Dow off 225 on economic worries, higher oil

By Charley Blaine and Elizabeth Strott

A two-day stock market rally was stopped dead in its tracks today as oil prices rose and Moody's Investors Service said it might downgrade shares of American Express (AXP, news, msgs).

The Dow Jones industrials finished with a loss of 225 points, or 1.9%, to 11,431. The Standard & Poor's 500 Index was down 23 points, or 1.8%, to 1,266, and the Nasdaq Composite Index fell 23 points, or 1%, to 2,356.

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American Express shares fell 4.2% to $36.40, with most of the decline coming in the late afternoon after news of the potential downgrade came out. The news slammed an already weak financial sector yet one more time.

Moody's said it was concerned about American Express' asset quality trends and lending exposures. The rating agency was especially worried that the company would be hurt by customer problems in areas experiencing sharp home price declines. The issues may put a damper on card-member spending growth in the United States, Moody's said.

The market had already been slumping on three other problems:

• Crude oil rose 1.2% to $120.02 in New York after declining for three days. Two culprits pushed oil higher: an explosion of a pipeline bringing crude from Azerbaijan through Turkey to the Mediterranean Sea. Also, the U.S. Weather Service forecast more big Atlantic storms this year, including three-to-six Category Atlantic hurricanes.

• Wal-Mart Stores (WMT, news, msgs) was down 6.3% to $56.96 after its July sales were slightly weaker than expected and it warned that August sales might be soft.

• Shares of insurance giant American International Group (AIG, news, msgs), which reported a huge loss late Wednesday, fell 18.1% to $23.84. It was biggest one-day loss for the stock since the company went public in 1969 and the worst performer in both the Dow and the S&P 500.

Financial stocks sag on Amex, AIG

The problems faced by American Express and AIG dragged financial stocks lower. The Select Sector SPDR-Financial (XLF, news, msgs) exchange-traded fund fell 4.9% to $21.21. The ETF mirrors the financial sector of the S&P 500. The Amex Securities Broker/Dealer Index ($XBD.X) fell 4.5% to 149. The Standard & Poor's Banking Index ($BIX.X) was off 5.2% to 185.

Citigroup (C, news, msgs) fell 5.6% to $18.59. Part of the decline was caused by the banking giant's agreement to buy back or help clients unload as much as $19.5 billion in auction-rate securities. It will also pay a $100 million fine to settle U.S. regulatory claims it improperly saddled more than 40,000 customers with untradeable bonds.

Auction-rate securities are long-term debts functioning as short-term investments that investors could sell at weekly or monthly auctions when interest rates reset.
Municipalities frequently tapped the $330 billion market to borrow money, but it collapsed earlier this year, Marketwatch noted, sending yields on some auction-rate securities soaring and leaving investors unable to sell the assets.

The only strength in the market was in technology. The Philadelphia Semiconductor Index ($SOX.X) was the leading index of 42 tracked by Market Dispatches, up 1.5% to 360, powered by a 3.8% gain to $23.67 for Intel (INTC, news, msgs).

A Citigroup analyst said that the company's projection that third-quarter sales would be $10 billion to $10.6 billion was aggressive -- and likely to be reached.

Intel was the top-performing Dow stock, second among stocks in the Nasdaq-100 Index($NDX.X), which tracks large-cap Nasdaq stocks, and seventh-best among S&P 500 stocks.

Flash memory maker SanDisk (SNDK, news, msgs) was the top Nasdaq-100 performer, up 6.1% to $16.17.

Microsoft (MSFT, news, msgs), up 1.4% to $27.39, was the second-best Dow performer, followed by Hewlett-Packard (HPQ, news, msgs), up 0.8% to $45.51.

The three stocks were the only winners among the 30 stocks. Only 82 S&P 500 stocks were higher, along with 33 stocks in the Nasdaq-100 Index. The index fell 0.8% to 1,880.

Energy prices -- New York close

	Wed.	Thur.	Chg.	Month chg.	YTD chg.
Crude oil (NYMEX) (per barrel)	$120.02	$118.58	$1.44	-3.27%	25.05%
Heating oil (per gallon)	$3.2336	$3.2379	-$0.0043	-5.96%	22.05%
Natural gas (per million BTU)	$8.5710	$8.7730	-$0.2020	-6.01%	14.54%
Unleaded gasoline (per gallon)	$3.0027	$2.9493	$0.0534	-1.49%	20.55%

Wal-Mart sees softer sales

Wal-Mart said July sales at stores open at least one year rose 3%, missing analysts' prediction of a 3.4% gain. Wal-Mart had topped sales expectations in May and June.

"With the end of the stimulus checks, we know consumers are spending more cautiously, and we continue to see a pronounced paycheck cycle at the end of the month," said Eduardo Castro-Wright, chief executive of Wal-Mart U.S., in a press release.

Wal-Mart said sales growth in August will be minimal, predicting an increase in comparable store sales between 1% and 2%.

The company accounts for about 10% of all retail sales in the U.S.

Jobless claims rise

The number of initial jobless claims jumped by 7,000 last week to 455,000, the highest level in more than six years, according to a report released today.

The jump in claims is partly due to a government extension of eligibility. "People are coming into the system that probably would not have filed" absent the extension, a Labor Department analyst told The Wall Street Journal.

Still, "the labor market is slackening," Michael Gregory, a senior economist at BMO Capital Markets, told Bloomberg News. "The underlying trend for jobs has got recession written all over it."

The economy lost 51,000 jobs in July.

Will Iran tensions boost oil again?

As crude has fallen from its $147.22 high on July 11, some energy analysts believe oil investors are missing the potential problem of rising tensions with Iran.

"The market has been ignoring supply-side concerns lately, but it's looking like the world powers will go forward and place more sanctions on Iran," Victor Shum, an energy analyst with consultancy Purvin & Gertz, told CNNMoney.com.

Iran is a key player in the oil markets. Recent worries about the country's nuclear capabilities and tensions between Iran and Israel have raised questions about the country's dependability as a supplier.

Olli Heinonen, deputy director general of the International Atomic Energy Agency, is in Tehran today for talks about Iran's nuclear program, Agence France-Presse reported.

On Wednesday, oil lost 59 cents to close at $118.58 a barrel. Crude is up 64% over the past year.

Pending home sales rise

Some decent news on the housing front added a little bit of hope to the battered market.

Pending home sales, which are an advance indicator of existing-home sales, rose 5.3% in June from May, the National Association of Realtors said in a report. Sales rose 9.3% in the South, 4.6% in the West, 3.4% in the Northeast and 1.3% in the Midwest.

But don't get too excited. Pending sales were still down 12.3% from June 2007, the trade association said. And it looks like one reason for the gain is that sales of foreclosed properties are generating much of the business.

"Even if we are seeing the lows here . . . it's going to take a long time before we see a solid improvement that will trigger widespread home-price increases," Steve Gallagher, chief U.S. economist at Societe Generale, told CNBC. Gallagher does not expect home prices to turn higher until at least the middle of 2009.

AIG hit by housing mess

American International Group shares were slumping today because it's clear the company is still reeling from the mortgage mess.

AIG reported a whopping second-quarter loss of $5.36 billion, or $2.06 per share, a huge drop from the profit of $4.28 billion, or $1.64 per share, reported last year. The company said its adjusted net loss was 51 cents per share, nowhere near Wall Street's consensus expectation for a profit of 63 cents per share. It was the company's third quarterly loss in a row.

AIG said its loss included $5.56 billion from credit-default swaps -- a credit derivative contract designed to transfer the credit exposure of fixed-income products between parties. Credit-default swaps have plagued the company. In the past three quarters, AIG has lost more than $25 billion there. AIG said that it wrote down $6.08 billion on other investments.

"Our second-quarter results were adversely affected by the severe conditions in the housing and credit markets and a very difficult investment environment," Chief Executive Robert Willumstad said in a statement. "We have a lot of work to do to restore AIG's profitability to where it should be."

Willumstad replaced Martin Sullivan as CEO on June 15; major AIG shareholders had pushed for Sullivan's resignation.

"We are examining every business," Willumstad added, "as well as the assumptions underlying how we do business in the markets where we have a presence. We are considering all options."

Discounters do well in July

If there were clear winners from July's retail sales, it seems to be discounters like Wal-Mart, Sam's Club, Costco Wholesale (COST, news, msgs) and BJ Wholesale (BJ, news, msgs). But the big issue for all retailers is whether consumers feel good enough about their prospects to do more than buy necessities.

That's why BJ Wholesale was down 2.2% to $38.91, even though July sales were up 16.7%.

Jumping gasoline prices have sopped up cash that isn't already budgeted, Britt Beemer of America's Research Group told Bloomberg Television today. "It's all about what we're paying at the pump."

Costco said same-store sales rose 10% in July, well above the 7.6% gain analysts had expected.

Excluding gasoline sales, Costco said sales were up 6%. Shares rose 0.2% to $65.82 this afternoon.

Target (TGT, news, msgs), meanwhile, missed the bull's-eye with its July same-store sales. The company said sales fell 1.2%, missing Wall Street's estimate of a 0.3% decline. Shares dropped 4.7% to $45.76.

Gap (GPS, news, msgs) also missed analysts' expectations. The Gap said July sales fell 11%, worse than the 7% decline that had been forecast; shares fell 0.2% to $16.92.

Meanwhile Limited Brands (LTD, news, msgs) said sales at stores open at least one year fell 5%, better than the 7.4% decline analysts had predicted. Shares were up 1.2% to $17.10 this afternoon.

Back-to-school shopping "happens every year, and parents are budgeted for it," Jharonne Martis, an analyst at Thomson Reuters, told MarketWatch. "After August there are no back-to-school or rebate checks to boost consumer spending. We will see then how robust the U.S. consumer can be."

ECB, BOE keep rates steady

The European Central Bank and the Bank of England both kept interest rates on hold this morning as worries about a slowing economy in Europe outweighed inflation concerns.

The ECB kept its rate steady at 4.25%, and the BOE held at 5%.

European Central Bank President Jean-Claude Trichet will comment on the bank's decision later this morning. In July, Trichet had some cautionary comments about inflation:

"Inflation is now the major economic concern of European citizens. They know of course that the bank is not responsible for the increase in the cost of oil, commodities and food," Trichet said in an interview with four European newspapers, according to The Wall Street Journal.

Credit mess likely to weigh on bonuses

The prosperity of recent years has brought a lot of wealth to many people on Wall Street, causing some observers to criticize the big paychecks top executives have been taking home. But this year may be different come bonus time.

Wall Street bonuses will likely fall this year, as the mortgage-market mess and related credit crunch have taken a serious toll on most of the financial-services and banking companies. Johnson Associates, a compensation consultancy firm, said in a report that senior investment bankers could see their bonuses slump between 35% and 45% from last year.

Hedge fund managers' bonuses will likely be about 15% lower than 2007 bonuses, and other investment banking staffers should expect a 20% to 30% cut relative to last year's bonus.

Wall Street bonuses fell 4.7% in 2007 from 2006, Johnson Associates said.

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

	Thur.	Wed.	Chg.	Month chg.	YTD chg.
Treasurys
13-week Treasury bill	1.630%	1.600%	0.030	-0.31%	-48.09%
5-year Treasury note yield	3.170%	3.315%	-0.145	-2.94%	-8.25%
10-year Treasury note yield	3.935%	4.048%	-0.113	-1.11%	-2.48%
30-year Treasury bond yield	4.564%	4.690%	-0.126	-0.85%	2.35%
Currencies
U.S. Dollar Index	74.725	74.410	0.315	1.78%	-2.57%
British pound in dollars	$1.9448	$1.9474	-0.0027	-1.93%	-2.24%
Dollar in British pounds	£0.5142	£0.5135	0.0007	1.96%	2.29%
Euro in dollars	$1.5326	$1.5423	-0.0097	-1.76%	4.86%
Dollar in euros	€ 0.6525	€ 0.6484	0.0041	1.79%	-4.63%
Dollar in yen	109.35	109.57	-0.22	1.36%	-2.24%
Canadian dollar in U.S. dollars	$0.950	$0.955	-$0.0049	-2.84%	-4.36%
U.S. dollar in Canadian dollars	$1.054	$1.048	$0.0063	3.01%	4.57%
Commodities
Gold	$877.90	$883.00	-$5.10	-4.86%	4.76%
Copper	$3.4180	$3.4235	-$0.01	-6.65%	12.40%
Silver	$16.2570	$16.5050	-$0.25	-8.62%	8.96%
Corn	$5.2225	$5.0800	$0.14	-11.11%	14.65%
Crude oil (NYMEX) (per barrel)	$120.02	$118.58	$1.44	-3.27%	25.05%