decline in the stock market and saying oil demand is going to be a lot weaker than we thought," James Ritterbusch, president of Ritterbusch & Associates, told Bloomberg News.

U.S. gasoline demand fell 5.2% last week, the 12th consecutive weekly decline, a sign record pump prices are changing driving habits, a MasterCard (MA, news, msgs) report showed today.

Gasoline futures fell 17 cents, or 4.9%, to $3.3848 a gallon in New York. The national retail price of gasoline was $4.109 a gallon today, unchanged from Monday and up 3.2 cents in the last month, AAA reported.

Oil-and-gas and coal stocks were generally lower. Coal producer Massey Energy (MEE, news, msgs) fell 6.4% to $77.73. Oil-and-gas producer Apache (APA, news, msgs) dropped 5.6% to $117.94.

Energy prices -- New York close

	Tues.	Mon.	Chg.	Month chg.	YTD chg.
Crude oil (NYMEX) (per barrel)	$138.74	$145.18	-$6.44	-0.90%	44.55%
Heating oil (per gallon)	$3.9190	$4.0649	-$0.1459	0.41%	47.92%
Natural gas (per million BTU)	$11.4560	$11.9590	-$0.5030	-14.21%	53.09%
Unleaded gasoline (per gallon)	$3.3848	$3.5577	-$0.1729	-3.33%	35.89%

Notebook chips power Intel results

Intel shares were up slightly in after-hours trading after a bullish earnings report.

The company said sales were strong in all markets and raised its sales estimates for the third quarter to $10 billion to $10.6 billion. Analysts had expected $10 billion in revenue.

Intel said sales of chips used in notebook computers were especially strong, and it expects this group of chips to outsell those used in desktop computers by the end of the year.

The company earned $1.6 billion, or 28 cents a share, up 31% from $1.22 billion, or 22 cents a share, a year ago. Revenue was up 9.1% to $9.47 billion. Analysts had expected $9.32 billion, Reuters said.

The company said its gross profit margin -- a key profitability measure -- was 55.4%, up from 53.8% a year ago. Analysts had been looking for 56%. For the third quarter, it expects a 58% profit margin.

Separately, Sun Microsystems (JAVA, news, msgs) offered guidance above analyst estimates for its fiscal fourth quarter. Sun expects earnings of 25 to 35 cents, after one-time items. Analysts had expected 27 cents a share. The stock was up 13.3% to $9.97 from a regular close of $8.80.

SEC moves on short sellers

Securities and Exchange Commission Chairman Christopher Cox said the SEC will ban naked short-selling of Fannie Mae, Freddie Mac and primary dealers of government securities for 30 days.

Cox announced the order at a Senate Banking Committee hearing on plans to support Fannie Mae and Freddie Mac. The SEC is studying whether to expand the order.

Cox's announcement gave the market a big -- but short-lived -- boost.

Fannie Mae and Freddie Mac were down sharply today, with Fannie Mae down 27% to $7.07 and Freddie Mac off 26% to $5.26, respectively -- the worst performers among S&P 50 stocks. Both were downgraded by Moody's Investors Services.

Meanwhile, hedge fund manager William Ackman said he had been shorting both stocks since early this month.

There's no indication Ackman is engaging in naked short selling, in which traders never borrow shares from their broker or deliver the stock to buyers.

The SEC has been reluctant to curb short selling altogether "because it would require a major retooling of the plumbing of Wall Street," James Angel, a finance professor at Georgetown University who studies short sales, told Bloomberg. "It's only when the big Wall Street firms are threatened that the SEC does something about it."

In classic short-selling, an investor borrows shares from a broker and sells them. His profit comes from buying the shares back. In naked short-selling, the investor sells shares he does not yet control.

Naked shorting is not necessarily a violation of the federal securities laws and can contribute to market liquidity. It is illegal, however, when it drives down stock prices.

The SEC order means traders who want to short stocks must be able to show they have, in fact, borrowed the shares.

Primary dealers include Lehman Bros. (LEH, news, msgs). Its shares were up as much as 14% on that news and speculation the company might go private. But Lehman fell back to a 6.6% gain to $13.22. JPMorgan Chase (JPM, news, msgs), which had been up as much as 3.6%, fell to a 1.9% loss at $31.10.

Bernanke: Markets are under 'considerable stress'

The SEC move came after rather gloomy testimony about the economy and the financial system from Federal Reserve Chairman Ben Bernanke.

"The possibility of higher energy prices, tighter credit conditions, and a still-deeper contraction in housing markets all represent significant downside risks to the outlook for growth," Bernanke said in a speech to the Senate Banking Committee this morning. "At the same time, upside risks to the inflation outlook have intensified lately."

Inflation "seems likely to move temporarily higher in the near term," Bernanke said.

Bernanke also highlighted the problems in the financial markets, which he said remain under "considerable stress."

"Helping the financial markets to return to more normal functioning will continue to be a top priority of the Federal Reserve," Bernanke said.

Treasury Secretary Hank Paulson also addressed the committee this afternoon about the health of mortgage giants Fannie Mae and Freddie Mac after Monday's federal bailout plans failed to lift sentiment. The companies' role in the housing market is "important," Paulson said.

Meanwhile, President Bush said that Fannie and Freddie should remain private enterprises. The president also said that it will take some time to bring down the record-high gasoline prices that have been clobbering consumers.

Financial-services companies have been slammed by more than $400 billion in credit-related losses.

Financials frustrate Wall Street

Despite that mid-day bump, U.S. bank stocks fell to their level since 1996. The KBW Bank Index ($BKX.X) fell 3.1% on the day; it had been down as much as 7% in the morning.

Even with the recovery in the index, Bank of America (BAC, news, msgs) was off 8.1% to $18.52. Wachovia (WB, news, msgs) fell 7.7% to $9.08. And US Bancorp (USB, news, msgs), which surprised investors with an 18% profit decline today, was off 2.7% to $22.70.

Insurance stocks were hard hit as well. Dow component American International Group (AIG, news, msgs) was off 8.5%, the worst-performer among the 30 Dow stocks.

"There are some financials that can't recover, but there are plenty out there that are fine," said said MadisonPropTrading's Chris Conefry. "I think it will take about six months for people to realize the value in those."

The financial sector of the S&P 500 has lost 54.4% of its value since peaking in February 2007.

Merrill Lynch economists David Rosenberg and Sheryl King wrote in a note to clients late Monday that the crisis enveloping the financials is still "far from over."

Earnings reports from Citigroup (C, news, msgs), Merrill Lynch (MER, news, msgs) and JPMorgan Chase will soon offer deeper insight into the extent of damage to the financials, and analysts are not expecting any miracles. Merrill Lynch and JPMorgan report on Thursday; Citigroup reports on Friday.

"The Financials sector is expecting the weakest earnings growth rate of any sector at (negative) 72%," a report from Thomson Reuters said. "In aggregate, the sector is expected to earn $17.9 billion compared to earnings of $63.4 billion in (the second quarter of) 2007."

WaMu says it has enough capital; shares jump

On Monday, Washington Mutual (WM, news, msgs) shares plunged nearly 35% to $3.23, as the markets were spooked by worries about the sufficiency of capital at banks and mortgage companies. It was the company's biggest one-day decline on record. The company late Monday said that it has more than $40 billion in excess liquidity, making it "well-capitalized."

Today shares closed up 38 cents, or 11.8%, to $3.61.

GM announces more restructuring

In an effort to deal with the struggling auto business, battered General Motors (GM, news, msgs) said it will cut salaried jobs, suspend its dividend and sell assets to boost its cash position. The company also said it will speed up factory closings.

The moves should help ease recent fears about possible bankruptcy for the Dow component.

• Read more: GM's bankruptcy fears

GM's sales have slumped 16% so far this year, as consumers shift away from gas-guzzling sport utility vehicles amid soaring prices at the pump. GM's light truck and SUV sales have fallen 21% through June. In early June, GM said it would close four truck plants in the next two years.

Shares rose 4.9% to $9.84 on the day.

J&J beats the Street

Shares of Johnson & Johnson (JNJ, news, msgs) rose $1.42, or 2.1%, to $67.83 in midday trading after the company reported better-than-expected second-quarter earnings.

J&J said it earned $3.3 billion, or $1.17 per share, up from the $3.1 billion, or $1.05 per share, it earned last year.

Excluding items, the company earned $1.18 per share; analysts were looking for earnings of $1.12 per share.

The drug giant boosted its 2008 forecast to between $4.45 and $4.50 per share, excluding items, up from previous guidance of between $4.40 and $4.45 per share.

Shares closed up 1.9% to $67.70.

Strong sales boost Genentech

Biotech giant Genentech (DNA, news, msgs) late Monday reported a 5% increase in second-quarter earnings, thanks to strong sales of its cancer drug, Avastin.

Genentech said it earned $782 million, or 73 cents per share, up from $747 million, or 70 cents per share, in the same period a year ago. Excluding items, Genentech earned 82 cents per share, 3 cents shy of Wall Street's estimate.

Sales fared better: Revenue rose 8% to $3.24 billion, slightly better than the consensus estimate of $3.23 billion. Sales of Avastin rose 12% to $650 million.

"The numbers looked pretty good. The investor focus has been on the top line and on Avastin in particular, and that number for the first time in several quarters edged ahead of consensus," Eric Schmidt, an analyst at Cowen & Co., told Reuters.

Genentech ended up 5.1% to $79.25.

The company also boosted full-year guidance to between $3.40 to $3.50 per share, excluding charges. It previously had forecast earnings -- excluding items -- of between $3.35 and $3.45 per share.