Oil's Surge Deepens Stocks' Dive

PETER A. MCKAY / Wall Street Journal 21may2008

Soaring oil prices continued to pummel the stock market and hack away at investors' hopes for a resumption of the rally that had carried equities well off the lows seen during the worst of the credit crisis earlier this year.

The Dow Jones Industrial Average, which plunged nearly 200 points Tuesday, shed another 227.49 points on Wednesday, falling 1.8% to 12601.19, off 5% on the year. All 30 of its components finished in the red. The two-day slide was the Dow's worst in nearly three months.

Crude futures surged to a fourth straight record, up $4.19, or 3.3%, to $133.17 a barrel in New York. Oil continued to surge in electronic trading, climbing over $134 a barrel. The gains came after a report showing U.S. inventories of crude fell last week, contrary to analysts' expectations for growth in reserves. Crude oil has leapt 39% this year and is more than double its price of 52 weeks ago.

The stock market has been stopped in its tracks during the latest run higher by crude oil. The Dow rallied more than 11% from its early-March lows to May 2, but is off 3.5% since.

Investors fear that higher crude prices, while a boon to energy companies, may undercut consumer spending, which accounts for better than two-thirds of U.S. economic output. The recent rally in stocks had been predicated, in part, on the notion that the U.S. economy might be able to avert an outright recession.

"The rise in energy products is going to be the death knell for the consumer," said Douglas Kass, head of the hedge fund Seabreeze Partners Management in Palm Beach, Fla. "The stock market has sort of been in denial about this until now. I mean, these (oil) prices are punitive."

High energy costs could also start to carve into corporate profits. Businesses are already struggling to cope with the rapid ascent in fuel prices. American Airlines parent AMR said Wednesday that it plans to cut flights and introduce bag-checking fees as it looks to offset a huge jump in the cost of jet fuel. Other carriers are expected to follow suit.

AMR's shares plunged 24.2%; rival airlines also cratered. Continental Airlines plummeted 13.15% and Delta Air Lines declined 16.4%. UAL Corp., parent of United Airlines, dropped 29.5%.

The market's losses accelerated Wednesday afternoon after the Federal Reserve released minutes of its policy makers' April meeting. The minutes bolstered the view the central bank is unlikely to cut interest rates anytime in the near future. The Fed also said that it now expects inflation to be higher than it envisioned in its last forecast and foresees a higher unemployment rate and slower economic growth.

The S&P 500 tumbled 1.6%, or 22.69 points, at 1390.71, off 5.3% on the year. All its sectors ended in the red Wednesday, led by a 2.9% decline in the basic-materials sector.

The technology-focused Nasdaq Composite Index was down 1.8%, or 43.99 points, to 2448.27, off 7.7% on the year. The small-stock Russell 2000 fell 1.2%, or 8.53 points, to 727.11, off 5.1% on the year. Both measures are on four-day losing streaks.

Don Bright, of the proprietary firm Bright Trading in Chicago, said he still believes the market is stuck in a trading range, although further losses in the days ahead would confirm that a longer pullback trend is now in effect. "The market can absorb these kinds of losses for two days in a row, but not much longer," said Mr. Bright.

Financial stocks suffered Wednesday after a Financial Times report that ratings agency Moody's incorrectly assigned top-tier AAA ratings to some instruments because of a computer problem and then failed to correct the error after it was unearthed in early 2007. Moody's, which like other ratings agencies has come under criticism for giving top ratings to hard-to-value investments, plunged 15.9%.

Art Hogan, chief market analyst at Jefferies & Co., said Moody's problems don't appear likely to do significant harm to other firms' balance sheets in the months ahead. But given the litany of write-downs and losses that companies have already announced throughout the credit crisis, investors are apt to sell the sector quickly at any sign of new trouble, then parse the details later.

"This story definitely has people concerned," said Mr. Hogan. "It's a new wrinkle." Lehman Brothers Holdings shares fell by 5.8% while Morgan Stanley declined 4.3%. Citigroup fell 4.8%.

A decline in the dollar also weighed on stocks and helped boost commodities. The U.S. Dollar Index, which tracks the greenback's value against a basket of six major foreign denominations, was off 0.7%, or 0.5 point, at 71.90.

Gold climbed as investors sought safe havens. Futures on the metal ended higher for a fifth straight day, up 0.9%, or $8.50, at $9.38 per ounce in New York. The contracts are up 7.2% over the course of the recent winning streak.

Bonds fell. The 2-year note was down 6/32, yielding 2.407%. The benchmark 10-year note was off 8/32, yielding 3.810%. The 30-year bond fell 4/32 to yield 4.544%.

source: 21may2008