Dow falls 290 as credit fears hit financial stocks

By Charley Blaine and Elizabeth Strott

A six-week rally that saw the Dow Jones industrials ($INDU) rise 24% came to an abrupt halt today as investors took one look at Bank of America's (BAC, news, msgs) first-quarter earnings and sold.

They sold the bank's shares; they were down 24.3% to $8.02. They sold financial stocks: The S&P Financial exchange-traded fund -- technically, the Select Sector SPDR-Financial (XLF, news, msgs) -- was off 11.2% to $9.87, the largest loss among the 10 ETFs that track the sectors of the S&P 500.

They sold everything else, too. The Dow was down 290 points, or 3.6%, to 7,842. The Standard & Poor's 500 Index ($INX) was off 37 points, or 4.3%, to 832, and the Nasdaq Composite Index ($COMPX) was off 65 points, or 3.9%, to 1,608.

The point loss for the Dow was its worst since March 2; the percentage loss the worst since Feb. 10. The S&P 500's point and percentages losses were the largest since Feb. 10, and the Nasdaq's loss was its biggest since October. The percentage loss was the larges since Feb. 17.

All of the 30 Dow stocks were lower today, along with 479 S&P 500 stocks and 98 stocks in the Nasdaq-100 Index ($NDX.X). The index, which tracks the largest Nasdaq stocks, fell 45 points, or 3.3%, to 1,309.

To add insult to injury, IBM's (IBM, news, msgs) earnings of $1.70 a share, which came out after the close, beat Street estimates. However, revenue was down 11% from a year ago and short of analyst estimates. Result: The stock was down 1.7% to $98.70 after hours from a regular close of $100.43, down 0.8% from Friday.

IBM's results and cautious guidance from chip maker Texas Instruments (TXN, news, msgs) may affect markets on Tuesday. Futures trading suggests U.S. stocks will open flat or lower.

Bank of America's problem wasn't that the bank didn't make any money in the quarter. It earned $4.25 billion.

The problem, as The Wall Street Journal noted, was that the bank's retail and commercial banking, credit-card and mortgage businesses show no signs of a recovery. Bank of America had to set aside more money for delinquent loans, and profit margins in some businesses contracted. That told investors that the bank -- and most of its competitors -- will face continued problems ahead.

• Top Stocks blog: Today's drop could mean the rally is over

One other issue was hitting financial stocks: a comment by Larry Summers, President Obama's chief economic adviser, that the Obama administration wanted to rein in credit-card abuses. American Express (AXP, news, msgs) fell 13% to $18.98; Capital One Financial (COF, news, msgs) was down 25% to $13.38.

At the same time, oil prices and metals prices were lower as the dollar moved higher against major currencies. Crude oil fell to $45.88 a barrel today. Energy stocks were generally lower. ExxonMobil (XOM, news, msgs) was off 2.2% $65.29. Chevron (CVX, news, msgs) dropped 3.2% to $63.87. Schlumberger (SLB, news, msgs) was off 5.3% to $44.10.

• Top Stocks blog: How the earnings season so far stacks up

Today's pullback came after the market had enjoyed its best six-week rally since the 1930s. Not only had the Dow risen 24%, the S&P had jumped 28.5%, and the Nasdaq was up 31.9%.

"We've had a big rally for six weeks, and I wouldn't be surprised to see a consolidation phase that could last anywhere from two to four weeks," Bruce Bittles, the chief investment strategist at Robert W. Baird, told Bloomberg News. "Financials had a bigger run than the market, and certainly they are not out of the woods as well as the rest of the economy."

Earnings reports will come fast and furiously this week and next. Earnings due Tuesday include Coca-Cola (KO, news, msgs), Caterpillar (CAT, news, msgs), Merck (MRK, news, msgs) and Yahoo (YHOO, news, msgs).

Yahoo, whose shares fell 5.1% to $13.66 today, may report a drop in revenue of as much as 10% and a new round of job cuts.

Energy prices -- New York close

	Mon.	Fri.	Chg.	Month chg.	YTD chg.
Crude oil (NYMEX) (per barrel)	$45.88	$50.33	-$4.45	-7.61%	2.87%
Heating oil (per gallon)	$1.3316	$1.4225	-$0.0909	-2.65%	-5.27%
Natural gas (per million BTU)	$3.5400	$3.7290	-$0.1890	-6.25%	-37.03%
Unleaded gasoline (per gallon)	$1.4119	$1.4927	-$0.0808	-0.66%	40.04%

Recession hurts IBM; TI business may be stabilizing

IBM earned $2.30 billion from $2.32 billion in the year-ago quarter. Earnings per share, however, rose to $1.70 from $1.64, as the number of shares outstanding decreased.

Revenue fell to $21.71 billion from $24.50 billion a year earlier. Analysts had forecast of $22.56 billion, according to Reuters Estimates. The reason: Businesses cut back purchases of servers and other computers and related equipment.

IBM has fared better than many other technology firms, thanks to its growing focus on software and services, such as outsourcing and technology support

The company did confirm that it expects to earn at least $9.20 a share for the year. The Reuters estimate is for $9.03 a share.

Texas Instruments (TXN, news, msgs) surprised investors with a small profit for the quarter and better-than-expected revenue as demand for its chips appeared to stabilize.

The company, however, emphasized "caution about the business climate."

"What we saw was just one region, primarily Asia," chief financial officer Kevin March said on a conference call after the announcement. "Until we see demand pick up in other regions, as well as in other sectors, we don't believe that we are looking at something that suggests there is an overall increase in demand."

he company also said that it expected to moderately increase production levels in its factories in the current quarter.

Shares, which fell 3.6% in regular trading, jumped as much as 7% after hours before falling back to $17.60, up 1.6%.

TI, one of the largest makers of chips for cellular phones, earned $17 million, or a penny a share, on revenue of $662 million, or 49 cents a share, a year ago. Stripping out one-time items, earnings were 7 cents a share. Analysts had expected a loss of 3 cents.

Revenue was down 36% to $2.09 billion, better than the Wall Street estimate of $1.9 billion.

TI had forecast a loss of 8 cents a share to break even on revenue of $1.79 billion to $2.05 billion.

TI forecast earnings of 1 cent to 15 cents a share for the second quarter on revenue of $1.95 billion to $2.4 billion.

Bank of America benefits from Merrill, Countrywide

On the surface, the first quarter looked good for Bank of America.

The bank earned $4.2 billion, or 44 cents per share, well above the $1.2 billion, or 23 cents per share, it earned in the first quarter of 2008, and easily beating the consensus estimate of 4 cents per share. Bank of America lost $1.8 billion in the fourth quarter of 2008.

In fact, B of A earned more in the first quarter than it did in all of 2008.

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The company also said that the performances of its Merrill Lynch and Countrywide businesses were "outstanding" and said their integrations are on track.

Revenue more than doubled to $35.7 billion, helped in part by the acquisition of Merrill Lynch. Analysts had been looking for revenue of $27.1 billion.

"Three weeks ago, everyone had a noose around (CEO) Ken Lewis' neck, but it's amazing what a 50% increase in a stock price can do," Robert Patten, an analyst at Morgan Keegan, told Bloomberg. "There's a return to normalcy in some of their trading operations, and the write-downs aren't as severe."

That was an optimists' view and not shared by investors, who dumped the stock all day.

A differing view came from independent bank analyst Nancy Bush, who told Bloomberg. "It was a quarter with extremely low quality earnings and climbing credit costs. It's not a healthy picture."

Bank of America doubled its credit loss provisions to $13.38 billion, up from the prior quarter's $8.54 billion. The net charge-off rate rose to 2.85% from 1.25% a year earlier and 2.36% in the fourth quarter. Credit-card losses increased to 8.62% from 5.19% and total nonperforming assets jumped to 2.65% from 0.9% in the prior year and 1.96% in the fourth quarter.

Lewis himself was cautious. "We continue to face extremely difficult challenges primarily from deteriorating credit quality driven by weakness in the economy and growing unemployment," he said in a statement.

Analyst Meredith Whitney, famed for calling the huge losses many banks suffered, told Bloomberg Television that Bank of America benefitted from a number of one-time items, including big gains in securities sales, that probably won't be repeated.

Oracle will buy Sun Microsystems

Sun Microsystems (JAVA, news, msgs) shares soared 36.8% to $9.15, the top performer among stocks in the S&P 500 and the Nasdaq-100 indexes, after Oracle (ORCL, news, msgs) agreed to buy the software and server maker for $7.4 billion, or $9.50 per share in cash.

The deal, which comes just weeks after one between Sun and IBM fell apart, is expected to close this summer, if it receives approval from Sun shareholders.

"This would make the Sun acquisition more profitable in per share contribution in the first year than we had planned for the acquisitions of BEA, PeopleSoft and Siebel combined," Oracle President Safra Catz said in a statement.

Shares of Sun soared 36.8% to $9.15, one of two Nasdaq-100 ; Oracle shares fell 1.3% to $18.82.

• Top Stocks blog: Sun's surprisingly clever deal

Oil slumps on demand, dollar

Crude oil was lower because of the rising dollar. The greenback was higher against euro and the British pound.

"The dollar is a bit higher as well as the stock market is down, so you're getting hit on the two fronts that have been moving oil prices," Phil Flynn, vice president at Alaron Trading, told CNNMoney.com.

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The dollar gained against the euro as European Central Bank policymakers struggled over how to fight the recession.

ECB President Jean-Claude Trichet hinted that policymakers are considering an additional rate cut and will announce new measures at its May meeting. The dollar rose to $1.2908 against the euro this morning from $1.3044 on Friday.

The May oil contract expires on Tuesday.

Last week, a weekly report from the Energy Information Administration showed an unexpected buildup in crude stocks. Inventories rose by 5.6 million barrels, more than double what analysts expected, in the week ended April 10.

PepsiCo bids for remaining stakes of bottlers

Pepsico late Sunday announced an offer to purchase its two largest bottlers, Pepsi Bottling Group (PBG, news, msgs) and PepsiAmericas (PAS, news, msgs), for about $6 billion in cash and stock.

PepsiCo currently owns 33% of the outstanding shares of Pepsi Bottling and 43% of the outstanding shares of PepsiAmericas. The bid represents a premium of about 17% over the companies' closing prices on Friday.

The offers consist of $14.75 in cash plus 0.283 shares of PepsiCo common stock for each share of Pepsi Bottling, and $11.64 in cash plus 0.223 shares of PepsiCo common stock for each share of PepsiAmericas.

The deal will allow PepsiCo to control about 80% of its total North American volume. That should let the company streamline the process of getting newer or smaller products to stores.

PepsiCo also beat Wall Street's expectations this morning. Earnings per share were 72 cents on revenue of $8.27 billion. Net income was $1.14 billion, down 0.8% from the same period in the previous year, and revenue dropped 8%. Analysts had expected earnings of 67 cents on revenue of $8.28 billion.

The company also reaffirmed its full-year guidance for both net revenue and earnings per share of mid- to high-single-digit growth, although it acknowledged that the high value of the dollar could cut into profit made outside the U.S. PepsiCo earned $3.68 per share in 2008.

PepsiCo was off 4.4% to $49.86. Pepsi Bottling Group was up 21.9% to $30.73, and PepsiAmericas was up 26% to $25.04.

Eli Lilly has a strong quarter

Drug giant Eli Lilly (LLY, news, msgs) reported surprisingly strong first-quarter earnings this morning. But the stock was still hit by the day's selling, falling 2.3% to $32.99.

Lilly posted earnings of $1.31 billion, or $1.20 per share, up 23% from the $1.06 billion, or 97 cents per share, the company earned in the same quarter a year ago. Analysts were looking for earnings of 99 cents per share.

"Despite the downturn in the economy, in the first quarter of 2009, Lilly delivered strong financial results with good underlying operational performance, aided in part by movements in exchange rates," said CEO John Lechleiter.

Glaxo to buy rival Stiefel Labs

British pharmaceuticals producer GlaxoSmithKline is to acquire the U.S.-based Stiefel, a skin-care specialist, for $3.6 billion.

Stiefel is the world's largest dermatology company in terms of revenue.

Glaxo will pay cash for the privately held company but will take on about $400 million in debt to finance the deal.

Analysts said Glaxo was diversifying into a broad range of different industries in order to better manage risks.

Glaxo was down 1.8% to $30.05.

Leading indicators fall

The recession will stick around through the summer, according to The Conference Board's leading economic indicators index.

The index showed a decline of 0.3% in March, after an upwardly revised decline of 0.2% in February.

Economists had expected the index to come in flat last month.

"There have been some intermittent signs of improvement in the economy in April, but the leading economic index and most of its components are still pointing down," Ken Goldstein, an economist at The Conference Board, said in a statement.

"The leading index has declined at an annualized rate of 4.9% over the past six months, and in general shows few signs of the 'green shoots' of recovery evident in other indicators," Nomura chief economist David Resler wrote in a note to clients this morning.

Higher unemployment insurance claims, a decline in the ISM supplier delivery index and weakness in stock prices were the main reasons for the index's decline.

The index is compiled from a series of 10 economic indicators including unemployment, stock prices, interest rates and prices for consumer goods.

Andrew Rosenbaum contributed to this report.

Short hits from the markets -- New York close

	Mon.	Fri.	Chg.	Month chg.	YTD chg.
Treasurys
13-week Treasury bill	0.120%	0.130%	-0.010	-40.00%	4.35%
5-year Treasury note yield	1.795%	1.878%	-0.083	7.16%	15.73%
10-year Treasury note yield	2.843%	2.930%	-0.087	5.88%	26.69%
30-year Treasury bond yield	3.687%	3.785%	-0.098	3.54%	37.01%
Currencies
U.S. Dollar Index	86.980	86.295	0.685	1.26%	5.88%
British pound in dollars	$1.4543	$1.4791	-0.0247	1.50%	-1.29%
Dollar in British pounds	£0.6876	£0.6761	0.0115	-1.48%	1.31%
Euro in dollars	$1.2928	$1.3051	-0.0123	-2.44%	-7.72%
Dollar in euros	€ 0.7735	€ 0.7662	0.0073	2.50%	8.36%
Dollar in yen	97.85	99.19	-1.34	-1.04%	7.94%
Canadian dollar in U.S. dollars	$0.810	$0.824	-$0.0145	2.24%	-0.99%
U.S. dollar in Canadian dollars	$1.236	$1.213	$0.0226	-2.14%	1.00%
Commodities
Gold	$887.50	$867.90	$19.60	-4.05%	0.36%
Copper	$2.1050	$2.1975	-$0.09	14.12%	49.29%
Silver	$12.1050	$11.7900	$0.32	-6.78%	4.38%
Corn	$3.6950	$3.7625	-$0.07	-8.71%	-9.21%
Crude oil (NYMEX) (per barrel)	$45.88	$50.33	-$4.45	-7.61%	2.87%