Dow off 131 on higher oil, economic worries

By Charley Blaine and Elizabeth Strott

Stocks tumbled again today, driven lower by higher oil prices, very weak housing data, surprisingly bad news on producer prices and continued pressure on financial stocks.

At the close, the Dow Jones industrials were down 131 points, or 1.1%, to 11,349. The Nasdaq Composite Index shed 33 points, 1.4%, to 2,384, and the Standard & Poor's 500 Index dropped 12 points, 0.9%, to 1,267.

But trading volume was light again, because many traders and money managers are on vacation. That means many transactions are being done for business reasons rather than because investors are panicking.

Crude oil jumped $1.66, or 1.5%, to $114.53 a barrel as tensions between the western nations and Russia appeared to grow over the Russian incursion into Georgia.

Because of crude's gain, energy stocks were the leading market sector. Chevron (CVX, news, msgs) and ExxonMobil (XOM, news, msgs) were the top performers among the 30 Dow stocks, up 1.8% to $84.71 and 1.9% to $77.95, respectively. Coal producer Peabody Energy (BTU, news, msgs) was the S&P 500 leader, up 7.6% to $61.45.

But the financial components of the Dow were slammed, with American International Group (AIG, news, msgs) the worst Dow performer, down 5.9% to $20.32 after Goldman Sachs said the world's largest insurance company may be forced to pay $20 billion to investors who had bought insurance against bond defaults. The payouts will require AIG to raise more capital.

Meanwhile, investment bank Lehman Bros. (LEH, news, msgs) was down 13% to $13.07 in part because a JPMorgan analyst said the company would write down $4 billion in assets in the third quarter, which ends on Aug. 31, because of the housing slump. The loss was the second-worst among S&P 500 stocks.

After the close, Goldman Sachs analyst William Tanona cut his estimate on Lehman, saying he thinks it will report a loss of $2.5 billion to $3.5 billion for the quarter. Lehman should report results in mid-September.

Lehman is reportedly shopping its investment management business.

Tanona also cut estimates on Morgan Stanley (MS, news, msgs), Citigroup (C, news, msgs) and JPMorgan Chase (JPM, news, msgs), saying any recovery for the troubled industry is still a few quarters away. And, he added, many Wall Street banks will focus on purging their books of risky mortgage securities.

All of the stocks were down in after-hours trading.

But Tanona did recommend Morgan Stanley as a buy and said investors should stay clear of Citigroup.

Twenty-five of the 30 Dow stocks were lower, along with 401 S&P 500 stocks and 83 stocks in the Nasdaq-100 Index ($NDX.X). The index was down 24 points, or 1.2%, to 1,909.

Energy prices -- New York close

	Tues.	Mon.	Chg.	Month chg.	YTD chg.
Crude oil (NYMEX) (per barrel)	$114.53	$113.01	$1.66	-7.70%	19.33%
Heating oil (per gallon)	$3.1237	$3.0848	$0.0389	-9.16%	17.90%
Natural gas (per million BTU)	$7.9760	$7.8800	$0.0960	-12.53%	6.59%
Unleaded gasoline (per gallon)	$2.8639	$2.8152	$0.0487	-6.04%	14.98%

Foreign sales boost Hewlett-Packard

There was some good news -- finally -- after the bell. Computer maker Hewlett-Packard (HPQ, news, msgs) reported that it earned 86 cents a share in its fiscal-third quarter, up 21% from a year ago. Revenue of $28 billion was up 10% from a year ago.

The stock was up 2.9% to $44.95 in after-hours trading. The stock had fallen 2% to $43.69 in regular trading.

The company said international sales in its computer and printer businesses helped it overcome pockets of weak technology spending during its third quarter.

H-P forecast fiscal fourth-quarter profit, excluding items, of $1.01 to $1.03 a share; analysts have been projecting $1 a share. Revenue should be $30.2 billion to $30.3 billion, slightly behind the average forecast of $30.4 billion.

Non-U.S. revenue accounted for 68% of sales. Adjusted for exchange rates, Europe, Middle East and Africa revenue rose 5%, and Asia Pacific revenue rose 8%. Revenue in the Americas rose 3% -- better than expected, CEO Mark Hurd said on a conference call, and marked a pickup the previous quarter.

HP and other PC makers have been depending on strong overseas growth because of the sagging U.S. economy.

Revenue in the personal systems group rose 15% to $10.3 billion, with unit shipments up 20% from last year. Notebook revenue grew 26% from last year, while desktop revenue rose 6%.

The worst housing starts in 17 years

The Commerce Department said today that U.S. housing starts were running at an annual rate of 965,000 units in July – the lowest level in 17 years, down 11% from June and 29.6% from a year ago.

Building permits, a signal of future construction, slumped 18% in July from June to a seasonally adjusted pace of 937,000. That was down 39% from a year ago.

There were some who saw good news in the weak housing report.

"The drop is good news because what is sorely needed in the housing market is a decrease in supply, not an increase. . . . The lower the better," Tony Crescenzi, chief bond market strategist for Miller Tabak & Co., wrote in a note to clients.

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Building permits for single-family homes fell 5.2% to a 584,000 pace last month, the lowest since August 1982.

But economist David Rosenberg of Merrill Lynch said housing weakness will persist well into 2009. The problem, he wrote in a note to clients today, is that single-family starts are still 10% too high at 641,000 units. Exacerbating the problem is the flood of new homes seized by lenders in foreclosures that are now getting dumped on the market.

As a result, he thinks there is an excess of 1 million homes and condominiums on the market now. To get to a bottom will require starts dropping another 20% and home prices falling 15% to 20% -- on top of a near 20% overall price decline since 2006.

Investors seemed to agree. Pulte Homes (PHM, news, msgs) was down 3.7% to $12.07. Ryland (RYL, news, msgs) was off 3.3% to $19.28. The Philadelphia Housing Sector Index ($HGX.X) was down 3.5% to 118.

Home Depot profit falls

Home Depot (HD, news, msgs) said second-quarter profit fell 24%, to $1.2 billion, or 71 cents per share, the eighth consecutive quarterly loss for the company. Home Depot earned $1.6 billion, or 81 cents per share, in the same period last year.

The results were better than the analysts' consensus estimate of 61 cents per share, but Chief Executive Officer Frank Blake was less than optimistic, saying the company continues "to see pressure on our market and the consumer."

Home Depot did, however, reiterate its full-year guidance of a 24% decline in earnings from the previous year, to between $1.72 and $1.84 per share.

Home Depot shares were down 3.7% to $25.96. Rival Lowe's (LOW, news, msgs), which reported on Monday, was down 2.8% to $23.85.

Producer prices in focus

Inflation reared its head again today when the Labor Department reported a 1.2% increase in the Producer Price Index, which measures wholesale prices. That was higher than analysts' expectations of a 0.6% rise. The PPI rose 1.8% in June.

Producer prices are up 9.8% over the past year.

The core PPI was up 0.7% in July, also higher than the consensus estimate of a 0.2% increase last month. Core prices are up 3.5% over the past year.

"The overall theme for the summer has been the market being pushed around by whatever macroeconomic data comes out," explained Madison Prop Trading's Chris Conefry. "Bullish and bearish sentiment is fairly equal, so economic numbers have been the tiebreaker, so to speak. This morning's numbers could be an example of that, and in a two-week period such as this, which notoriously has been a common vacation period, these moves could be further accentuated."

Tropical Storm Fay worries fade, but oil jumps

There was some spike in oil today.

After being down all morning, crude oil jumped to as high as $116.65, in part because the dollar fell against the euro. The immediate result of the spike was a sharp drop in the Dow. When crude fell back again to $114.53, the market losses were trimmed.

Crude had closed down 90 cents at $112.87 a barrel Monday, its lowest close since May 1.

Tensions between Russia and Georgia are growing, which could add more pressures to prices.

"Azerbaijan's national oil company has suspended rail shipments of crude to the Black Sea in the wake of a Russian attack on the Georgian village of Grakali two days ago," Cameron Hanover analyst Peter Beutel wrote in a note to clients this morning. "A critical bridge link was destroyed in the attack and will take a week or more to repair. An estimated 20,000 to 30,000 tons of oil were moved across this rail link."

Oil, which has been down in six of the past seven days, had fallen this morning as worries eased about the potential impact of Tropical Storm Fay on oil production rigs in the Gulf of Mexico.

"Evidence is all around of contracting demand," MF Global analyst John Kilduff told MarketWatch. "Road travel is in decline, mass-transit ridership is at all-time highs, gasoline sales are down and auto sales are at a multiyear low."

Oil is down 23% since hitting an all-time intraday high of $147.27 a barrel on July 11.

Target, Saks have weak quarters

Target (TGT, news, msgs) this morning reported an 8% drop in second-quarter profit.

The discount retailer earned $634 million, or 82 cents, a share. Although the results beat Wall Street's estimate of 76 cents per share, shares fell 0.7% to $49.72.

Sales at stores open at least one year fell 0.4% in the quarter.

"Right now they're just having to buckle down and figure out how to compete against Wal-Mart (WMT, news, msgs) in a slowing market," David Abella, portfolio manager at Rochdale Investment Management, told Bloomberg News.

Higher-end retailer Saks (SKS, news, msgs) didn't have much better luck. Saks said it lost $31.7 million, or 23 cents per share, in the second quarter, worse than the loss of $24.6 million, or 17 cents per share, last year. The per-share loss was also worse than analysts' expectations of 19 cents per share.

Saks fell 8.3% to $10.29.

Fannie and Freddie move lower again

Shares of mortgage giants Fannie Mae (FNM, news, msgs) and Freddie Mac (FRE, news, msgs) were lower again as investors continued to worry that the federal government will have to step in to save mortgage giants Fannie Mae (FNM, news, msgs) and Freddie Mac (FRE, news, msgs).

Shares of Fannie fell 2.3% to $6.01 after plunging 22% on Monday; Freddie shares were down 5% to $4.17 after losing 25% Monday.

And Freddie Mac was obliged to pay 4.172% for a $3-billion auction of five-year notes today. That was 1.13 percentage above yields on comparable U.S. Treasury notes, the biggest spread Freddie Mac has ever paid for such a debt issue. The spread is a clear signal of investor wariness about the long-term prospects for the nation's largest providers of capital to the mortgage markets.

Over the weekend, a report in Barron's suggested that the companies may not be able to raise enough capital to keep operations stable.

"We agree with the call for Treasury intervention and think it is very, very likely to happen before the end of the third quarter," Ajay Rajadhyaksha, head of fixed-income strategy for Barclays Capital, told Bloomberg News. "Without government help, we think there is very little chance of Freddie completing a significant capital raising."

General Dynamics to buy Jet Aviation

General Dynamics (GD, news, msgs), which makes Gulfstream jets, said today that it will pay $2.23 billion for Swiss airline services company Jet Aviation.

The deal will help General Dynamics expand its flight-support services, the company said.

"It's a matter of extending the product offering into the aftermarket," Nick Cunningham, aerospace analyst at Evolution Securities, told Bloomberg News. "Looking forward, the value in the business jet industry is going to be in services, because the fleets are getting bigger."

Jet Aviation, founded in 1967, is majority-owned by European private-equity firm Permira and operates in 25 markets around the world.

Shares of General Dynamic were down slightly to $91.99.

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

	Tues.	Mon.	Chg.	Month chg.	YTD chg.
Treasurys
13-week Treasury bill	1.765%	1.740%	0.025	7.95%	-43.79%
5-year Treasury note yield	3.071%	3.066%	0.005	-5.97%	-11.11%
10-year Treasury note yield	3.842%	3.816%	0.026	-3.44%	-4.78%
30-year Treasury bond yield	4.469%	4.441%	0.028	-2.91%	0.22%
Currencies
U.S. Dollar Index	76.985	77.270	-0.285	4.86%	0.38%
British pound in dollars	$1.8678	$1.8639	0.0038	-5.81%	-6.11%
Dollar in British pounds	£0.5354	£0.5365	-0.0011	6.17%	6.50%
Euro in dollars	$1.4789	$1.4689	0.0100	-5.21%	1.18%
Dollar in euros	€ 0.6762	€ 0.6808	-0.0046	5.49%	-1.17%
Dollar in yen	109.69	110.16	-0.47	1.68%	-1.93%
Canadian dollar in U.S. dollars	$0.943	$0.940	$0.0031	-3.54%	-5.04%
U.S. dollar in Canadian dollars	$1.062	$1.064	-$0.0025	3.76%	5.34%
Commodities
Gold	$816.80	$805.70	$11.10	-11.48%	-2.53%
Copper	$3.4270	$3.3090	$0.12	-6.40%	12.69%
Silver	$13.2200	$13.2170	$0.00	-25.69%	-11.39%
Corn	$5.6475	$5.6475	$0.12	-3.87%	23.98%
Crude oil (NYMEX) (per barrel)	$114.53	$112.87	$1.66	-7.70%	19.33%