Dow up 303 as oil falls to $115

By Charlie Blaine and Elizabeth Strott

Crude oil dropped to $115.20 a barrel in New York on Friday, and stocks finished their best week since April as talk grew that the U.S. stock market has finally stabilized.

But skepticism is probably a good idea, as the U.S. economic slowdown is spreading to the global economy and could hurt the profits of large U.S. companies, which have used strength overseas to offset weak domestic business.

Plus, the weak condition of a number of big financial companies, especially mortgage capital providers Fannie Mae (FNM) and Freddie Mac (FRE, news, msgs), could easily derail the rally.

The Dow Jones industrials closed up 303 points, or 2.7%, to 11,734 on Friday, finishing the week with a 3.6% gain, its best weekly gain since the week of April 14. It was the highest close for the blue chip index since June 25.

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The Standard & Poor's 500 Index had a 30-point gain, or 2.5%, to 1,296; its 3% gain for the week was its best since the week of April 14.

The Nasdaq Composite Index jumped 58 points, or 2.5%, to 2,414. Its weekly gain of 4.5% was its fourth in a row and its best weekly showing since the week of April 14.

Crude oil's $115.20 close was a drop of $4.82 a barrel, or 4%, from Thursday and its lowest close since May 2. For the week, crude was off nearly 8%, although it is still up 20% for the year.

Crude has now declined about 22% from its intraday high on July 11. It has also pulled retail gasoline prices lower. AAA's daily Fuel Gauge survey said Friday the national retail price of gasoline was $3.836 a gallon, down 1.3 cents from Thursday and 6.8% from its $4.114 high on July 17. Wholesale gasoline futures were down 3.8% to $2.8874 a gallon and suggest retail prices will continue to fall.

Crude fell as the dollar rose nearly 2% against the euro, its biggest one-day gain since July 2002.

The market's gain more than overcame its losses on Thursday when the Dow fell nearly 225 points. It came even as Fannie Mae, the nation's largest supplier of mortgage capital, reported a $2.3 billion loss for the second quarter and saw its stock fall 9.1% to $9.05. The stock had been down more than 15% early in the day.

But financial and real-estate stocks were mostly higher -- part of a big, broad rally that saw 28 of 30 Dow stocks rising, along with 430 S&P 500 stocks and 83 of the stocks in the Nasdaq-100 Index ($NDX.X), which tracks large-capitalization Nasdaq stocks.

Home Depot (HD, news, msgs) and McDonald's (MCD, news, msgs)were the top Dow gainers, up 7.2% to $26.37 and 6.2% to $65.67, respectively. McDonald's was higher because of an 8% gain in July sales, better than expected, with the strongest gains coming from Europe and Asia.

Twenty-eight of the 30 Dow stocks were higher on the day. The losers: Alcoa (AA, news, msgs), down 0.1% to $31.76, and IBM Corp. (IBM, news, msgs), down 0.2%, to $128.81.

Nine of the 10 sectors of the S&P 500 were higher.

The only loser was energy. The Select Sector SPDR-Energy (XLE, news, msgs) exchange-traded fund, which mirrors the energy sector of the S&P 500, fell 1.7% to $70.98. Devon Energy (DVN, news, msgs) dropped 4.2% to $89.60; Baker Hughes (BHI, news, msgs) fell 4.1% to $77.20

Airline and retail stocks were especially strong. Macy's (M, news, msgs) rose 9.6% to $20.73. Continental Airlines (CAL, news, msgs) jumped 11.7% to $16.48.

The markets for the week

	Close for week	Wk. ago close	% chg.	YTD. chg.
Dow Jones industrials	11,734.32	11,326.32	3.60%	-11.54%
S&P 500	1,296.32	1,260.31	2.86%	-11.72%
Nasdaq Composite	2,414.10	2,310.96	4.46%	-8.98%
Russell 2000	734.30	716.16	2.53%	-4.14%
Crude oil per barrel	$115.20	$125.10	-7.91%	20.03%
10-yr. Treasury yield	3.95%	3.95%	0.00%	-2.11%
Gold per troy ounce	$864.80	$917.50	-5.74%	3.20%

The dollar wins by default

The dollar's rise on Friday came as evidence mounted that economies in Europe are slowing. That's why the European Central Bank and the Bank of England both left rates steady on Thursday, just as the Federal Reserve did on Tuesday.

The dollar's gain against the euro is not a testament to the strength of the U.S. economy. Far from it.

The issue is that economies in Europe are weakening faster than the domestic economy, a fact that European Central Bank President Jean-Claude Trichet conceded as the bank left its key rate alone. The Bank of England also held steady on rates.

"The dollar is getting a boost by default," Sharada Selvanathan, a currency strategist at BNP Paribas, told Reuters.

• Check out today's currency rates

Does the volatility mean there's a bottom?

So, does Friday's rally mean stocks are headed higher?

There are reasons to cheer.

• The S&P 500 hit a low of 1,200 on July 15 and hasn't come close to testing it. That's a bullish sign.

• The Dow's big gain was its seventh of 100 points or more since July 15, when the market put in its most recent bottom. And it is the 11th session since July 15 when the blue chips moved up or down more than 100 points in a day. This volatility suggests to some that a big bottom in stocks has been put in. The S&P 500 is up 7.5% from its intraday low on July 15; the rally for financial stocks has been even stronger.

• The Select Sector SPDR-Financial (XLF, news, msgs) exchange-traded fund, which mirrors the financial sector of the S&P 500, is up nearly 31% from July 15. It is also trading above its 50-day moving average for the first time since May. The financial sector fell more than 54% from its peak in February 2007 through July 15, a bigger, faster drop than the 49% decline the S&P 500 experienced between its March 2000 peak and iOctober 2002 bottom after the dot-com bust.

But the excitement some investors feel right now should be tempered by two realities:

• The weak economy, with what Fannie Mae CEO Daniel Mudd called the worst housing slump since the Great Depression likely to extend well into 2009.

• Trading volume is light. New York Stock Exchange volume on Friday was only 900 million shares; 1.5 billion has been normal over the past few months. Nasdaq volume was 1.8 billion shares. That's about average, but it does not suggest that the rally is drawing money back into the stock market.

Energy prices -- New York close

	Fri.	Thur.	Chg.	Month chg.	YTD chg.
Crude oil (NYMEX) (per barrel)	$115.20	$120.02	-$4.82	-7.16%	20.03%
Heating oil (per gallon)	$3.1280	$3.2336	-$0.1056	-9.04%	18.06%
Natural gas (per million BTU)	$8.2480	$8.5710	-$0.3230	-9.55%	10.22%
Unleaded gasoline (per gallon)	$2.8874	$3.0027	-$0.1153	-5.27%	15.92%

Fannie Mae loses $2.3 billion

Fannie Mae's loss followed directly in the footsteps of sibling Freddie Mac with a big second-quarter loss that took Wall Street by surprise.

Fannie Mae's ugly loss was $2.3 billion, or $2.54 per share; analysts had pegged Fannie to lose 68 cents per share. The company earned $1.9 billion, or $1.86 per share, in the same quarter last year.

Fannie also said it is cutting its quarterly dividend by 86%, to 5 cents per share from 35 cents.

"Our second-quarter results reflect challenging conditions in the housing and mortgage markets that began in 2006 and have deepened through 2007 and 2008," Fannie Mae's Mudd said in a press release. "Volatility and disruptions in the capital markets became even more pronounced in July. In addition, credit performance has continued to deteriorate and, based on our experience in July, we anticipate further increases in our combined loss reserves."

Fannie Mae said its quarterly credit-loss provision soared to $5.3 billion from $3.2 billion in the first quarter. Combined loss reserves rose to $8.9 billion from $5.2 billion in the first three months of the year.

The company said that it expects to remain above its capital requirement for the rest of 2008.

Earlier in the week, Freddie Mac reported a much-worse-than-expected loss of $1.63 per share. It also announced plans to cut its dividend, by 80%.

"Neither we nor anyone else can predict when the housing market will recover, and it would be folly for anyone to try to do so," Freddie Mac Chief Executive Officer Richard Syron had told analysts on Wednesday.

Productivity jumps in Q2

U.S. productivity rose 2.2% in the second quarter, the Labor Department reported this morning. That was slightly lower than the 2.5% growth economists had expected.

Unit labor costs, a gauge of inflationary pressures, rose 1.3%; economists had forecast 1.6% growth. "Unit labor costs are decelerating, and, from an inflationary perspective, that's a good thing," Julia Coronado, senior economist at Barclays Capital, told Bloomberg. "It'll help ease concern at the Fed."

The Fed on Tuesday kept interest rates on hold at 2% and acknowledged its effort to keep the economy rolling while trying to keep inflation in check.

Bank of America subpoenaed over sale of securities

Bank of America (BAC, news, msgs) late Thursday said it had received subpoenas from federal regulators over sales of its auction-rate securities.

Auction-rate securities are bonds sold at the lowest possible yield that will clear the market; their interest rates are reset periodically. They are long-term securities that act as short-term securities, and the $330 billion market for them, like those for other debt-related securities, crumbled earlier this year.

Bank of America said it is cooperating with the regulators' requests.

A filing with the Securities and Exchange Commission said that four class-action lawsuits have also been filed against Bank of America over auction-rate securities sold between May 2003 and February 2008.

Bank of America shares were up 2.3% to $32.25 Friday.

Earlier on Thursday Citigroup (C, news, msgs) said it reached an agreement with the New York attorney general's office whereby the bank will buy back $7 billion in auction-rate securities and will pay $100 million in penalties. Regulators said Citigroup marketed the securities as safe investments and did not tell investors about potential liquidity risks.

"The Citi settlement sets a precedent -- not from a litigation perspective but more from a public-relations perspective," Ron Geffner, an attorney with Sadis and Goldberg and a former investigator with the SEC, told MarketWatch.com. "However, I expect that regulators are sensitive to the fact that investment banks' very survival is at risk with the subprime and credit crunch. So regulators may be looking at the viability of the entire industry before exacting a pound of flesh."

Merrill Lynch (MER, news, msgs) said late Thursday that it, too, will buy back customers' auction-rate securities, about $10 billion worth.

That move was not a surprise, said Anthony Carfang, a partner at financial consultant company Treasury Strategies. "When one major firm settles a material piece of litigation, others follow suit pretty quickly," Carfang told Bloomberg News. "It puts pressure on other institutions to make their customers whole."

At least one analyst questioned the attorney general's pressure: "They keep finding ways to attack the industry, and that will drive innovation out of New York City and to London, Tokyo and elsewhere," analyst Dick Bove of Ladenburg Thalmann told The Associated Press.

Citigroup shares were up 5% to $19.39 Friday. Merrill Lynch was up 3% to $26.87.

Crocs' profit plunges

Crocs (CROX, news, msgs) late Thursday posted second-quarter results that missed analysts' expectations.

The stock, however, was up 3.2% to $4.46.

Crocs reported net income of $2.1 million, or 3 cents per share -- down from $48.5 million, or 58 cents per share, in the same quarter a year ago. Analysts had expected Crocs to earn a nickel in the quarter.

Crocs' results came in at the lower end of the 3- to 7-cents-per-share range the company had forecast in late July.

The sandal maker reiterated its third-quarter guidance of a penny to 5 cents per share in profit; Wall Street is looking for earnings of 3 cents.

Consumer credit rises

Americans borrowed more than economists expected in June, the Federal Reserve said late Thursday.

Consumer credit rose by $14.3 billion, or at an annual pace of 6.7%, in June, the biggest monthly increase since November, when borrowing rose at an 8.2% pace. Non-revolving credit, which is used to finance cars and other big-ticket items, rose 6.6% in June, up from 1.5% in May. Revolving credit, which is mostly credit cards, increased at a 6.8% rate, slightly lower than the 7.6% rate in May.

"This is definitely showing some level of spending activity on the part of the consumer following the fiscal stimulus bounce," Maxwell Clarke, chief U.S. economist at IDEAGlobal, told Bloomberg News. "The impact of the stimulus has put our problems off for tomorrow."

Merrill Lynch North American economist David Rosenberg said U.S. consumers are starting to rein in their spending. "We are detecting early signs that a new pattern of spending behavior is taking hold in the aftermath of the housing, credit and oil shocks; it is called frugality. The trend towards essentials and away from discretionary," Rosenberg wrote in a note to clients.

Rosenberg noted that air travel fell by 20% in the second quarter, while mass transit jumped 30.7% and spending on cars and SUVs fell 18.5%. Bicycle sales rose 4.4%.

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

	Fri.	Thur.	Chg.	Month chg.	YTD chg.
Treasurys
13-week Treasury bill	1.665%	1.630%	0.035	1.83%	-46.97%
5-year Treasury note yield	3.217%	3.170%	0.047	-1.50%	-6.89%
10-year Treasury note yield	3.950%	3.935%	0.015	-0.73%	-2.11%
30-year Treasury bond yield	4.555%	4.564%	-0.009	-1.04%	2.15%
Currencies
U.S. Dollar Index	75.980	74.725	1.255	3.49%	-0.93%
British pound in dollars	$1.9190	$1.9436	-0.0246	-3.22%	-3.53%
Dollar in British pounds	£0.5211	£0.5145	0.0066	3.33%	3.66%
Euro in dollars	$1.5038	$1.5335	-0.0297	-3.61%	2.89%
Dollar in euros	€ 0.6650	€ 0.6521	0.0129	3.74%	-2.81%
Dollar in yen	110.06	109.32	0.74	2.02%	-1.60%
Canadian dollar in U.S. dollars	$0.937	$0.950	-$0.0130	-4.09%	-5.59%
U.S. dollar in Canadian dollars	$1.068	$1.054	$0.0142	4.36%	5.95%
Commodities
Gold	$864.80	$877.90	-$13.10	-6.28%	3.20%
Copper	$3.3330	$3.4180	-$0.09	-8.97%	9.60%
Silver	$15.3300	$16.2570	-$0.93	-13.83%	2.75%
Corn	$4.9750	$4.9750	-$0.25	-15.32%	9.22%
Crude oil (NYMEX) (per barrel)	$115.20	$120.02	-$4.82	-7.16%	20.03%