Oil vs. earnings: Will stock rally continue?

By Charley Blaine and Elizabeth Strott

What a week the markets had, and what a week they face.

With gloom about stocks extending from Wall Street around the world, Wells Fargo (WFC, news, msgs) on Wednesday set off a huge rally in financial stocks that carried through the rest of the week.

Even troubled Citigroup (C, news, msgs) got into the action. Its second-quarter loss of 54 cents a share was better than expected and sent the stock up 7.7% on Friday to $19.35. For the week, it was up 19.5%.

At the same time, oil prices broke. Crude oil in New York finished Friday at $128.88 a barrel. While that was a modest decline of 41 cents for the day, crude finished the week down $16.41, or 11.3%. Wholesale gasoline was down 11% on the week as well, and it may mean motorists will start to see some relief at the gas pump.

AAA's Fuel Gauge Survey put the national average retail price of gasoline at $4.105 a gallon Friday, down -- yes, down -- from $4.114 a gallon on Thursday.

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Meanwhile, the Dow Jones industrials, thanks to Citigroup and a 2.7% gain to $129.89 for computer giant IBM (IBM, news, msgs), finished Friday up 50 points to 11,497 and ended the week up 3.6% -- its best week since the week of April 14. It's off 13.3% for the year.

The Standard & Poor's 500 Index was up very slightly to 1,261, and the Nasdaq Composite Index was off 30 points to 2,283.

Both indexes were pulled lower due to weakness in Google (GOOG, news, msgs) and Microsoft (MSFT, news, msgs). The companies reported second-quarter earnings that missed Wall Street estimates.

Google fell 9.8% to $481.32 -- its biggest one-day loss since it went public in 2004. Moreover, it is off 35% since peaking at $741.79 on Nov. 6.

Microsoft was off 6% to $25.86, its worst one-day loss since 2006.

The S&P 500 was up 1.7% for the week but is down 14.1% for the year. The Nasdaq was up 2% on the week but is down 13.9% on the year.

Led by Citigroup and Bank of America (BAC, news, msgs), 20 of the 30 Dow stocks were higher on Friday. In addition, 254 S&P 500 stocks were higher, along with 41 of the stocks in the Nasdaq-100 Index ($NDX.X). The index was down 30 points, or 1.6%, to 1,823.

The U.S. market overall was down roughly 22% from its October highs on Wednesday when stocks began their big jump, but a typical bear market drops 30%.

With Friday's close, the Dow is down 18.8% from its Oct. 9 higher; the S&P 500 is down 19.5%. The Nasdaq, thanks to the selling in Google and Microsoft, was down 20.2% from its October high.

The markets for the week

	Close for week	Wk. ago close	% chg.	YTD. chg.
Dow Jones industrials	11,496.57	11,100.54	3.57%	-13.33%
S&P 500	1,260.68	1,239.49	1.71%	-14.14%
Nasdaq Composite	2,282.78	2,239.08	1.95%	-13.93%
Russell 2000	693.08	674.95	2.69%	-9.52%
Crude oil per barrel	$128.88	$145.29	-11.29%	34.28%
10-yr. Treasury yield	4.08%	3.94%	3.58%	1.14%
Gold per troy ounce	$958.00	$933.60	2.61%	14.32%

Can the rally continue?

So, can stocks can continue to move higher -- and will oil move lower?

Let's start with "Can the market move higher?"

What's not known is whether this week's rally was a bear-market bounce. These are short, intense upticks in the midst of a longer downtrend.

The operative word is "short." A number of analysts have been watching the S&P 500 to see if it can get past about 1,260. That's roughly the level of its intraday low on March 17, the day after investment bank Bear Stearns agreed to sell out to JPMorgan Chase (JPM, news, msgs).

The S&P couldn't get past 1,262 on Wednesday, Thursday and Friday, suggesting that traders were using that level as a signal to sell and take profits. Additional failures to jump above 1,260 to 1,262 could provoke a new round of selling that could take the index back to 1,200, its intraday low on Tuesday.

Stocks could be buoyed if crude's big drop can continue and pull the already-weakening energy sector lower.

The Select Sector SPDR-Energy (XLE, news, msgs) exchange-traded fund, which tracks the energy stocks in the S&P 500, is off 16.1% since May 21 and 13.3% in July -- the worst performance of the ETFs that track the sectors of the S&P 500.

ExxonMobil (XOM, news, msgs) is down 12.9% since May 21; Apache (APA, news, msgs) has dropped 23.4%.

Coal producer Massey Energy (MEE, news, msgs), down 4.2% to $67.01 on Friday, is off 29% since June 30.

There is increasing evidence that global demand for oil and various fuels is falling under the weight of sharply higher prices. Motorists around the world are being more careful in how much they drive, and airlines are cutting flights and mothballing increasing numbers of planes, hoping just to survive.

But there's a big caveat: Iran. The United States will sit in on meetings with Iranian diplomats in Geneva this weekend, and the hope is to get the Iranians to curtail their nuclear program. If there's progress, crude oil could drop further. If there isn't, crude could move higher.

Since stocks have tended to move in an opposite direction to oil, further drops in crude could boost stocks.

One last point: The market got a boost from the Securities and Exchange Commission, which ordered a ban on naked short-selling of shares of primary dealers -- including the biggest banks and investment banks -- and mortgage companies Fannie Mae (FNM, news, msgs) and Freddie Mac (FRE, news, msgs).

The ban, which takes effect Monday, altered the trading world for these stocks. From their Wednesday intraday lows, Fannie Mae shares doubled to $13.40; Freddie Mac shares more than doubled to $9.18. One reason for the gain: Freddie Mac won approval from regulators on Friday to sell the stock needed to overcome mounting losses, and the Wall Street Journal said the mortgage finance company may seek $10 billion.

But financial stocks are not out of the woods yet. Some regional banks were notably weak on Friday. Zions Bancorp (ZION, news, msgs) was down 8% on Friday to $25.32; it's down 54% this year.

And most experts see foreclosure problems for banks and other lenders growing for some time.

Energy prices -- New York close

	Fri.	Thur.	Chg.	Month chg.	YTD chg.
Crude oil (NYMEX) (per barrel)	$128.88	$129.29	-$0.41	-7.94%	34.28%
Heating oil (per gallon)	$3.6915	$3.7438	-$0.0523	-5.42%	39.33%
Natural gas (per million BTU)	$10.5700	$10.5370	$0.0330	-20.84%	41.25%
Unleaded gasoline (per gallon)	$3.1709	$3.1633	$0.0076	-9.44%	27.30%

Earnings will move markets

Next week's earnings reports will definitely play a big role on how stocks move.

Monday brings Bank of America and Apple (AAPL, news, msgs). Bank America has been under stress because of its merger with Countrywide Financial. The stock was up 3.7% on Friday to $27.49. It rose 27% on the week.

Apple just launched the new version of its iPhone, but Apple got no benefit from the event. The stock fell 3.9% to $165.15 and was off 4.3% on the week.

On Tuesday, Wachovia's (WB, news, msgs) report will bring the most scrutiny because of its exposure to the problems in the housing industry. The stock was down 3.5% on Friday but up 12.4% on the week.

But Caterpillar's (CAT, news, msgs) comments about the domestic economy will command attention. The stock fell 1.3% on Friday.

After Tuesday's close, Yahoo (YHOO, news, msgs) reports. Its board won support Friday when Legg Mason's Bill Miller said he would vote for the board in its proxy fight against Carl Icahn. But Yahoo was flat on Friday at $22.45.

On Wednesday, watch for the guidance from Dow components Boeing (BA, news, msgs) and Pfizer (PFE, news, msgs) and from online retailer Amazon.com (AMZN, news, msgs). Boeing is being watched because of fears that high fuel costs will cut into orders. Boeing was up 1.8% Friday to $68.14. Pfizer was up down slightly at $18.32. Amazon.com fell 4.2% to $69.12 on Friday.

Oil company ConocoPhilllips (COP, news, msgs) will offer a glimpse of how high oil prices have affected the bottom line and how the prospect of lower prices will affect profits. The stock was up 1.2% to $83.91 on Friday but down 4.8% for the week.

Citigroup: When a loss becomes a win

Citigroup reported its third quarterly loss in a row -- $2.5 billion, or 54 cents a share -- for the second quarter. That was down from a profit of $6.23 billion, or $1.24 a share, last year. But, since analysts were expecting a loss of 66 cents, the smaller-than-expected loss was a victory, and the stock was moving higher.

The gain helped financial stocks generally move higher. The Select Sector SPDR-Financial (XLF, news, msgs) exchange-traded fund, which tracks the financial stocks in the S&P 500, was up 1.9% to $20.65.

Citigroup said it wrote down $7.2 billion in bad mortgage bets in the quarter.

"While there is still much to do, we are encouraged by our progress in delivering on our commitment to the re-engineering efforts," Citigroup CEO Vikram Pandit said in a statement.

The larger rally in financial stocks this week started when Wells Fargo and JPMorgan Chase reported better-than-expected second-quarter results.

"The worst news is out," Malcolm Polley, chief investment officer of Stewart Capital Advisors, told Bloomberg News. "I don't think it's going to get worse. It may not get better for a while."

Deutsche Bank analyst Mike Mayo upgraded the stock to "hold" from "sell," adding that Citigroup eased concerns about its ability to raise capital.

Merrill reports loss, will sell Bloomberg stake

It may be a longer road to recovery for Merrill Lynch (MER, news, msgs), on the other hand. The stock closed up 0.6% to $30.91 Friday.

Merrill late Thursday reported a loss of $4.9 billion for the second quarter and recorded a whopping $9.4 billion in write-downs and charges related to the mortgage mess. Merrill lost $4.97 per share -- a plunge from the $2.24 per-share profit the company reported in the second quarter last year. Analysts had been looking for a loss of $1.91 per share.

Moody's downgraded Merrill's senior long-term debt to "A2" from "A1" after the brokerage's earnings results came out; the ratings company said Merrill could report an additional $10 billion in write-downs. "They're moving in the right direction but Merrill still has significant challenges, including material exposure to collateralized debt obligations," analyst Chris Armbruster of Al Frank Asset Management, told Reuters.

Merrill CEO John Thain confirmed a move to sell the company's 20% stake in Bloomberg LP back to the financial-data company, for $4.43 billion. Thain said Merrill's core franchise "remains strong" and said he is comfortable with the company's capital position; Merrill has $92 billion in liquidity, Thain said.

Morgan Stanley lowered its third-quarter estimate for Merrill to 6 cents per share from 39 cents per share, and Fox-Pitt cut the stock to "underperform" from "in line."

Citigroup said it sees a third-quarter profit of 4 cents per share, though -- up from a previous estimate of an 18-cent loss in the current quarter.

Techs: Two misses and a boost

Google and Microsoft may be rivals, but they have one thing in common: Both disappointed investors late Thursday with lower-than-expected earnings.

Google said second-quarter earnings were $1.25 billion, or $3.92 per share, up from $925.1 million, or $2.93 per share, in the same period last year. Excluding items, Google earned $4.63 per share. The results missed analysts' expectations of $4.74.

Two things hit Google: a comment from CEO Eric Schmidt about the "more challenging economic environment," and a 1% drop in the company's paid clicks for search advertisements from the previous quarter. The rate was up 19% from the same period a year ago, but it's down from the 47% growth rate in the second quarter of 2007.

"Very likely Google spent their earnings, raising headcount and doing other things that penalized the bottom line," Solaris Asset Management chief investment officer Timothy Ghriskey told Bloomberg Radio.

Microsoft, meanwhile, reported fiscal-fourth-quarter profit of $4.3 billion, or 46 cents per share -- a 46% increase from the $3.04 billion, or 31 cents per share, in the same period last year. Results missed Wall Street's estimate by a penny. (Microsoft is the publisher of MSN Money.)

Microsoft said it expects to earn between 47 and 48 cents per share in the current quarter; analysts had been looking for 50 cents.

IBM reported better-than-expected earnings after Thursday's close. Big Blue earned $2.77 billion, or $1.98 per share, in the second quarter, a 22% increase from the $2.26 billion, or $1.55 per share, it earned last year. The consensus estimate was $1.81 per share.

"It was probably the best quarter Big Blue has had in recent memory, if not ever," Bob Djurdjevic, president of Annex Research, told MarketWatch. "Wall Street doomsayers and recession buzzards had better look for trouble outside the IT industry, for things could not be better in this sector."

IBM's 2.7% gain on Friday contributed 27 points to the Dow. IBM is up 20% this year, the second-best Dow performer behind Wal-Mart Stores (WMT, news, msgs), which is up 21.9%.

Big drug deal

Israeli drug giant Teva Pharmaceuticals (TEVA, news, msgs), the world's biggest generic drug company, is buying generic drug maker Barr Pharmaceuticals (BRL, news, msgs) in a $7.46 billion cash-and-stock deal, the company said this morning.

The deal values Barr at $66.50 per share.

Buying Barr "will enhance our market share and leadership position in the U.S. and key global markets, further strengthen our portfolio and pipeline, and provide upside to our strategic plan," Teva CEO Shlomo Yanai said in a statement.

Shares of Barr closed up 11% to $63.43; Teva shares ended up 4.4% to $42.87.

'Dark Knight' could top $100 million this weekend

Holy opening weekend, Batman!

This weekend's debut of the much-anticipated "The Dark Knight," the latest of the Batman movies, is expected to be one of the best on record. "The advance-ticket sales are among the best of any film," Gitesh Pandya, editor of BoxOfficeGuru.com, told MarketWatch. "The anticipation could not be higher."

The movie's distributor, Time Warner's (TWX, news, msgs) Warner Bros., is releasing the film in 4,366 theaters across the country, and some fans are even going to see the movie at crazy hours like 3 a.m. and 6 a.m. "It's been a true phenomenon for us, we started to see interest as early as last year for this film," said Rick Butler, chief operating officer for Fandango, to Reuters.

Many observers believe the movie, which stars Christian Bale as Batman and Heath Ledger as the Joker, will top $100 million this weekend, and some think it could top the $151 million record set by "Spider-Man 3" last year.

Time Warner shares were up 0.3% to $14.70 Friday.

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

	Fri.	Thur.	Chg.	Month chg.	YTD chg.
Treasurys
13-week Treasury bill	1.420%	1.390%	0.030	-16.72%	-54.78%
5-year Treasury note yield	3.397%	3.332%	0.065	1.68%	-1.68%
10-year Treasury note yield	4.081%	4.038%	0.043	2.56%	1.14%
30-year Treasury bond yield	4.662%	4.638%	0.024	2.89%	4.55%
Currencies
U.S. Dollar Index	72.425	72.495	-0.070	-0.52%	-5.57%
British pound in dollars	$1.9988	$2.0008	-0.0020	0.28%	0.48%
Dollar in British pounds	£0.5003	£0.4998	0.0005	-0.28%	-0.48%
Euro in dollars	$1.5860	$1.5863	-0.0003	0.70%	8.52%
Dollar in euros	€ 0.6305	€ 0.6304	0.0001	-0.69%	-7.85%
Dollar in yen	106.69	106.14	0.55	0.47%	-4.61%
Canadian dollar in U.S. dollars	$0.995	$0.995	-$0.0002	1.55%	0.22%
U.S. dollar in Canadian dollars	$1.006	$1.005	$0.0012	-1.48%	-0.18%
Commodities
Gold	$958.00	$970.70	-$12.70	3.20%	14.32%
Copper	$3.6690	$3.7150	-$0.05	-5.50%	20.65%
Silver	$18.2000	$18.7350	-$0.54	3.94%	21.98%
Corn	$6.0950	$6.3125	-$0.22	-15.90%	33.81%
Crude oil (NYMEX) (per barrel)	$128.88	$129.29	-$0.41	-7.94%	34.28%