Dow ends with modest gain despite Lehman loss

By Charley Blaine and Elizabeth Strott

Stocks finished higher today, but a big rally lost energy as financial stocks weakened in the last hour of trading.

Investors had been skittish about financial stocks after Lehman Bros. (LEH, news, msgs) announced it lost $4 billion in the third quarter and would sell assets to shore up its capital position.

Late in the day, the skittishness turned into selling. Insurance giant American International Group (AIG, news, msgs), which had been up as much as 5.9%, fell back to a 4.7% loss at $17.50. Citigroup (C, news, msgs) also saw gains disappear and finished down 1.1% to $18.68.

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At the close, the Dow Jones industrials were up 38 points, or 0.3%, to 11,269. While a gain was nice after Tuesday's 280-point loss, the blue-chip index had been up 150 points at 2:30 p.m.

The Standard & Poor's 500 Index was up 8 points, or 0.6%, to 1,232, and the Nasdaq Composite Index was up 19 points, or 0.9%, to 2,229.

Financial stocks represented 14 of the 20 worst performers among S&P 500 stocks. AIG was the worst Dow performer.

Meanwhile, energy and materials stocks led the market, even as commodity prices fell.

Crude oil closed at $102.58 a barrel, down 68 cents from Tuesday. The decline came despite the possibility that Hurricane Ike could cause problems for oil and gas producers in the Gulf of Mexico. Traders seemed to ignore the decision by the Organization of Petroleum Exporting Countries to cut production.

Gold, meanwhile, slumped $29.50 an ounce to $762.50, its fifth straight close under $800 an ounce and its lowest close since October.

Commodities fell as the dollar continued its sharp rally against major currencies. The euro was at $1.4011, down from $1.4106 and off 11% from its mid-July highs. The U.S. Dollar Index, which measures the dollar against a basket of currencies, was up 0.7% to 79.875 this afternoon. It's up 11% since July 15.

Dow components ExxonMobil (XOM, news, msgs) and Chevron (CVX, news, msgs) were up 2.7% to $75.25 and 3% to $81.16, respectively. Freeport-McMoRan Copper & Gold (FCX, news, msgs) jumped 6.2% to $69.18. U.S. Steel (X, news, msgs) was up 6.8% to $100.05.

Another area of strength: semiconductors, which rose after Texas Instruments (TXN, news, msgs) offered a better-than-expected earnings forecast after Tuesday's close. The Philadelphia Semiconductor Index ($SOX.X) was up 0.8% to 322.

Sirius XM Radio (SIRI, news, msgs) fell 14% to 98 cents after the satellite radio company forecast a wider loss and slower subscriber growth for 2008 than analysts expected.

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Energy prices -- New York close

	Wed.	Tues.	Chg.	Month chg.	YTD chg.
Crude oil (NYMEX) (per barrel)	$102.58	$103.26	-$0.68	-11.16%	6.88%
Heating oil (per gallon)	$2.9024	$2.9247	-$0.0223	-8.78%	9.55%
Natural gas (per million BTU)	$7.3930	$7.5350	-$0.1420	-6.92%	-1.20%
Unleaded gasoline (per gallon)	$2.6616	$2.6526	$0.0090	-11.57%	6.86%

Lehman dominates the talk

A rally in Lehman Bros. shares fell apart in the late afternoon, and the stock closed down 6.9% to $7.25. The loss was the sixth worst among S&P 500 stocks.

The company pre-announced a third-quarter loss of $3.9 billion, or $5.92 per share (it is scheduled to formally report on Sept. 18). Lehman said it is slashing its annual dividend by 93%, to a nickel, from 68 cents per share, in order to save $450 million each year.

Lehman will cut its residential mortgage exposure by 47%. It is talking to asset manager BlackRock about a sale of $4 billion of its assets and is "committed" to examining all alternatives.

The investment bank also said it will spin off $25 billion to $30 billion of its commercial real-estate portfolio to shareholders in a separate publicly traded fund. And Lehman plans to sell an estimated 55% stake in its investment-management division, including its fund-manager business, Neuberger Berman.

Many investors and observers were disappointed that Lehman didn’t announce a clear deal with any buyer.

"I think they're in a tough spot," Pershing Square Capital's William Ackman told CNBC. "Once you're talking to the Korea Development Bank, I think they've scraped the bottom of the barrel."

"The strategic initiatives we have announced today reflect our determination to fundamentally reposition Lehman Bros. by dramatically reducing balance-sheet risk, reinforcing our focus on our client-facing businesses and returning the firm to profitability," Lehman CEO Dick Fuld said on a conference call with analysts.

Those drastic moves, unthinkable a year ago, come in response to concerns about the company's ability to survive the mortgage-market meltdown. Lehman was a huge player in the subprime-mortgage game, ground zero for the current crisis, and skepticism has stalked Lehman since rival Bear Stearns collapsed in March.

Lehman plunged 45% on Tuesday after Korea Development Bank ended talks with Lehman, prompting more jitters and contributing to a broad sell-off.

"There's just panic. Everyone is afraid to be caught on the other side of a Bear Stearns," Frank Ingarra, co-portfolio manager at Hennessy Advisors, told Bloomberg News.

Buyers bail on WaMu, too

Shares of Washington Mutual (WM, news, msgs) slumped 29.7% to $2.32 on the day after Bloomberg News reported that three potential acquirers had bailed on talks to buy WaMu or National City (NCC, news, msgs).

The talks ended because of an accounting rule that would pin the takeover targets' asset values to market prices instead of using a more complex formula that takes into account purchase prices.

"The new rule will curtail M&A by making it too expensive," Robert Willens, Columbia Business School professor, told Bloomberg. "With loans fetching their greatest discounts since the Great Depression, it sharply reduces the value of a target's assets. That will force an acquirer to raise additional capital in this very difficult environment."

WaMu was just the worst performer among financial stocks, which were mostly lower this afternoon. Wachovia (WB, news, msgs) was down 7.1% to $15.08. Merrill Lynch (MER, news, msgs) was off 5.9% to 23.30. Goldman Sachs (GS, news, msgs) was down 2.5% to $157.59.

Mortgage applications jump

More Americans applied for mortgages last week, according to the Mortgage Bankers Association.

The number of filed applications rose 9.5% from the week before as potential buyers took advantage of a drop in mortgage rates. The rate for a 30-year fixed mortgage averaged 6.06% last week, down from 6.39% the week before; the 15-year fixed rate was 5.73%, lower than the previous week's 5.96% rate.

On a year-over-year basis, the picture was still pretty dismal: Applications were 24.4% lower than at this time last year.

Tanker competition cancelled

Shares of Boeing (BA, news, msgs) and Northrop Grumman (NOC, news, msgs) both fell today after the Defense Department decided to cancel a planned Air Force tanker competition entirely.

The next administration will get to deal with the problem.

The Air Force in February awarded the $35 billion, 179-plane program to a team of Northrop Grumman and Europe's EADS , parent of Boeing commercial archrival Airbus.

After Boeing protested its loss on procedural grounds, a congressional umpire found the Air Force made "significant errors" in evaluating the rival bids.

Boeing was down 3.6% to $61.71, the second-worst Dow loss on the day; Northrop Grumman was down 1.1% to $69.99.

OPEC to trim production

Crude oil fell even as the Organization of Petroleum Exporting Countries agreed to cut oil production by more than 500,000 barrels a day. OPEC supplies about 30% of the world's oil.

Meantime, the International Energy Agency lowered its 2008 global oil demand forecast by 100,000 barrels, to 86.8 million barrels of oil per day.

"The demand impact of weaker economic conditions and high prices during the summer, when oil prices reached an all-time peak, was more marked than expected, notably in the U.S.," the IEA's report said.

Oil bears are hoping for good luck with the weather -- and getting it so far. Hurricane Ike was downgraded to a Category 1 on Tuesday but is expected to pick up steam as it heads toward the southeast coast of Texas.

The Energy Department said that crude oil inventories fell by 5.8 million barrels last week, a bigger decline than the expectations of a 3.5 million drop. Gasoline inventories fell by 6.4 million barrels, also more than expected; distillate stocks fell by 1.25 million barrels, less than analysts' estimates of a 2.1 million decline.

Oil is down nearly $45 since peaking at $147.27 on July 11.

ImClone rejects Bristol bid

Shares of ImClone (IMCL, news, msgs) shot up 6.7% to $67.94 after the company said an offer by Bristol-Myers Squibb (BMY, news, msgs) was too low.

In July, Bristol-Myers offered $4.5 billion, or $60 per share, for the 83% of ImClone it does not already own, but ImClone said today it has a better offer on the table. ImClone Chairman Carl Icahn said "a large pharmaceutical company" bid $70 per share in cash for the company, subject to due diligence.

Shares of Bristol-Myers fell 1.7% to $21.67.

Texas Instruments narrows forecast

Shares of chipmaker Texas Instruments finished up 0.6% to $21.85 after the company late Tuesday narrowed its third-quarter sales and earnings forecasts.

TI said it expects sales between $3.33 billion and $3.47 billion, with the midpoint of that range in line with analysts' estimate of $3.4 billion. The company said earnings will be between 42 and 46 cents; Wall Street is looking for 44 cents per share.

In July, TI predicted earnings of 41 to 47 cents per share on sales of $3.26 billion to $3.54 billion.

"It's actually a very large positive, given the difficulty we just heard out of Nokia (NOK, news, msgs)," Stifel Nicolaus analyst Cody Acree told Bloomberg Television. "I would think that most are finding this a relief."

Last week, mobile-phone maker Nokia said it will lose market share in the third quarter because of aggressive price cuts by rivals. Nokia is Texas Instruments' biggest customer.

Lower fuel prices to boost FedEx

The surge in oil prices in the first half of the year weighed heavily on the economy, so it won't come as a surprise that the recent decrease in the price of oil is good news for shipping giant FedEx (FDX, news, msgs).

FedEx late Tuesday said fiscal-first-quarter earnings will be $1.23 per share, well above a previous forecast of 80 cents to $1 per share. Analysts had expected FedEx to earn 98 cents in the quarter.

The stock soared 3.7% to $87.86 on the news.

The quarter won't be all positive, however.

"While sustained declines in fuel prices could improve our full-year outlook, the slowing economic growth trends in the U.S. are now extending to other areas of the global economy. As a result, we have reduced our planned capital investments by $400 million, to $2.6 billion for fiscal 2009," Chief Finance Officer Alan Graf said in a statement.

FedEx posted its first quarterly loss in more than a decade in early June, weighed down by weak demand and high fuel prices. The company is considered a good gauge of U.S. economic growth and activity.

S&P boots Fannie, Freddie

The latest blow to Fannie Mae (FNM, news, msgs) and Freddie Mac (FRE, news, msgs) came late Tuesday when Standard & Poor's announced plans to remove the companies from the S&P 500 Index.

The government's takeover of the companies sent their stocks' share prices plunging below $1 each, shrinking their market capitalizations to $1.04 billion and $614 million, respectively. Standard & Poor's requires companies to have a market cap of at least $5 billion to be eligible for S&P 500 membership.

The companies will be replaced with Fastenal (FAST, news, msgs) and salesforce.com (CRM, news, msgs), respectively. Fannie, which was put into the index in 1988, and Freddie, a member since 1992, will be removed from the index after the end of trading today.

Fastenal was up 0.8% to $52.58; salesforce.com was up 7.7% to $56.09.

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

	Wed.	Tues.	Chg.	Month chg.	YTD chg.
Treasurys
13-week Treasury bill	1.620%	1.640%	-0.020	-4.14%	-48.41%
5-year Treasury note yield	2.917%	2.882%	0.035	-5.57%	-15.57%
10-year Treasury note yield	3.641%	3.596%	0.045	-4.51%	-9.76%
30-year Treasury bond yield	4.225%	4.192%	0.033	-4.24%	-5.25%
Currencies
U.S. Dollar Index	79.875	79.290	0.585	3.06%	4.15%
British pound in dollars	$1.7495	$1.7501	-0.0006	-3.95%	-12.05%
Dollar in British pounds	£0.5716	£0.5714	0.0002	4.12%	13.71%
Euro in dollars	$1.3984	$1.3986	-0.0002	-4.70%	-4.32%
Dollar in euros	€ 0.7151	€ 0.7150	0.0001	4.93%	4.52%
Dollar in yen	107.75	107.82	-0.07	-0.94%	-3.67%
Canadian dollar in U.S. dollars	$0.931	$0.932	-$0.0003	-0.98%	-6.21%
U.S. dollar in Canadian dollars	$1.075	$1.074	$0.0012	1.00%	6.64%
Commodities
Gold	$762.50	$792.00	-$29.50	-8.70%	-9.01%
Copper	$3.1140	$3.0870	$0.03	-8.06%	2.40%
Silver	$10.8900	$11.7150	-$0.82	-20.55%	-27.01%
Corn	$5.3675	$5.4450	-$0.08	-5.54%	17.84%
Crude oil (NYMEX) (per barrel)	$102.58	$103.26	-$0.68	-11.16%	6.88%