Weak financials, higher oil mug market

By Charley Blaine and Elizabeth Strott

The twin bullies of the stock market -- the frenzy to drive financial stocks lower and higher oil prices -- beat up the stock market again today and pushed the major averages back into bear market territory.

The Dow Jones industrials fell 240 points, or 2.1%, to 11,131.

The Standard & Poor's 500 Index tumbled 23 points, or 1.9%, to 1,234, and the Nasdaq Composite Index was down 46 points, or 2%, to 2,264, and the Nasdaq-100 Index ($NDX.X) was down 44 points, or 2.4%, to 1,803.

It was the Dow's second loss of 200 points or more in three trading sessions, and its three-day loss of 501 points is its worst three-day loss since March 10.

With today's close, the Dow is down 21.4% and the S&P 500 is off 21.1% from their Oct. 9 highs. The Nasdaq is off 20.8% from its Oct. 31 high. A 20% decline off a market top is a popular definition of a bear market.

Financial stocks were the big drag among S&P 500 stocks, with Merrill Lynch (MER, news, msgs) among the weakest.

Late today, however, the investment house said it would raise $8.5 billion in a new stock sale and sell more than $30 billion in bad mortgage securities, taking a huge loss in the process.

Merrill Lynch shares had fallen 11.6% to $24.33 in regular trading, third-worst among S&P 500 stocks. It had been down some 6% in after-hours trading, but news of the share sale brought the stock price back to $24.35, up 2 cents from the regular close. It was not clear how the stock would open on Tuesday.

• Get free, real-time stock quotes on MSN Money

Meanwhile, a big loser for the Nasdaq and Nasdaq-100 today was Apple (AAPL, news, msgs), down 4.8% to $154.40 on continued concerns about the health of CEO Steve Jobs. Apple's loss subtracted 11 points from the Nasdaq-100.

While Jobs and Apple continue to insist Jobs' health is a private affair, The New York Times has suggested he has had some serious problems this year that did require surgery.

But columnist Joe Nocera wrote Saturday that the problem doesn't appear to be cancer.

Google (GOOG, news, msgs) fell 3% to $477.12. Microsoft (MSFT, news, msgs) (the publisher of MSN Money) was down 2.5% to $25.50. Yahoo (YHOO, news, msgs) fell 4.8% to $20.12.

• Top Stocks blog: Apple can't escape health drama

Only one of the 30 Dow stocks was higher on the day: Alcoa (AA, news, msgs), up 2.7% to $32.66, after announcing that Highfields Capital Management plans to buy up to 8% of the company's common stock.

Only 69 S&P 500 stocks were higher, along with nine Nasdaq-100 stocks.

Short-covering, Iran push oil higher

Crude oil, meanwhile, jumped 1.2% to $124.73. Some of the move was simply short-covering. Traders who had sold crude futures short were buying back contracts to lock in their profits.

There was also more worries about Iran's nuclear program after Iran president said that county had 6,000 uranium-enriching centrifuges. Iran, the second-biggest oil producer in the Middle East, has threatened to cut off shipping through the Strait of Hormuz, the gateway from the Persian Gulf into the Indian Ocean, if its nuclear facilities are targeted.

Energy prices -- New York close

	Mon.	Fri.	Chg.	Month chg.	YTD chg.
Crude oil (NYMEX) (per barrel)	$124.73	$123.26	$1.47	-10.91%	29.95%
Heating oil (per gallon)	$3.5620	$3.5229	$0.0391	-8.73%	34.45%
Natural gas (per million BTU)	$9.1630	$9.0840	$0.0790	-31.38%	22.45%
Unleaded gasoline (per gallon)	$3.0700	$3.0323	$0.0377	-12.32%	23.25%

Financial stocks get battered

But the biggest problem today was financial stocks, which opened up slightly from Friday but tumbled all day long.

The Select Sector SPDR-Financial (XLF, news, msgs) exchange-traded fund was down 4.1% to $20.02 today, and a third of the Dow's decline today was losses in its financial stocks. The ETF has fallen 47.5% since peaking in May 2007.

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American International Group (AIG, news, msgs) was down 12% to $23.96. Citigroup (C, news, msgs) was off 7.5% to $17.43, and Bank of America (BAC, news, msgs) fell 5.1% to $28.06.

As Merrill Lynch's announcement late attested, the biggest problem for many of the largest financial institutions is concern that the housing market has not yet bottomed.

Merrill's stock sale also comes as it announced that huge sale of bad mortgage securites. That will cut its exposure to the mortgage market by some $11.1 billion.

But it will force the company to take a $5.7 billion write-down in the third quarter. Since June 2007, Merrill Lynch has lost more than $41 billion.

The stock sale will dilute existing shareholders' equity by about 20%.

One of the investors in the new plan will be Temasek Holding, Singapore's investment arm. But Temasek's stake is really Merrill Lynch's way of providing price protection.

When Temasek and others invested $6.2 billion in new shares in December and March, Merrill agreed to compensate them if the stock fell under $48 a share. With the new sale, the Wall Street Journal noted, the protection could cost Merrill $2.5 billion, but Temasek agreed to plow its compensation into new shares.

The details of the stock sale notwithstanding, the Merrill Lynch announcement raised several questions, as Barry Ritzholtz noted on his blog, The Big Picture, including:

• Why didn't Merrill Lynch disclose the write-down on July 17 in its second-quarter earnings report?

• Given how badly financial stocks traded today before Merrill Lynch's announcement, especially Merrill itself, was there trading on non-public information?

The Merrill move came after the Federal Deposit Insurance Corp. seized two small banks on Friday that were overwhelmed with problems in their mortgage portfolios.

All the details of the deals notwithstanding, a number of questions, as Barry Ritzholtz noted on his blog The Big Picture:

Why did Merrill Lynch not disclose the writedown last week when it reported second-quarter earnings?

The FDIC took over First National Bank of Nevada and First Heritage Bank of Newport Beach, Calif. -- both owned by First National Bank Holding Co. Their $3.2 billion in total deposits were taken over by Mutual of Omaha Bank.

Seven banks have failed so far this year, victims of the mortgage-market fallout.

"This is part of the wringing-out process that we need to go through," Senate Banking Committee Chairman Christopher Dodd said Sunday, after the Senate voted to pass legislation to help boost the slumping housing market and shore up mortgage backers Fannie Mae (FNM, news, msgs) and Freddie Mac (FRE, news, msgs). "I would anticipate there will be some additional bank failures."

Fannie Mae fell 10.7% to $10.31 today; Freddie Mac fell 6.7% to $7.72.

Amgen earnings are surprisingly good

If there was some good news today, it came from Amgen (AMGN, news, msgs) after the market close.

The biotech giant reported a far better-than-expected profit for the second quarter than Wall Street expected, and the stock was up 3% to $62.30 in after-hours trading. The stock had risen 12.2% to $60.48 in regular trading, tops among S&P 500 and Nasdaq-100 stocks.

Sales of its anemia drugs, hurt by safety concerns and reimbursement restrictions, declined less than expected.

In addition, good news about the company's most important experimental medicine, the osteoporosis drug denosumab, has helped the stock hit a 52-week high.

Amgen said it earned $91 million, or 87 cents a share, down from $1 billion, or 90 cents a share, a year ago. Excluding one-time items, the company earned $1.14 a share, beating the consensus estimate by 11 cents, Reuters said.

Amgen raised its full-year earnings forecast to $4.25 to $4.45 from prior guidance of $4 to $4.30. Analysts had been predicting $4.19.

The Bear Market scoreboard

	Monday	Change from closing peak	Date of peak
Dow Jones Industrial Average	11,131.08	-21.42%	Oct. 9, 2007
S&P 500 Index	1,234.37	-21.13%	Oct. 9, 2007
S&P 100 Index	568.35	-22.12%	Oct. 9, 2007
Nasdaq Composite Index	2,264.22	-20.81%	Oct. 31, 2007
Nasdaq-100 Index	1,802.99	-19.47%	Oct. 31, 2007
S&P Midcap 400 Index	786.07	-14.29%	Oct. 9, 2007
Russell 2000 Index	696.11	-18.66%	July 13, 2007
Dow Jones Utilities Average	478.66	-13.40%	Dec. 10, 2007
Dow Jones Transportation Average	4,883.55	-11.09%	June 5, 2008
Nikkei 225 Index (Japan)	13,353.78	-23.51%	Oct. 11, 2007
FTSE 100 Index (Britain)	5,312.60	-21.07%	Oct. 12, 2007
Dax Index (Germany)	6,351.15	-21.02%	Oct. 12, 2007

Wall Street likes Kraft earnings but boos Verizon

Kraft Foods (KFT, news, msgs) this morning said it earned $732 million, or 48 cents per share, a 9% increase from the $707 million, or 44 cents per share, the company earned in the same quarter last year.

"Everybody is dealing with the same input costs, and I think they are all coming to understand that this isn't going away anytime soon," Kraft chief executive Irene Rosenfeld said on a conference call with analysts.

Excluding items, Kraft earned 58 cents per share, topping analysts' estimate of 50 cents per share; the stock was up 4.9% to $30.83.

But investors did not think much of Dow component Verizon Communications' (VZ, news, msgs) earnings. The company earned 67 cents per share, 2 cents ahead of expectations.

Net income came in at $1.88 billion, 12% higher than the $1.68 billion Verizon earned last year. Revenue also rose, up 3% to $24.1 billion.

But shares fell 2.5% to $33.60 on worries about its declining landlines and weaker-than-expected growth in its FiOS Internet and video service. Shares of rival AT&T (T, news, msgs) fell 2.5% to $30.63.

Federal deficit to surge

The federal budget deficit is expected to grow to $490 billion next year, according to two Bush administration officials.

The budget forecast will officially be released by the White House this afternoon, at 1:30 p.m. ET. In February the administration had forecast a deficit of $407 billion. The fiscal year begins on Oct. 1.

The weak economy and the economic stimulus package contributed to the higher price tag, the officials said, according to published reports.

The International Monetary Fund this morning reaffirmed its forecast that the past year's market turmoil will cost roughly $1 trillion. The group said that things will likely remain difficult for a while as "credit risks remain elevated" and that "a bottom for the housing market is not visible."

KKR to go public

Private-equity giant Kohlberg Kravis Roberts has finally announced details of its plans to go public.

The transaction could value KKR between $12 billion and $15 billion.

KKR shareholders would own 79% of the public company, with the remaining 21% to be held by KKR Private Equity Investors, a fund that went public in May 2006 and currently trades in Amsterdam. The public company will be listed on the New York Stock Exchange.

"For KKR, this transaction provides us with additional capital for our business," founders Henry Kravis and George Roberts said in a statement late Sunday. "Moving forward with a public listing will allow KKR to do what we do best -- grow companies around the world and produce solid returns for our investors from a larger platform and a deeper capital base."

But the fact is KKR won't be raising any cash in going public, unlike rival Blackstone (BX, news, msgs), which went public with a $4.1 billion initial public offering a year ago. But the units have not been successful for investors. They opened at $37 and are down 55% since.

The problem is the stock market itself.

"U.S. equity markets are so difficult, particularly for anyone doing leveraged transactions," Dan Veru, money manager at Palisade Capital Management, told Bloomberg News. "That's ultimately how they're going to get the best valuation."

KKR filed papers for an initial public offering more than a year ago.

Prices at the pump fall

For the first time in more than a month, the average price of regular gasoline fell below $4 a gallon, according to the Lundberg Survey.

Gas prices slipped 11.7 cents, or 2.8%, to $3.9959 a gallon during the two weeks that ended July 25.

"Gasoline is responding to crude oil's recent price drops, and crude oil is responding to some moderate changes in demand and supply," Lundberg said.

Oil prices have fallen 16% since peaking at $147.27 on July 11; oil makes up nearly three-quarters of the price of gasoline.

Lundberg surveys 7,000 gasoline stations across the country.

Meanwhile, the soaring price of gas has kept drivers off the road. The Federal Highway Administration said that U.S. drivers drove 9.6 billion fewer miles in May than they did the in same month last year. The drop was the third biggest since the FHA started to track the data 66 years ago.

AAA's Fuel Gauge Report put the national average price of gasoline at $3.958 a gallon as of today, down from $4 a gallon on Friday.

All eyes on Friday's jobs number

With the economy teetering on the edge of a recession, this Friday's July jobs report is taking on added significance. The Labor Department reported a decline of 62,000 non-farm payrolls in June; economists are expecting a drop of 70,000 in July.

"The bottom line is that we are not yet near a bottom in the labor market," Joseph LaVorgna, chief U.S. economist for Deutsche Bank, wrote in a note to clients. "This should keep downside risks to the economy in place for some time."

In other economic data out this week, the Commerce Department will release its revised report on second-quarter gross domestic product Thursday. The government had reported 1% growth in the first quarter a few weeks ago; the revised number is expected to come in at 2.1% growth.

"With the tax rebates, we essentially put our troubles off for another day," Maxwell Clarke, chief U.S. economist at IDEAGlobal, told Bloomberg News. "The weakening employment market will definitely hurt the consumer's ability to spend."

Investors can digest more housing data on Tuesday. According to Merrill Lynch economists David Rosenberg and Drew Matus, the S&P/Case-Shiller home price index will likely fall 1.0% in May, compared to April. The index reflects housing prices in the 20 largest U.S. cities.

"While this would be the smallest monthly decline we've seen in the past 7 months, it marks the 22nd consecutive decline, and a year-over-year pace of -15.3%," the analysts wrote.

They see more bad news ahead.

"Despite an 18% decline in home prices from peak levels in mid-2006, we estimate that home values are currently still 15-20% overvalued and are poised to fall by this amount by end-2009," they wrote.

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

	Mon.	Fri.	Chg.	Month chg.	YTD chg.
Treasurys
13-week Treasury bill	1.665%	1.690%	-0.025	-2.35%	-46.97%
5-year Treasury note yield	3.332%	3.449%	-0.117	-0.27%	-3.56%
10-year Treasury note yield	4.018%	4.111%	-0.093	0.98%	-0.42%
30-year Treasury bond yield	4.614%	4.696%	-0.082	1.83%	3.48%
Currencies
U.S. Dollar Index	72.860	73.075	-0.215	0.08%	-5.00%
British pound in dollars	$1.9940	$1.9916	0.0024	0.04%	0.24%
Dollar in British pounds	£0.5015	£0.5021	-0.0006	-0.04%	-0.24%
Euro in dollars	$1.5758	$1.5706	0.0052	0.05%	7.82%
Dollar in euros	€ 0.6346	€ 0.6367	-0.0021	-0.05%	-7.25%
Dollar in yen	107.44	107.84	-0.40	1.18%	-3.94%
Canadian dollar in U.S. dollars	$0.978	$0.982	-$0.0032	-0.16%	-1.47%
U.S. dollar in Canadian dollars	$1.023	$1.019	$0.0045	0.23%	1.55%
Commodities
Gold	$937.80	$936.98	$0.82	1.02%	11.91%
Copper	$3.6120	$3.6050	$0.01	-6.97%	18.78%
Silver	$17.4650	$17.3750	$0.09	-0.26%	17.06%
Corn	$5.8200	$5.7725	$0.05	-19.70%	27.77%
Crude oil (NYMEX) (per barrel)	$124.73	$123.26	$1.47	-10.91%	29.95%