Stocks break even as oil tops $121

By Charley Blaine and Elizabeth Strott

Stocks ended the day basically flat. For bulls, that counted as a win because crude oil closed above $120 a barrel for the first time since Aug. 4.

Crude briefly topped $122 a barrel before settling at $121.18 in New York, up $5.62 a barrel or nearly 5%, because of rising tensions over Russia's incursion into Georgia. It was crude's third straight gain.

Energy shares moved higher as a result, pushing stocks higher overall.

The Dow Jones industrials finished up 13 points to 11,430; the blue chips had been down as many as 102 points soon after the open as crude moved higher. The Standard & Poor's 500 Index added 3 points to 1,278. The Nasdaq Composite Index, however, was down 9 points to 2,380.

Energy giants Chevron (CVX, news, msgs) and ExxonMobil (XOM, news, msgs) led the Dow, up 2.4% to $88.52 and 2% to $80.35, respectively. The Select Sector SPDR-Energy (XLE, news, msgs) exchange-traded fund, which tracks the energy sector of the S&P 500, was the best performer of the ETFs that mirror the S&P 500. The ETF finished up 2.5% to $76.37.

The weak spot in the market was financial stocks. American International Group (AIG, news, msgs) was the Dow loser, falling 4.9% to $19.78, its lowest close since October 1995. The Select Sector SPDR-Financial (XLF, news, msgs) ETF was down 1.8% to $19.98.

Crude's gain today came as the dollar fell against major currencies, especially the Japanese yen and the Canadian dollar.

The gains suggest that crude's drop from its mid-July high of $147.27 to an intraday low of $111.66 on Tuesday may well be done for now. Oil had strengthened Wednesday after Goldman Sachs repeated its belief that oil will end 2008 at $149 a barrel.

Investors are "running back to gold, running back to oil," Alaron Trading analyst Phil Flynn told CNNMoney.

"After the pullback that oil recently had, it's only natural for a snap-back rally in the short term with the tensions between Russia and the situation in that part of the world," Madison Prop Trading's Chris Conefry said.

Plus the big picture of rising global demand hasn't changed, he said.

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Credit jitters have also sent the dollar lower against the euro, adding some strength to oil's move higher over the past few sessions. Oil prices are denominated in dollars and generally rise when the dollar falls, and vice versa.

"A two-day slide in the dollar has taken some wind out of the bear's sail in the energy complex," industry analyst Stephen Schork told clients in his daily newsletter, The Schork Report.

Energy prices -- New York close

	Thur.	Wed.	Chg.	Month chg.	YTD chg.
Crude oil (NYMEX) (per barrel)	$121.18	$113.01	$5.62	-2.34%	26.26%
Heating oil (per gallon)	$3.3006	$3.1635	$0.1371	-4.02%	24.58%
Natural gas (per million BTU)	$8.2520	$8.0770	$0.1750	-9.51%	10.28%
Unleaded gasoline (per gallon)	$3.0452	$2.9103	$0.1349	-0.09%	22.26%

Will Boeing walk away from the tanker contract?

Late today, The Wall Street Journal said that Boeing (BA, news, msgs) may bail out of its effort to win a $40 billion refueling tanker contract for the Air Force unless the Pentagon agrees to give it a total of six months to submit a new bid.

The threat of walking away from the competition -- and leaving the government with no competition at all for a high-profile defense contract -- is perhaps the biggest weapon Boeing has at its disposal in latest chapter of the long-running tanker saga.

Jim Albaugh, head of Boeing's defense unit, said in an interview with The Wall Street Journal that Boeing has taken a hard look at the latest requirements and concluded that they call for a plane that can haul more fuel than the plane Boeing originally bid.

"I think the option we would have if we were not given the six months, there is a really high likelihood that we would no-bid the program," Albaugh said.

The Journal said that the government is leaning toward adding another 15 days for Boeing and rival Northrop Grumman (NOC, news, msgs) to respond to the latest request for proposals, giving the competitors a total of 60 days to submit a new bid. Because Boeing would have to figure out how to convert a larger airplane into a flying gas station, the company says it needs an additional four months to prepare a competitive proposal.

Boeing closed up 0.5% to $63.55 today. Northrop Grumman was up 0.6% to $69.39.

Worries about financials ease a little

Financials were under pressure after two analysts lowered their earnings estimates on several financial-services companies and jitters about Fannie Mae (FNM, news, msgs) and Freddie Mac (FRE, news, msgs) grew.

Citigroup analyst Prashant Bhatia said Lehman Bros. (LEH, news, msgs) will lose $3.25 per share in the third quarter, far worse than the analyst's previous estimate of a 41-cent loss. Bhatia said Lehman will write down $2.9 billion in the quarter.

Bhatia also lowered estimates on Morgan Stanley (MS, news, msgs) and Goldman Sachs (GS, news, msgs). "We are lowering our third-quarter estimates to reflect the difficult operating environment, characterized by lower client-related trading volumes and losses on hard-to-sell assets," Bhatia's note to clients said.

Morgan will write down $1.7 billion in the third quarter, while Goldman will write down $1.8 billion, Citigroup's Bhatia said.

Goldman shares fell 1.2% to $156.42, and Morgan Stanley's stock was off 0.9%, to $37.06.

Lehman Bros. had been down as much as 8.7%, but the stock finished basically unchanged at $13.72 after Ladenburg Thalmann analyst Dick Bove changed his rating on the stock to buy. Lehman may sell $30 billion to $50 billion in securities to raise capital and slash its dividend by 90%, he said, and it may sell 20% of its Neuberger Berman business. Moreover, it may become a hostile takeover target.

Meanwhile, Lehman analyst Roger Freeman made similarly grim comments, lowering third-quarter estimates on Goldman Sachs and Morgan Stanley. Goldman faces the "greatest risk" this quarter, Freeman wrote in a note to clients.

Banc of America Securities analyst Michael Hecht didn't want to be left out, adding that investment banks face a difficult environment throughout the rest of the year. Lehman has troubled asset exposure of $72 billion, Hecht said in his note this morning, while Morgan Stanley's exposure is about $26 billion.

Fannie, Freddie still in hot water

Fannie Mae shares jumped 10.2% to $4.85 after closing Wednesday at their lowest level in nearly 20 years. Freddie shares edged down 9 cents, or 2.8%, to $3.16.

Shares of the companies have plunged 40% this week alone as jitters about their future have mounted.

Fannie Mae CEO Daniel Mudd told National Public Radio on Wednesday that the company has not turned to the Treasury Department for help, nor has the Treasury asked to step in. But his comments did little to calm speculation that a government bailout will occur. "There's a big negative feedback loop, and there's no way out of it," Friedman, Billings, Ramsey & Co. analyst Paul Miller told The Associated Press. "As the stock falls more and more, it's more likely the government steps in and more likely equity holders get wiped out."

Ladenburg Thalmann's Bove told clients today that the only "rational action" for Fannie and Freddie would be "to get rid of them." Bove suggested that the government restructure the mortgage entities.

Today's economic data

A report on U.S. leading economic indicators showed a 0.7% decline in July, worse than economists' expectations of a 0.2% drop.

Investors should prepare for "slow growth the rest of the year, and possibly an economy grinding to a halt," the Conference Board said in its report. "If there's a second-half recovery, it'll be the second half of 2009," said Ken Goldstein, the Conference Board's labor economist.

Initial jobless claims fell by 13,000 last week to 432,000, the Labor Department reported this morning. The four-week moving average for claims rose 66,250 to 3.33 million, up from 2.55 million last year.

Fed called Credit Suisse about Lehman

Lehman Bros. still seems to have a bull's-eye on its back.

After Bear Stearns' demise, many observers pegged Lehman to be the next to go under, amid nasty rumors about its liquidity levels, potential losses and exposure to the messy mortgage sector.

Worries have sent Lehman shares plummeting in recent months, but the Federal Reserve took a major step in July to prevent the company from imploding, The Wall Street Journal reported today.

The Fed called Credit Suisse (CS, news, msgs) after a rumor last month that the Swiss bank had pulled a line of credit from Lehman, the newspaper wrote. Credit Suisse reportedly denied the rumor and told the central bank it had no plans to pull that credit line.

In separate news, the Financial Times reported this morning that Korea Development Bank and China's Citic Securities bailed on talks to buy stakes in Lehman. The potential investors walked away because the price Lehman was asking was too high, the FT wrote.

Lehman's struggles have prompted rumors that it would sell its investment management division or a stake in the company.

Temasek to boost Merrill stake?

Singapore's Temasek Holdings could take an even bigger stake in Merrill Lynch (MER, news, msgs), according to published reports.

"If there's an opportunity, we would like to look at it," S. Dhanabalan, chairman of the Singapore state-owned investment company, said in a speech today. "Whether we do it depends on our assessment and risk diversification."

One analyst was not surprised. "One has to believe in investing in the longer term, whether locally or globally," Tan Teng Boo, money manager at Capital Dynamics Asset Management in Kuala Lumpur, told Bloomberg News. "The pessimism driving the Western financial institutions down is so extreme right now that for longer-term investors like Temasek it does make sense to get some exposure."

Temasek paid $5 billion for a 5% stake in Merrill in late December as Merrill sought out new ways to boost capital.

Shares of Merrill were down 0.3% to $24.34.

Heinz, Limited beat the Street

H.J. Heinz (HNZ, news, msgs) said today that fiscal-first-quarter profit rose 11% from last year.

The maker of the famous ketchup, Ore-Ida and Weight Watchers products said profit was $229 million, or 72 cents per share, up from $205.3 million, or 63 cents per share, a year ago. Analysts had been looking for 66 cents per share.

Sales rose 14% to $2.58 billion, despite some weakness in its U.S. food segment business.

Heinz closed up 0.5% to $51.99; the stock is up 12% this year.

Limited Brands (LTD, news, msgs) late Wednesday reported a 61% drop in second-quarter profit as consumers turned away from shopping at the company's Victoria's Secret and Bath & Body Works stores.

Limited earned $102 million, or 30 cents per share, down from $264.4 million, or 67 cents per share, last year. Excluding charges, the company earned 27 cents in the quarter, topping Wall Street's estimate of 19 cents, sending the stock up 12.9% to $20.28.

Revenue fell 13% to $2.28 billion.

"We expect that the environment will continue to remain challenging," CEO Leslie Wexner said in a statement. The company forecast third-quarter earnings of 4 cents, matching the consensus estimate among analysts.

Airlines to lose billions

Crude oil may be off its record highs. But $100-plus-a-barrel oil has clearly taken a huge toll on the airline industry, which could face losses of more than $6.1 billion this year, according to the International Air Transport Association.

"We are bracing for more situations of airlines collapsing" amid higher fuel prices and lower revenue, IATA Chief Executive Officer Giovanni Bisignani said at a National Aviation Press Club lunch, The Wall Street Journal reported. "We are a fragile industry in a crisis."

A $1 increase in the price of oil adds $1.6 billion to airlines' costs, Bisignani said.

The IATA represents 230 airlines around the world.

Airline stocks were lower today because of the oil price increase. The Amex Airlines Index ($XAL.X) was 4.1% to 22.70.

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

	Thur.	Wed.	Chg.	Month chg.	YTD chg.
Treasurys
13-week Treasury bill	1.685%	1.670%	0.015	3.06%	-46.34%
5-year Treasury note yield	3.067%	3.012%	0.055	-6.09%	-11.23%
10-year Treasury note yield	3.838%	3.799%	0.039	-3.54%	-4.88%
30-year Treasury bond yield	4.465%	4.443%	0.022	-3.00%	0.13%
Currencies
U.S. Dollar Index	76.330	77.095	-0.765	3.96%	-0.48%
British pound in dollars	$1.8751	$1.8629	0.0122	-5.44%	-5.74%
Dollar in British pounds	£0.5333	£0.5368	-0.0035	5.75%	6.09%
Euro in dollars	$1.4872	$1.4751	0.0121	-4.67%	1.75%
Dollar in euros	€ 0.6724	€ 0.6779	-0.0055	4.90%	-1.72%
Dollar in yen	108.51	109.84	-1.33	0.58%	-2.99%
Canadian dollar in U.S. dollars	$0.956	$0.944	$0.0129	-2.14%	-3.67%
U.S. dollar in Canadian dollars	$1.046	$1.060	-$0.0137	2.25%	3.81%
Commodities
Gold	$839.00	$816.30	$22.70	-9.07%	0.12%
Copper	$3.5385	$3.3955	$0.14	-3.36%	16.36%
Silver	$13.8430	$13.1530	$0.69	-22.19%	-7.22%
Corn	$5.9775	$5.9775	$0.23	1.74%	31.23%
Crude oil (NYMEX) (per barrel)	$121.18	$115.56	$5.62	-2.34%	26.26%

Continental Airlines (CAL, news, msgs) was down 5.4% to $14.34.