Crude falls, but stock rally collapses

By Charley Blaine and Elizabeth Strott

Volatility returned to the stock market today with a vengeance, turning a 247-point gain for the Dow Jones Industrial Average soon after the open into a small loss on the day.

The tumble was a shock to traders and market bulls. Stocks had rallied amid sharply lower crude oil prices after damage to refineries and offshore platforms and pipelines in the Gulf of Mexico from Hurricane Gustav appeared to be much less severe than expected.

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Crude in New York closed at $109.71, down 5% from Friday. Crude had been down to as low as $105.46 early today in electronic trading. Crude's gains off that bottom seemed to trim the overall market.

At the close, the Dow was down 27 points, or 0.2%, to 11,517. The Standard & Poor's 500 Index was off 5 points, or 0.4%, to 1,278, and the Nasdaq Composite Index was down 18 points, or 0.8%, to 2,349. The Nasdaq-100 Index ($NDX.X), which tracks large-cap Nasdaq stocks, was down 22 points, or 1.2%, to 1,850.

Moreover, the pullback came at the start of a holiday-shortened week when stocks usually move higher.

There wasn't a specific catalyst that blew out the rally. And pundits and analysts had a lot of thoughts. Here are four reasons for the pullback:

• Commodity prices -- not just oil -- uniformly sold off. That feeds into the theory of slowing economies around the world. Gold was down $24.70 an ounce to $810.50. Corn fell 2.7% to $5.53 a bushel; corn, in fact, is down nearly 24% this quarter.

• Tech stocks weakened. Apple (AAPL, news, msgs) was down 2% to $166.19 after Thomas Weisel Partners cut profit estimates, saying sales may be slowing. EBay (EBAY, news, msgs) fell 3.5% to $24.07 after brokerage Stifel Nicolaus reduced its price estimate for the stock because of the strengthening dollar and a weakening Western European consumer. Research In Motion (RIMM, news, msgs) fell 2.7% to $118.35.

• Energy and metals stocks moved lower as the dollar moved higher. ExxonMobil (XOM, news, msgs) fell 3.4% to $77.32. Freeport-McMoRan Copper & Gold (FCX, news, msgs) fell 7% to $83.05. Steel Dynamics (STLD, news, msgs) fell 8.5% to $22.72 and was the worst performer among Nasdaq-100 stocks.

• Financial stocks saw gains trimmed. There are continuing fears that financial stocks have not yet bottomed. Citigroup (C, news, msgs), up 4.4% in the morning, closed down 0.2% to $18.96. Wells Fargo (WFC, news, msgs), up as much as 4.7%, ended with a 3.1% gain at $31.21. The Select Sector SPDR-Financial (XLF, news, msgs) exchange-traded fund, which tracks the financial sector of the S&P 500, was up 1.4% to $21.72 after jumping as much as 3.3% during the day.

There was one clear group of winners: airlines. AMR (AMR, news, msgs), parent of American Airlines, was up 11.3% to $11.50, Continental Airlines (CAL, news, msgs) rose 9.8% to $17.84, and Delta Air Lines (DAL, news, msgs) was up 12.8% to $9.17.

Nineteen of the 30 Dow stocks were higher today, led by General Motors (GM, news, msgs), up 6.5% to $10.65. A total of 289 S&P 500 stocks showed gains, led by Regions Financial (RF, news, msgs), up 19.2% to $11.05. But only 31 Nasdaq-100 stocks were higher. Irish airline Ryanair Holdings (RYAAY, news, msgs) was the leader, up 6.8% to $24.31.

Energy prices -- New York close

	Tues.	Fri.	Chg.	Month chg.	YTD chg.
Crude oil (NYMEX) (per barrel)	$109.71	$115.46	-$5.75	-4.98%	14.31%
Heating oil (per gallon)	$3.0736	$3.1819	-$0.1083	-3.40%	16.01%
Natural gas (per million BTU)	$7.2610	$7.9430	-$0.6820	-8.59%	-2.97%
Unleaded gasoline (per gallon)	$2.7337	$3.0099	-$0.2762	-9.18%	9.75%

Weak August auto sales expected

Automakers are expected to post a 10th consecutive month of U.S. sales declines on Wednesday as incentives on slow-selling trucks and SUVs and General Motors' employee pricing promotion failed to ignite demand from struggling consumers in August.

Analysts see automakers posting double-digit declines in U.S. auto sales for August -- adding to the longest monthly losing streak for the industry since the domestic recession of 2001.

U.S. auto sales may have been down anywhere from 14% to 19% industrywide in August from a year earlier, according to analysts, but should have been up slightly from the 16-year low reported in July.

Also coming Wednesday: reports on factory orders and the Federal Reserve's Beige Book report, an anecdotal snapshot of the economy.

The most important earnings will come from homebuilder Hovnanian (HOV, news, msgs) and construction and mining equipment maker Joy Global (JOYG, news, msgs). Hovnanian will offer some guidance on whether the housing market has bottomed. Joy Global will give some guidance of overseas business prospects. The stock jumped 169% between September 2006 and June but has fallen 27% from a peak in June, reflecting declines in energy prices.

No damage to rigs -- for now

Early updates from Gulf of Mexico drillers and oil and natural gas producers were "very promising," with no major damage reported, said Lars Herbst, regional director for Minerals Management Service, the Interior Department office that regulates the offshore oil and gas industry.

Refiners were beginning to send crews Monday to assess facilities in Louisiana and hoped to resume operations quickly.

But Herbst and energy companies cautioned it could be days before a full assessment of Gustav's impact is known. Until then, offshore oil and gas installations and refineries could remain closed.

As of this afternoon, 100% of oil production in the Gulf was shut down, along with 84% of natural gas production.

Still, Michael Wittner, global head of oil research at Societe Generale, wrote in a note to clients, "The market reaction to Gustav has confirmed our opinion that when the disruption threats fade, the underlying factors (for oil) are bearish."

A year ago, September crude oil was trading at $70 a barrel; oil is down nearly 30% since its all-time intraday high of $147.27 on July 11.

Gustav hit the Louisiana coast at Cocodrie, about 70 miles southwest of New Orleans, on Monday and was quickly downgraded to a Category 2 hurricane. The storm had been a Category 4 over the weekend. This morning, the storm was downgraded again, to a tropical depression.

ExxonMobil, Valero Energy (VLO, news, msgs) and ConocoPhillips (COP, news, msgs) said the storm did little damage to their operations in the Gulf. Personnel from 100 rigs were evacuated ahead of the storm. There are now 121 rigs operating in the Gulf, analyst Stephen Schork wrote in his daily newsletter, The Schork Report.

Still, there are other storms to worry about, Purvin & Getz energy analyst Victor Shum told The Associated Press: "September is the peak of the Atlantic hurricane season. After Gustav, there are two more now on the radar screen. The storms are likely to provide some upside risks to the oil futures market," Shum said.

Gustav hit the Louisiana coast almost exactly three years after Hurricane Katrina inundated New Orleans.

Storm to cost billions

While Gustav may not have caused the catastrophic damage that was feared, the storm could bring insurance claims between $6 billion and $10 billion, according to companies that estimate catastrophe damage. The low end of the estimate would make Gustav the fourth-costliest storm ever to hit the U.S.

When numbers are adjusted for inflation, Hurricane Katrina caused $41 billion in property damage along the Gulf, and Hurricane Andrew cost $22.9 billion in Florida in 1992, according to the Insurance Information Institute.

"While 2005 was by far the worst year ever for insured catastrophe losses in the U.S., future storms could prove even costlier, reaching upwards of $100 billion," said institute president Robert Hartwig. "Disaster losses along the coast are likely to escalate in the coming years because of huge increases in development, rising rebuilding and repair costs, and the expectation for more frequent and more severe storms in hurricane-prone areas."

One observer was cautious about the impact of the damage costs.

"Even if it causes $10 billion in damage, that is not a huge deal for the overall economy," David Wyss, chief economist for Standard & Poor's, told CNNMoney. "But it's coming on top of everything else going wrong. It's more likely a recession scenario for the end of the year."

Nonetheless, insurance stocks were mostly higher. The Philadelphia KBW Insurance Index ($KIX.X) was up 1.3% to 130.

Lehman in talks about stake sale

Shares of Lehman Bros. (LEH, news, msgs) closed up 0.3% to $16.13 today after Korean Development Bank confirmed that it is in talks to buy a stake in the struggling company.

"Short term it would be a huge boon to Lehman," Bruce Foerster, president of South Beach Capital Markets, told Bloomberg News. "It would put a bounce in the step of everybody that works there."

Worries about Lehman's ability to survive have been growing since the demise of Bear Stearns, as Lehman faces losses and a huge drop in its share price amid the mortgage-market meltdown.

Lehman hasn't commented on the news.

BP to buy stake in Chesapeake

BP's (BP, news, msgs) BP America is buying a 25% stake in natural-gas producer Chesapeake Energy (CHK, news, msgs) for $1.9 billion, the companies said this morning.

Shares of Chesapeake were off 6.5% to $45.24; BP shares were down 6.3% to $54.01.

Manufacturing slips in August

The manufacturing sector contracted slightly in August, the Institute of Supply Management said this morning.

The ISM's index came in at a reading 49.9%, just a hair below the reading of 50% seen in July. Economists were expecting a reading of 49.5%.

"The PMI indicates a slight decline in manufacturing during August," ISM chair Norbert Ore said in a press release. "This continues the 2008 trend toward negligible growth or contraction each month but ultimately results in very little overall change in the sector."

Readings below 50 indicate contraction in the sector, while readings above 50 indicate expansion.

UK faces tough times

The United Kingdom's top finance official, Chancellor of the Exchequer Alistair Darling, told The Guardian newspaper that country faces the worst economic conditions in 60 years.

"I think it's going to be more profound and long-lasting than people thought," Darling told the paper.

"We have a credit crunch the like of which we haven't seen in generations. We have it at the same time as oil and food prices are going up," Darling added in an interview with the British Broadcasting Corp.

On Monday, Darling's comments pushed the pound below $1.80 against the dollar for the first time since April 2006.

Google launches new Web browser

Google (GOOG, news, msgs) is going after Microsoft (MSFT, news, msgs) again.

Google this morning introduced Chrome, an open-source Internet browser that will take on Microsoft's Internet Explorer and Mozilla's Firefox. Google said on its Web site that Chrome is now available for download, saying that it is "streamlined and simple . . . clean and fast. It gets out of your way and gets you where you want to go." (Microsoft is the publisher of MSN Money.)

"This gives Google another opportunity to protect its flank and to create a new branding position," analyst Roger Kay of Endpoint Technologies Associates told Bloomberg News. "The browser is a broader platform than they currently have."

"We realized that the web had evolved from mainly simple text pages to rich, interactive applications and that we needed to completely rethink the browser," Sundar Pichai, a Google vice president of product management, wrote on the company site. "What we really needed was not just a browser, but also a modern platform for web pages and applications, and that's what we set out to build."

Google shares were up 0.4% to $465.25; Microsoft was down 0.7% to $27.10.

Microsoft, which lags Google on the Internet search front, tried to buy mutual rival Yahoo (YHOO, news, msgs) earlier this year, but the two companies could not agree on terms of a deal.

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

	Tues.	Fri.	Chg.	Month chg.	YTD chg.
Treasurys
13-week Treasury bill	1.650%	1.690%	-0.040	-2.37%	-47.45%
5-year Treasury note yield	2.996%	3.089%	-0.093	-3.01%	-13.29%
10-year Treasury note yield	3.746%	3.813%	-0.067	-1.76%	-7.16%
30-year Treasury bond yield	4.362%	4.412%	-0.050	-1.13%	-2.18%
Currencies
U.S. Dollar Index	78.140	77.720	0.420	0.83%	1.88%
British pound in dollars	$1.7848	$1.7841	0.0006	-2.02%	-10.28%
Dollar in British pounds	£0.5603	£0.5605	-0.0002	2.06%	11.46%
Euro in dollars	$1.4524	$1.4524	0.0000	-1.02%	-0.62%
Dollar in euros	€ 0.6885	€ 0.6885	0.0000	1.03%	0.63%
Dollar in yen	108.58	108.58	0.00	-0.17%	-2.92%
Canadian dollar in U.S. dollars	$0.937	$0.937	$0.0000	-0.32%	-5.59%
U.S. dollar in Canadian dollars	$1.068	$1.067	$0.0009	0.33%	5.94%
Commodities
Gold	$810.50	$835.20	-$24.70	-2.96%	-3.28%
Copper	$3.2730	$3.3870	-$0.11	-3.37%	7.63%
Silver	$13.1450	$13.7070	-$0.56	-4.10%	-11.90%
Corn	$5.5300	$5.6825	-$0.15	-2.68%	21.41%
Crude oil (NYMEX) (per barrel)	$109.71	$115.46	-$5.75	-4.98%	14.31%