Dow off 140 as big banks slump

By Charley Blaine and Elizabeth Strott

Stocks slumped today after two days of gains as financial stocks were hit by more write-offs and analyst downgrades.

The problems for financials overwhelmed any cheer investors could take from crude oil closing at $113.01 a barrel, down $1.44, or 1.3%, from Monday.

A 9.5% decline to $37.92 for JPMorgan Chase (JPM, news, msgs) was the catalyst for a 140-point loss, or 1.2%, to 11,642 for the Dow Jones industrials. The Standard & Poor's 500 Index slumped 16 points, or 1.2%, to 1,290, a day after the broad index of the market had crossed 1,300 for the first time since June.

The Nasdaq Composite Index fell 9 points, or 0.4%, to 2,431. But the loss was less in percentage terms because of strength in such key stocks as Apple (AAPL, news, msgs), Microsoft (MSFT, news, msgs) and Google (GOOG, news, msgs). (Microsoft is the publisher of MSN Money.)

Can short sellers push banks lower?

A big question for investors Wednesday is how the stocks of Fannie Mae (FNM, news, msgs), Freddie Mac (FRE, news, msgs) and 17 other financial stocks will fare as rules limiting some short selling expired today.

The companies' shares have stabilized since the ban took effect July 21. The Securities and Exchange Commission says that its order helped prevent stock manipulation and that regulators will be able to analyze data to gauge its effectiveness. But some experts say that may be difficult to determine.

The SEC instituted the emergency ban in July after a precipitous slide in the shares of Fannie and Freddie, the government-sponsored companies that together hold or guarantee more than $5 trillion in home mortgages -- nearly half the U.S. total. The SEC extended the ban July 29 until Tuesday, saying it would not be extended further.

Fannie Mae was down 4.5% to $8.02 today; Freddie Mac fell 4.1% to $5.37.

Morgan sags on analyst downgrade

JPMorgan shares slumped after analyst Richard Bove of Ladenburg Thalmann downgraded the stock. Bove said the company's merger with Banc One hasn't worked, and the merger with Bear Stearns makes it more vulnerable to problems in the capital markets.

Holding JPMorgan shares, he told Bloomberg, is "dead money."

Late Monday, the banking company said it has incurred wider losses in its mortgage holdings so far in the third quarter than in the second quarter. JPMorgan said it lost $1.5 billion, after hedges, in its mortgage-backed securities and loans this quarter, compared with $1.1 billion in the second three months of 2008.

The latest figures bring total losses from the subprime mortgage collapse to more than $500 billion, Bloomberg News said today.

The JPMorgan pullback was just one bit of bad news to hit financial stocks today.

The weakness in financials began overnight when UBS (UBS, news, msgs), Switzerland's largest company, reported its fourth quarterly loss in a row as the credit crunch continued to batter profits.

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But the weakness quickly spread. By midafternoon, the Select Sector SPDR-Financial (XLF, news, msgs) exchange-traded fund was down 5.1% to $21.18. In addition to UBS, Wachovia (WB, news, msgs) was down 12.1% to $16. Citigroup (C, news, msgs) was off 6.5% to $18.54, and Wells Fargo (WFC, news, msgs) was off 3.9% to $30.38.

Decliners were ahead of gainers 2-to-1 on the New York Stock Exchange and 1.35-to-1 on Nasdaq.

Eight Dow stocks were ahead on the day, led by General Motors (GM, news, msgs), up 3.2% to $11.10. A total of 128 S&P 500 stocks were higher, along with 39 of the stocks of the Nasdaq-100 Index ($NDX.X). The index was flat at 1,941.

Energy prices -- New York close

	Tues.	Mon.	Chg.	Month chg.	YTD chg.
Crude oil (NYMEX) (per barrel)	$113.01	$114.45	-$1.44	-8.92%	17.74%
Heating oil (per gallon)	$3.0781	$3.1195	-$0.0414	-10.49%	16.18%
Natural gas (per million BTU)	$8.3300	$8.3490	-$0.0190	-8.65%	11.32%
Unleaded gasoline (per gallon)	$2.8432	$2.8666	-$0.0234	-6.72%	14.15%

CVS will buy Longs Drug

Late today, shares of Longs Drug Stores (LDG, news, msgs) jumped nearly 30% to $70.20 after CVS Caremark (CVS, news, msgs) said it will buy the pharmacy chain for $71.50 a share or $2.61 billion plus debt. CVS said the total value of the deal was $2.9 billion.

The deal will help CVS gain stores in California, Nevada, Arizona and Hawaii. Longs has 521 drug stores in the four states. CVS will also get Longs' Rx America subsidiary, which offers prescription benefits management services to more than 8 million members and prescription drug plan benefits to about 450,000 Medicare beneficiaries.

CVS shares fell 4.4% to $36.38 in after-hours trading. The stock had fallen 1.3% to $38.05 in regular trading.

Corn moves higher, despite huge 2008 crop

The price of corn moved up 2.4% to $5.09 a bushel today, despite an Agriculture Department projection that the 2008 U.S. corn crop will be the second-largest on record.

The crop report said farmers may well harvest 12.3 billion bushels of corn, which will be behind 2007's record production of 13.1 billion bushels.

The estimate is a huge improvement from worries in June that flooding in Iowa and Illinois would substantially trim this year's corn crop. The result was sharply higher corn prices, higher food prices at the retail level and criticism that promoting the use of corn to make ethanol for motor fuels was adding to inflation pressures.

Don't expect much relief at the supermarket, however, The Wall Street Journal said today.

Global demand for corn for making ethanol, fattening livestock and exporting is so strong that USDA economists expect prices of the new crop, which will be harvested in a few months, to fluctuate around $5.40 a bushel.

Corn peaked at $7.79 a bushel on June 27 and has fallen by more than a third since then. It's still up 11.6% on the year and 135% since the end of 2005.

Corn's gain today and gains for soybeans helped fertilizer and other agriculture stocks move higher. Fertilizer maker Mosaic (MOS, news, msgs) closed up 0.7% to $97.04; Potash of Saskatchewan (POT, news, msgs) added 4.7% to $168.39. Seed producer Monsanto (MON, news, msgs) climbed 3.3% to $111.48.

Applied Materials net falls

After the close, Applied Materials (AMAT, news, msgs) reported a 65% drop in third-quarter profit, as hard times continue for suppliers of tools to the semiconductor industry.

The Silicon Valley company, whose machines are used to make chips, has been hurt as economic worries and pricing pressures have caused customers -- particularly those that make memory chips -- to stop placing new orders for manufacturing equipment.

The company said it earned $14.8 million, or 12 cents a share, down from $43.5 million or 34 cents a share, a year ago. Revenue fell 28% to $1.85 billion. In addition, new orders declined 11%.

But CEO Michael Splinter noted that the company's new sideline in machines for making solar panels is growing quickly. He said about 30% of the company's backlog of orders now comes from its new energy and environmental solutions group.

In a conference call, company officials said they expect revenue in the fiscal-fourth quarter to increase 2% to 10% compared with the third period, with orders up 5% to 10% over that period. On a less optimistic note, Applied said it expects a sharp decline in new orders for equipment used in making flat-panel TVs and computer displays.

UBS takes a $5.1 billion write-down

UBS lost $331 million in the second quarter, down from a profit of $5.1 billion in the same period last year. The bank also wrote down $5.1 billion on bad mortgage bets.

UBS shares in New York were down 6.4% to $20.30 today.

The company also said it will change its business structure by making its divisions more autonomous.

But CEO Marcel Rohner said the company has "no intention whatsoever to sell our investment bank or any of our businesses."

Goldman, Morgan Stanley ratings are cut

Shares of Goldman Sachs (GS, news, msgs) fell 6% to $167.30 after Oppenheimer & Co. analyst Meredith Whitney cut her third-quarter estimate for the company.

Whitney said Goldman will likely earn $2.15 per share in the current quarter, lower than her previous estimate for $3.54 per share.

Deutsche Bank analyst Mike Mayo late Monday cut his estimate for Goldman to $2.40 from $3.25 per share. "Goldman is not immune to capital-market pressures, especially given perhaps weaker European growth," Mayo wrote in a research note to clients.

Meanwhile, ratings company Moody's Investor Services lowered its rating on Morgan Stanley's (MS, news, msgs) long-term debt late Monday to "A1" from "Aa3."

Morgan Stanley, like many other financial-services companies and banks, has been hit by the crumbling mortgage market. The company has written down $14.4 billion in bad debt since the third quarter of 2007.

Morgan Stanley shares fell 6.4% to $42.50.

In separate news, Morgan Stanley said it will buy back $4.5 billion in auction-rate securities; Citigroup and Merrill Lynch (MER, news, msgs) last week said they would buy back billions of the securities.

Auction-rate securities are long-term bonds that carry variable interest rates. The interest rates are periodically reset through an auction process. The market for the securities crumbled earlier this year.

Dollar's gain pushes oil lower

Crude oil dropped again as the dollar was higher for much of the day against the euro and concerns about weakening demand for the commodity have persisted. On Monday, China said that crude imports fell 7% in July from a year ago.

The dollar faded in the middle of the day but recovered in the late afternoon.

Oil is down more than $30 since its closing high of $145.08 on July 11.

Gas prices have also been falling. The average price of a gallon of regular gasoline was $3.799 this morning, according to AAA's Fuel Gauge report. Gas hit a record $4.114 a gallon on July 16.

Despite crude's decline, natural gas stocks were higher, but oil shares slipped. The Amex Natural Gas Index ($XNG.X) rose 0.4% to 560.

The Amex Oil Index ($XOI.X) was down 0.4% to 1,288. The Philadelphia Oil Service Sector Index ($OSX.X, news, msgs) dropped 0.6% to 282.

Natural gas producer Devon Energy (DVN, news, msgs) was up 2.3% to $92.88; Schlumberger (SLB, news, msgs) fell slightly to $92.65. But Dow components ExxonMobil (XOM, news, msgs) and Chevron (CVX, news, msgs) were down 1.6% to $76.88 and 0.6% to $83.56, respectively.

Bear market for oil?

Oil traders have mostly ignored the conflict between Russia and Georgia. On Monday, Russian troops advanced into disputed territories in Georgia. But this morning, Russian President Dmitri Medvedev said that that Russia will halt its attack, while reserving the right to go back on the offensive.

Oil giant BP (BP, news, msgs) decided not to take any chances and shut down the Baku-Supsa pipeline in Georgia today; the pipeline is an important throughway between Asia and Europe.

Lack of a reaction to the fighting in Georgia has been interpreted as an indicator of growing weakness in the oil markets.

"It's really surprising that we're up the way we are today, with everything going on in Georgia," Marc Pado, U.S. market strategist for Cantor Fitzgerald, said in an interview with The Wall Street Journal yesterday. "It really shows that the market has entered a new phase since Friday, with a different psychology on the part of investors."

A second analyst was more emphatic.

"When an event like this cannot foster a bid, you know you are in a bear market," Stephen Schork wrote this morning in his daily Schork Report newsletter to clients.

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

	Tues.	Mon.	Chg.	Month chg.	YTD chg.
Treasurys
13-week Treasury bill	1.825%	1.770%	0.055	11.62%	-41.88%
5-year Treasury note yield	3.164%	3.268%	-0.104	-3.12%	-8.42%
10-year Treasury note yield	3.918%	4.002%	-0.084	-1.53%	-2.90%
30-year Treasury bond yield	4.552%	4.611%	-0.059	-1.11%	2.09%
Currencies
U.S. Dollar Index	76.320	76.315	0.005	3.95%	-0.49%
British pound in dollars	$1.8975	$1.9113	-0.0138	-4.31%	-4.61%
Dollar in British pounds	£0.5270	£0.5232	0.0038	4.50%	4.83%
Euro in dollars	$1.4930	$1.4908	0.0022	-4.30%	2.15%
Dollar in euros	€ 0.6698	€ 0.6708	-0.0010	4.49%	-2.10%
Dollar in yen	109.29	110.09	-0.80	1.31%	-2.29%
Canadian dollar in U.S. dollars	$0.941	$0.936	$0.0053	-3.74%	-5.25%
U.S. dollar in Canadian dollars	$1.063	$1.069	-$0.0060	3.89%	5.47%
Commodities
Gold	$814.60	$828.30	-$13.70	-11.72%	-2.79%
Copper	$3.2275	$3.2915	-$0.06	-11.85%	6.13%
Silver	$14.4850	$14.6200	-$0.14	-18.58%	-2.92%
Corn	$5.0900	$5.0900	$0.12	-13.36%	11.75%
Crude oil (NYMEX) (per barrel)	$114.45	$114.45	$0.00	-7.76%	19.24%