Oil falls as a stormy September opens

By Charley Blaine and Elizabeth Strott

Oil prices slumped Monday in electronic trading on news that Hurricane Gustav might cause much less damage to oil and gas platforms in the Gulf of Mexico than feared. That may give stocks a boost when markets open on Tuesday.

Stocks had fallen on Friday, with the Dow Jones industrials down 172 points to 11,544. Whether a rally can be sustained is unclear. September is historically quite volatile and, historically, the weakest month of the year.

Stock and bond markets were closed Monday for Labor Day.

At 11:45 p.m. ET on Monday, crude for October delivery was at $111.13 a barrel in electronic trading on the New York Mercantile Exchange, down $4.33 from Friday. Crude hit as low as $110.60 a barrel, its lowest level since May 2.

The eye of Gustav came ashore on Monday in Cocodrie, La., about 75 miles southwest of New Orleans, but winds were not as high as feared, raising hopes that damage to the rigs and pipelines in the Gulf would not be great.

Hurricane Katrina did extensive damage and pushed oil and natural gas prices to then-record levels when it slammed into the Gulf Coast in August 2005.

Preparations for the storm closed 96% of offshore oil production and about 10% of U.S. refining capacity. It will take some days before a clear picture of damage is available.

Millions of residents of southern Louisiana, Mississippi, Alabama and Texas, had moved inland in advance of the storm. But damage appears to be less severe than the damage from Katrina. Yet, the region may face flooding from heavy rains.

The oil price drop on Monday, along with only modest price gains ahead of the weekend, offers more confirmation of the strength of the oil sell-off since crude peaked in intraday trading at $147.27 a barrel on July 11.

"The reaction is telling us that this market just does not have the stomach it once did for higher prices," analyst Peter Beutel of Cameron-Hanover wrote in a note to clients late Sunday. "We believe it is telling us that existing prices are too high and that they have already discounted events that never happened."

Gasoline prices have dropped more than 10% nationally since peaking at $4.114 on July 17, according to AAA's Daily Fuel Gauge Report. The national average retail price Monday was $3.686 a gallon, down slightly from Sunday.

Meanwhile, Tropical Storm Hannah became Hurricane Hannah on Monday. The storm looks like it will move up the East Coast. There were also several tropical depressions forming in the eastern Atlantic that could develop into storms.

Dell, consumer spending drop stocks

Stocks slumped Friday in light pre-holiday trading. You can blame a surprising earnings miss for computer maker Dell (DELL, news, msgs) and a government report showing weak consumer spending for the down day.

Friday's sell-off came as stocks finished their best month since April and intensifies the argument between those investors who say the economy and business are doing well and those who see continuing risks. The argument will play an important role in the presidential election.

In addition to the Dow's loss, the Standard & Poor's 500 Index was down 18 points, or 1.4%, to 1,283, and the Nasdaq Composite Index fell 44 points, or 1.8%, to 2,368.

All 30 stocks in the Dow were lower on the day, with American International Group (AIG, news, msgs), down 2 cents to $21.49, the closest stock to a winner among the blue chips.

Dell was off 13.8% to $21.73, its worst one-day loss since November 2000. The stock was the third-worst performer in the S&P 500 and the worst performer among stocks in the Nasdaq-100 Index ($NDX.X), which fell 43 points, or 2.2%, to 1,873.

Only 78 S&P 500 stocks had gains on Friday, along with just seven stocks in the Nasdaq-100.

Dell's earnings, combined with a comment that it was seeing increasing conservative spending decisions by its corporate customers, slammed virtually the entire technology sector. So, too, did the government's consumer spending report.

For the week, the Dow and the S&P 500 were down 0.7%, with the Nasdaq off 2%.

The Dow also finished August with a 1.5% gain, its best monthly performance since rising 4.5% in April. The S&P 500 was up 1.2% for the month, its best gain since a 4.8% gain in April. The Nasdaq's 1.8% gain was its best since a 4.5% gain in May.

The markets for the week

	Close for week	Wk. ago close	% chg.	YTD. chg.
Dow Jones industrials	11,543.55	11,628.06	-0.73%	-12.98%
S&P 500	1,282.83	1,292.20	-0.73%	-12.64%
Nasdaq Composite	2,367.52	2,414.71	-1.95%	-10.74%
Russell 2000	739.50	737.60	0.26%	-3.46%
Crude oil per barrel	$115.46	$114.59	0.76%	20.30%
10-yr. Treasury yield	3.81%	3.87%	-1.40%	-5.50%
Gold per troy ounce	$835.20	$833.50	0.20%	-0.33%

A better picture of conditions ahead

Next week may offer some clarity on whose argument is right about the economy. Wall Street comes back from vacation, and trading volumes in the financial markets will start to accelerate.

Automakers will report August sales on Wednesday. On Wednesday and Thursday, homebuilders Hovnanian (HOV, news, msgs) and Toll Bros. (TOL, news, msgs) will offer glimpses into whether the housing market is close to a bottom.

And on Friday, the government will report on nonfarm payroll growth and unemployment for August.

In addition, three other issues will command investors' attention:

• A possible wave of short-selling from speculators who don't believe the worst of the problems are over. Many analysts and pundits believe the bottom that the market saw on July 15 is, in fact, the bottom from a sell-off that began last October and has pushed the major indexes down as much as 22%. But short-sellers are convinced the problems of financial companies are far deeper than anyone expects. Lehman Bros. (LEH, news, msgs) said Friday it's looking for new capital and will lay off more than 1,200 workers. The stock was up 1.4% to $16.09.

• The impact of the fall elections on business prospects. Sen. Barack Obama, D-Ill., wants to cut taxes for middle-class taxpayers, raising taxes for the most affluent. Sen. John McCain, R-Ariz., wants to renew and expand the Bush tax cuts as well as aggressively drill for new oil prospects. (This morning he named Alaska Gov. Sarah Palin, also a supporter of new drilling, as his running mate.)

• Growing tensions between the United States and Russia. The relationship between the superpowers has deteriorated and could cause problems for markets, especially in Europe.

Normally, September is one of the worst months for markets; it has produced losses in six of the last 10 years. Some believe that the market does well in September of an election year. However, the Dow fell 5% in September 2000 and 1% in September 2004.

Energy prices -- New York close

	Tues.	Mon.	Chg.	Month chg.	YTD chg.
Crude oil (NYMEX) (per barrel)	$115.46	$113.01	-$0.13	-6.95%	20.30%
Heating oil (per gallon)	$3.1819	$3.1826	-$0.0007	-7.47%	20.10%
Natural gas (per million BTU)	$7.9430	$8.0500	-$0.1070	-12.90%	6.15%
Unleaded gasoline (per gallon)	$3.0099	$3.0214	-$0.0115	-1.25%	20.84%

Dell's nasty surprise

Dell blamed its disappointing second-quarter earnings report -- and a very cautious outlook -- on what the company called "continued conservatism in IT spending in the U.S., which has extended into Western Europe and several countries in Asia."

That forced the computer maker to spend heavily on sale promotions, particularly in Asia -- and that in turn cut into profit margins.

Dell also was one of the first U.S. companies to concede that the recent rally in the U.S. dollar could hurt demand for its products. The decline in the dollar for most of the year had given an extra boost to U.S. companies with significant overseas profits.

The company earned $616 million, or 31 cents a share, on revenue of $16.4 billion. Analysts had expected 36 cents a share in earnings. Net income was down 17% from a year ago; earnings per share were down 6%. Revenue was up 11% from a year ago.

The difference between net income and earnings per share was a result of the company's buyback of 60 million shares for $1.4 billion.

"The thing that is concerning and the thing that is making the stock go down is they're starting to talk about demand destruction in Western Europe and in Asia," said John Menzies, a portfolio manager at Pacific Growth Equities in San Francisco. "Up until this point the large tech companies, like the IBMs of the world, have done pretty well in holding up their earnings because they've had strong and consistent international demand."

Dell said revenue was up 16% in its Asia-Pacific and Japan business, 11% in Europe, 5% in commercial sales in the United States and 53% in global consumer sales. Dell shipped more than twice as many consumer laptops in the second quarter as it did a year ago, driving revenue up 28% to $2.8 billion. Profitability was roughly break-even as the business expanded its retail presence and absorbed a litigation expense of $18 million.

The company said most of its planned 8,900 job reductions have been made. The final 400 cuts will come in the third quarter.

Rival Hewlett-Packard (HPQ, news, msgs) was down 0.9% to $46.92. Intel (INTC, news, msgs) was off 3.1% to $22.87. Microsoft (MSFT, news, msgs) was down 2.3% to $27.29. (Microsoft is the publisher of MSN Money.) Apple (AAPL, news, msgs) fell 2.4% to $169.53.

Biggest drop in personal income in three years

The Commerce Department said personal incomes fell last month by the largest amount in nearly three years, while consumer spending slowed as the lift from government stimulus checks waned.

"With the tax refund effect on spending now more or less over, we think the worst is yet to come for consumers," Ian Shepherdson, an economist with High Frequency Economics in Valhalla, N.Y., told Reuters.

"Even if the housing backdrop is showing fewer signs of stress as some of the recent indicators have tentatively suggested," Merrill Lynch economist David Rosenberg said Friday, "the recession is clearly moving beyond the residential real estate market and into the 70% chunk of the economy otherwise known as the once-resilient US consumer."

The Commerce Department report also said prices excluding food and energy, the Federal Reserve's preferred gauge, climbed 2.4% year-over-year basis.

The data overshadowed a better-than- forecast reading in the Reuters/University of Michigan consumer sentiment index and dampened optimism spurred by better- than-estimated growth in gross domestic product yesterday and an unexpected increase in orders for durable goods on Wednesday.

How much damage will Gustav cause?

The most immediate question facing investors on Tuesday is the effect that Gustav will have on the vast network of oil and gas platforms in the Gulf of Mexico as well as damage to communities along the Gulf Coast.

Gustav strengthened into a hurricane Friday and was expected to enter the Gulf of Mexico by late Saturday.

Energy stocks, however, were mostly lower.

The storm should make landfall Tuesday anywhere from Port O'Connor, Texas -- southwest of Houston -- to the Pensacola area in Florida.

Under the likeliest scenario as of Friday, Gustav would make landfall in central Louisiana as a hurricane on Tuesday. Then, it would move northwest into areas of Louisiana and Texas ravaged by Hurricane Rita three weeks after Katrina devastated New Orleans in 2005. Both hit as Category 3 storms.

"If Gustav strikes near the Texas-Louisiana border, several refiners could be knocked out for a number of weeks," Addison Armstrong, director of market research at TFS Energy in Stamford, Conn., told Bloomberg News.

If the storm hits a Category 3 level, with winds 111 to 130 mph, damage could be widespread. In 2004, Hurricane Ivan, a Category 3 storm, knocked oil rigs off their moorings. Hurricane Katrina, which brought winds greater than 155 mph in the Gulf, was only a Category 3 storm when it came ashore in Louisiana, Mississippi and Alabama. It knocked out refineries and disrupted pipelines, causing oil, natural gas and gasoline prices to rise sharply.

The credit crunch's devastating effect on Merrill Lynch

Merrill Lynch's (MER, news, msgs) losses in the past 18 months amount to about a quarter of the profits it has made in its 36 years as a listed company, according to Financial Times research that highlights the extent of the global banking crisis.

Since the onset of the credit crunch last year, Merrill has suffered after-tax losses of more than $14 billion, as its balance sheet has been savaged by almost $52 billion in write-downs and credit-related losses.

Despite the news, Merrill Lynch was up 3% to $28.35 Friday.

Merrill's total inflation-adjusted profits between its 1971 listing and 2006 were about $56 billion, according to figures from Thomson Reuters Fundamentals and an FT analysis of reported earnings.

The $14 billion in losses for 2007 and the first two quarters of 2008 equal half of Merrill's profits since the beginning of the decade.

Merrill had the highest ratio of credit-crunch losses to historical profits among 10 U.S. and European financial groups analyzed by the FT. The other banks studied: Citigroup, JPMorgan Chase (JPM, news, msgs), Bank of America (BAC, news, msgs), Morgan Stanley (MS, news, msgs), Goldman Sachs (GS, news, msgs), Lehman Brothers, Credit Suisse (CS, news, msgs) and UBS (UBS, news, msgs).

UBS, which has lost more than $15 billion during the crisis, had the second-highest ratio.

Will Boeing get hit by a strike?

Dow component Boeing (BA, news, msgs) shares fell 1.2% to $65.56 Friday as investors worried that a possible strike could delay the first flight of its 787 Dreamliner as well as other new programs.

Boeing presented what it called a last offer to members Thursday in a bid to avoid a strike. The offer, which would boost pay by 11% on average over three years, is the latest effort by the airplane maker to avoid a strike that could cost it millions of dollars a day.

Boeing said the proposed contract was its "best and final" offer and would increase compensation for the more than 27,000 union workers in Washington state, Kansas and Oregon. It includes a $2,500 bonus for workers if the contract is ratified by next Wednesday -- the day the current contract expires and a union vote is scheduled.

The company said it had withdrawn some proposals that drew concern from the union, including plans to cut early-retiree medical coverage and create a new defined-contribution retirement program for future employees.

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

	Tues.	Mon.	Chg.	Month chg.	YTD chg.
Treasurys
13-week Treasury bill	1.690%	1.700%	-0.010	3.36%	-46.18%
5-year Treasury note yield	3.089%	3.070%	0.019	-5.42%	-10.59%
10-year Treasury note yield	3.813%	3.795%	0.018	-4.17%	-5.50%
30-year Treasury bond yield	4.412%	4.389%	0.023	-4.15%	-1.05%
Currencies
U.S. Dollar Index	77.500	77.255	0.245	5.56%	1.05%
British pound in dollars	$1.8242	$1.8295	-0.0053	-8.01%	-8.30%
Dollar in British pounds	£0.5482	£0.5466	0.0016	8.71%	9.05%
Euro in dollars	$1.4676	$1.4712	-0.0037	-5.93%	0.41%
Dollar in euros	€ 0.6814	€ 0.6797	0.0017	6.30%	-0.41%
Dollar in yen	108.83	109.45	-0.62	0.88%	-2.70%
Canadian dollar in U.S. dollars	$0.945	$0.951	-$0.0063	-3.30%	-4.81%
U.S. dollar in Canadian dollars	$1.059	$1.051	$0.0078	3.49%	5.06%
Commodities
Gold	$835.20	$837.20	-$2.00	-9.48%	-0.33%
Copper	$3.3870	$3.4005	-$0.01	-7.50%	11.38%
Silver	$13.7070	$13.7050	$0.00	-22.95%	-8.13%
Corn	$5.6825	$5.7000	-$0.02	-3.28%	24.75%
Crude oil (NYMEX) (per barrel)	$115.46	$115.59	-$0.13	-6.95%	20.30%