Dow jumps 266 on lower oil, higher confidence

By Charley Blaine and Elizabeth Strott

Stocks recovered all of their Monday losses this afternoon as crude oil dropped nearly to $120 a barrel and Wall Street was cheered by better-than-expected economic news.

Crude oil moved lower as the dollar moved higher. But after bottoming at $120.42 a barrel in the morning, crude moved back up to $122.19 at the close, down $2.54, or 2%, from Monday.

At the close, the Dow Jones industrials, led by Bank of America (BAC, news, msgs), General Motors (GM, news, msgs) and JPMorgan Chase (JPM, news, msgs), were up 266 points, or 2.4%, to 11,398.

The Dow had lost 240 points on Monday.

The Standard & Poor's 500 Index was up 29 points, or 2.3%, to 1,263. And the Nasdaq Composite Index was up 55 points, or 2.5%, to 2,320. Nine of the 10 S&P 500 sectors were higher; the one losing sector: energy, which was lower because of lower oil prices.

The market leaders today were those beaten-down financial stocks, which came back after investment house Merrill Lynch (MER, news, msgs) said late Monday that it would raise $8.5 billion in a stock sale and take a huge write-down as it sold off some hard-hit mortgage securities. Down nearly 10% soon after the open, the stock jumped to a gain of 7.9% to $26.25. More than 293 million shares traded changed hands, nearly 10 times its average daily volume.

The Select Sector SPDR-Financial (XLF, news, msgs) exchange-traded fund, which mirrors the financial sector of the S&P 500, was up 8.1% to $21.50, its biggest percentage gain since jumping 13.1% on July 16.

The five financial stocks in the Dow -- Bank of America, JPMorgan Chase (JPM, news, msgs), American International Group (AIG, news, msgs), American Express (AXP, news, msgs) and Citigroup (C, news, msgs) plus GM -- led the blue-chip index with gains of at least 6% and contributed nearly 108 points to the Dow's gain. Bank of America's 14.8% gain to $32.22 was worth 34 points to the Dow alone.

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

Oil and gas production and oil service companies were the market laggards. Apache (APA, news, msgs) fell 3.5% to $107.63; Halliburton (HAL, news, msgs) was off 2.9% to $44.58.

• Talk back: Time to buy oil stocks?

But motorists have to be thrilled. AAA's daily Fuel Gauge report said its daily survey showed the national retail price of gasoline at $3.941 today, down nearly two cents from Monday and 17.3 cents, or 4.2%, from the high for the survey of $4.114 a gallon on July 17.

Another group of happy campers: airlines, for whom fuel is the largest cost. American Airlines parent AMR Corp. (AMR, news, msgs) jumped 18.5% to $9.48. Admittedly, the stock has fallen 77% since a high in January 2007. But, thanks to lower crude oil, the stock has jumped 137% in the last 10 trading sessions. The Amex Airline Index ($XAL.X) was up 11.4% to 22 and is up 71% since July 15.

What's not clear yet is whether today's rally is simply a bounce up from yesterday's lows or something more meaningful.

Tom Brown of Bankstocks.com told CNBC this afternoon that today's rally is confirmation that financial stocks have bottomed. The news should get better, he said, as oil prices move lower and problems in the housing market slowly improve.

• Video: Have financial stocks bottomed?

Two factors may ultimately answer that question:

• Where oil prices are headed. Crude topped out at $147.22 on July 11. With today's close of $122.19, it's now down 17% from that high and could drop substantially lower. High gasoline prices have caused motorists to curtail driving. MasterCard Advisors' SpendingPulse report said today that U.S. drivers bought 4% less gasoline last week than they did a year ago. It was the 14th consecutive week of year-over-year weekly declines. Ed Morse, chief energy economist at Lehman Bros., told CNBC today that crude could drop to $93 by year-end. If the dollar gets stronger and tensions about Iran's nuclear program ease, crude could fall to as low as $78, Chakib Khelil, president of the Organization of Petroleum Exporting Countries, said in Jakarta, Indonesia, today.

• Whether the new short-selling rule will be extended. The Securities and Exchange Commission instituted a rule requiring short-sellers speculating in Fannie Mae, Freddie Mac and the 17 so-called primary dealers of government securities to actually control the stocks they're shorting. The rule, which expires at midnight, has helped many financial stocks firm up. If the SEC doesn't extend the rule, look for new attacks on the financials. SEC Chairman Christopher Cox said earlier today that the rule would be extended.

Energy prices -- New York close

	Tues.	Mon.	Chg.	Month chg.	YTD chg.
Crude oil (NYMEX) (per barrel)	$122.19	$124.73	-$2.54	-12.72%	27.31%
Heating oil (per gallon)	$3.4722	$3.5620	-$0.0898	-11.04%	31.06%
Natural gas (per million BTU)	$9.2170	$9.1630	$0.0540	-30.97%	23.17%
Unleaded gasoline (per gallon)	$3.0077	$3.0700	-$0.0623	-14.10%	20.75%

What gave the market a lift

Oil alone didn't start the rally.

The Conference Board's index on consumer confidence rose to a reading of 51.9 in July from a revised reading of 51 in June, better than economists' expectations of a reading of 50.

The report helped boost the dollar, which in turn pushed oil lower.

Meanwhile, the S&P/Case-Shiller index of home prices (.pdf file) showed a 15.8% decline in May from the same month last year; the index has fallen every month since January 2007. Admittedly, the numbers were ugly. But they were just a touch better than economists' expectations of a 16% year-over-year drop.

In April, home prices were down 15.2% year over year.

All 20 cities in the index showed year-over-year declines, with Miami and Las Vegas taking the biggest hit with 28% drops. On a month-to-month basis, home prices fell 0.9% in May.

Investors, desperate for any good news on housing, pushed homebuilding stocks higher. The Philadelphia Housing Sector Index ($HGX.X) was up 6.1% to 114. Lennar (LEN, news, msgs) jumped 11% to $11.93. Ryland (RYL, news, msgs) jumped 5% to $19.81. Pulte Homes (PHM, news, msgs) jumped 10.1% to $11.81.

Merrill's plan to raise $8.5 billion cheers Street

In what some analysts are speculating could be a light at the end of the mortgage-meltdown tunnel, Merrill Lynch late Monday took further steps to bolster its balance sheet.

The company said it will take a third-quarter write-down of $5.7 billion on bad mortgage bets and collateralized debt obligations -- securities backed by a pool of bonds, loans or other assets -- as it sold off billions of dollars of securities nominally at 22 cents on the dollar to Lone Star Funds.

• Top Stocks blog: Can Merrill make it out alive?

But, Merrill Lynch is financing 75% of the sale. So, as Barry Ritholtz noted this afternoon, the reality is that the company is selling the bonds for 5.5 cents on the dollar.

Merrill also said it plans to raise $8.5 billion in added capital by selling new shares, including $3.4 billion in stock to be purchased by Temasek Holdings, the investment arm of the government of Singapore.

Merrill's moves praised

Analysts gave the Merrill-Temasek deal a thumbs up: "The good news is that the actual sales can give confidence that Merrill is finally selling assets rather than merely marking them to market," Deutsche Bank analyst Mike Mayo wrote in a note to clients this morning.

The deal essentially credits Temasek with $2.5 billion and requires from Temasek a payment of $900 million. The credit to Temasek relates to provisions of the first deal, which protected the first investment from further deterioration in the price of Merrill stock.

Merrill's moves "significantly reduce the company's risk exposures and further strengthen its capital position," the company said in a statement.

The value of many collateralized debt obligations (or CDOs) is linked to risky subprime mortgages. For that reason, CDOs have been a major contributor to the turmoil that has slammed the financial sector during the past year.

CEO John Thain, who replaced Stan O'Neal in December, has now raised $30 billion in capital to help Merrill weather the crisis.

Several analysts are optimistic about the moves, including one who has been exceptionally critical of the financials.

"We applaud this purging of assets as an attempt to cut its losses and focus on stabilizing its platform and righting the franchise toward growth," Oppenheimer & Co. analyst Meredith Whitney wrote in a note to clients today.

The stock "still sells at a premium to book value and is expensive in our opinion, (but) we believe the stock is getting closer to fairly valued levels as now the hardest work is behind the company."

Merrill reported a second-quarter loss of $4.65 billion earlier this month.

What about the rest of the financials?

Merrill's move put a price tag on securities whose price has stumped analysts for a while now.

Deutsche Bank analyst Mayo predicted something similar from Citigroup (C, news, msgs). Citigroup's "decision about raising new capital could be closer than we previously thought," Mayo wrote.

Mayo said that Citi has $22.5 billion of net CDO exposure already, and with Merrill's news, Citi could have another $7 billion of write-downs.

UBS analyst Glenn Schorr agreed that the Merrill move meant another writedown for Citigroup. He wasn't sure, however, it would be as big a discount.

Pickens calls Yahoo management 'pathetic'

Legendary oil man T. Boone Pickens has had enough of Yahoo (YHOO, news, msgs).

Pickens sold his entire stake in the Internet company at a loss, telling the San Francisco Chronicle that he thinks "that Yahoo management was pathetic." Pickens bought his 10 million shares in May, in hopes that Yahoo would accept a buyout offer from Microsoft (MSFT, news, msgs). (Microsoft is the publisher of MSN Money.)

• Top Stocks blog: Boone Pickens' bad stock pickings

Microsoft offered $31 per share for Yahoo on Feb. 1, which Yahoo then rejected as too low. In May, Microsoft walked away from talks, and the two companies have yet to hammer out any sort of deal.

Yahoo shares closed up 0.2% to $20.15.

US Steel profit doubles

Shares of United States Steel (X, news, msgs) soared 14.7% to $166.74 this afternoon, after the company reported a big jump in second-quarter earnings.

It was the biggest one-day move for the stock in seven years.

U.S. Steel earned $668 million, or $5.65 per share, up from $302 million, or $2.54 per share, last year. The results were much higher than the consensus estimate of $3.80 per share.

"We recorded the highest quarterly sales and net income in U.S. Steel's history during the second quarter as all three reportable segments posted record results," CEO John Surma wrote in a press release, adding that the company expects "another excellent quarter" for the period that ends Sept. 30.

Surma raised steel prices in June as demand has been booming around the world.

Alcatel-Lucent bosses step down

The founders of the merged Alcatel-Lucent (ALU, news, msgs) are leaving the company after six straight quarters of losses.

Chairman Serge Tchuruk and CEO Patricia Russo, who helped form the telecom giant in November 2006, will both step down from their posts this year. Tchuruk will exit on Oct. 1, and Russo will resign by the end of the year.

The resignations were no surprise to most people on the Street: "We've waited for these departures for a long time," Frederic Hamm, money manager at Agilis Gestion in Paris, told Bloomberg News. "Every earnings report there was a new profit warning."

Alcatel-Lucent reported a $1.73 billion loss for the second quarter; this morning, the company reiterated its full-year sales forecast of a decline between 2% and 5%.

The merger between Lucent and the French telecom company Alcatel has been viewed mostly as a failure. The company has not reported a profit since the merger. The stock has lost more than 60% of its value since the merger, and the company is now in the middle of an extensive restructuring plan that will cut 16,500 jobs.

Shares of the stock rose 5.9% to $6.10.

Amgen boosts forecast

Biotech giant Amgen (AMGN, news, msgs) late Monday had some good news for investors: The company raised its 2008 earnings forecast to between $4.25 and $4.45 per share, up from previous guidance of between $4.00 and $4.30 per share.

The company reported an 8% decline in profit for the quarter, earning $941 million, or 87 cents per share, down from $1.02 billion, or 90 cents per share, last year. Excluding items, Amgen reported $1.14 per share, topping Wall Street's estimate of $1.01 for the quarter.

The news sent the stock up 3% to $62.28.

Sales of Amgen's profitable anemia drug, Aranesp, fell 13% to $825 million in the quarter, but those results beat expectations. Amgen shares have been hurt by Aranesp in the past year, after tests showed links to heart attacks, strokes and other diseases.

Total revenue rose 1% to $3.76 billion.

Aranesp included, it was a "stellar quarter," Mark Schoenebaum, a Deutsche Bank analyst, wrote in a note to clients Monday. "All major products beat estimates."

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

	Tues.	Mon.	Chg.	Month chg.	YTD chg.
Treasurys
13-week Treasury bill	1.680%	1.665%	0.015	-1.47%	-46.50%
5-year Treasury note yield	3.370%	3.332%	0.038	0.87%	-2.46%
10-year Treasury note yield	4.044%	4.018%	0.026	1.63%	0.22%
30-year Treasury bond yield	4.622%	4.614%	0.008	2.01%	3.66%
Currencies
U.S. Dollar Index	73.505	72.860	0.645	0.97%	-4.16%
British pound in dollars	$1.9810	$1.9948	-0.0138	-0.61%	-0.42%
Dollar in British pounds	£0.5048	£0.5013	0.0035	0.62%	0.42%
Euro in dollars	$1.5591	$1.5755	-0.0165	-1.01%	6.67%
Dollar in euros	€ 0.6414	€ 0.6347	0.0067	1.02%	-6.26%
Dollar in yen	108.12	107.47	0.65	1.82%	-3.33%
Canadian dollar in U.S. dollars	$0.976	$0.979	-$0.0032	-0.45%	-1.76%
U.S. dollar in Canadian dollars	$1.026	$1.022	$0.0042	0.47%	1.80%
Commodities
Gold	$926.40	$937.80	-$11.40	-0.20%	10.55%
Copper	$3.5905	$3.6120	-$0.02	-7.52%	18.07%
Silver	$17.3750	$17.4650	-$0.09	-0.77%	16.45%
Corn	$5.9400	$5.8200	$0.12	-18.04%	30.41%
Crude oil (NYMEX) (per barrel)	$122.19	$124.73	-$2.54	-12.72%	27.31%