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Oil, GM Wallop Stocks

Mike Taylor

Stocks slumped into the close and finished sharply lower Wednesday following a bearish speech from Treasury Secretary Henry Paulson, disappointing jobs data and yet another increase in the price of crude oil.

The Dow Jones Industrial Average sank 166.75 points, or 1.5%, to 11,215.51, and the S&P 500 was off 23.39 points, or 1.8%, at 1261.52. The Nasdaq plunged 53.51 points, or 2.3%, to 2251.46.

With the decline, the Dow and the Nasdaq have both now fallen more than 20% from their highs last October, putting the indices in what is widely accepted as bear-market territory.

General Motors (GM Quote), a Dow component that helped the market rally from an early selloff Tuesday, suffered a Merrill Lynch downgrade to underperform from buy. Merrill cut its price target for GM to $7 from $28 and said the company needs $15 billion in additional capital. GM dropped 15% to $9.98.

In technology, Microsoft (MSFT Quote) is once again working to ink a deal to get Yahoo!'s (YHOO Quote) search business, according to a report in The Wall Street Journal. Yahoo! ended up 3.4% at $20.88, while Microsoft lost 3.7% to $25.88.

Meanwhile, Paulson -- speaking Wednesday at the G8 summit in London -- once again advocated regulatory reform to accommodate the failure of individual financial firms while preserving the integrity of the wider system. Paulson said that the housing market was in for more foreclosures and the financials remain an area of concern.

Fears about the financial sector had somewhat abated earlier when UBS (UBS Quote) and Deutsche Bank (DB Quote) said they won't need fresh capital to improve their balance sheets, but as the day wore on, the stocks lost momentum.

UBS finished down 2.6% at $19.83, and Deutsche Bank was up 2.4% to $85.64 following news it would buy segments of ABN Amro's commercial banking business in the Netherlands.

JPMorgan Chase (JPM Quote) and Lehman Brothers (LEH Quote) led among the sector's gainers. JPMorgan was up 1.7% at $34.60 and Lehman tacked on 6.7% at $22.36.

A Robert W. Baird upgrade to outperform from neutral for Fifth Third Bancorp (FITB Quote) sent the stock up 5.5%, but it gave back much of those gains, closing up 0.4% at $10.65. On the other hand, RBC cut its price targets for Wells Fargo (WFC Quote) and Bank of America (BAC Quote). Both were weaker.

Merrill Lynch (MER Quote) lost its footing after Oppenheimer forecast $5.8 billion in writedowns for the firm. It ended down 3.4% at $31.15. Oppenheimer also cut its second-quarter earnings estimates for Citigroup (C Quote), saying the company stands to lose $1.25 a share, vs. a prior estimates for a per-share profit of 25 cents. Shares shed 1.7% to $16.84.

"People should refrain from taking too much away from today's markets," said Charles Rotblut of Zacks Investment Research. Investors are headed into a holiday and waiting for Thursday's unemployment report, he said. "I think the action this week really lacks a lot of conviction overall. Particularly in the selling, we haven't seen fear set in." Earnings reports, which start next week, could do more to impact the market, he said.

Several consumer-dependent companies offered updates to their turnaround strategies. Latte maker Starbucks (SBUX Quote) announced late Tuesday that it would be closing 600 of its U.S. stores, effectively ending an era of rapid growth for the company. It will also probably cut several thousand jobs. Shares were up slightly.

Meanwhile, video rental chain Blockbuster(BBI Quote) said it was no longer planning to buy flagging electronics retailer Circuit City (CC Quote). The proposed deal had been worth more than $1 billion. Blockbuster's stock surged 5.8% to $2.65.

Meanwhile, UnitedHealth (UNH Quote) cut its 2008 earnings estimates, citing increased Medicare costs and declines in commercial business. The company also paid $912 million to settle two class-action lawsuits against it over stock-options backdating. The stock dropped 2% to $25.12.

As for commodities, crude oil closed up $2.60 to a record close at $143.57. Gold rose $2 to $946.50.

The government said that crude inventories declined by 2 million barrels last week, ahead of analysts' forecast of a drop of 1.2 million barrels.

Despite crude's gains, energy stocks sold off. The Energy Select SPDR (XLE Quote), which tracks the sector, lost 2.9% to $86.30.

The mining group was also mainly trading lower. Nucor (NUE Quote) lost 14% to $61.94, and U.S. Steel (X Quote) stumbled 13% to $153.40.

Coal took a hit in the afternoon, falling below $200 a ton from $225 a ton. Arch Coal (ACI Quote) fell 17% to $62.21, and Peabody Energy (BTU Quote) lost 9.3% to $77.90.

Chesapeake Energy (CHK Quote) was one of the energy sector's bright spots, adding 3% to $69.40 after reaching an agreement with Plains Exploration & Production (PXP Quote) to develop a natural gas property. Plains Exploration finished the day down 6% to $68.87.

In economic data, the ADP nonfarm payroll numbers showed that the U.S. lost 79,000 jobs in June, a much bigger decline than economists' prediction of 20,000. The estimated change in employment for May was revised down to an increase of 25,000 jobs from 40,000. On Thursday, the Labor Department will issue its monthly report, a data set that often moves the market.

The problems in the job market are related to the ailing auto sector, said Peter Morici, a professor at the University of Maryland's Robert H. Smith School of Business. He said the Federal Reserve should be focusing on slowing U.S. growth, rather than trying in vain to stamp out inflation. He said the economy has been shedding jobs for months now and that the U.S. is in for a long-term slowdown.

"There are times when it makes sense to raise interest rates to do something about inflation. This is just not one of them." Developing a program to alleviate the cost of phasing out oil-based automobiles will create manufacturing jobs and stimulate the housing market, Morici said. Historically, the government has helped industries make necessary technological transitions, he said.

A revitalized, fuel-efficient auto market could create jobs and spur demand for suburban homes, Morici said. As it stands now, though, "The suburbs will become obsolete. We're not going to get more suburbanites signing up at these price levels and these levels of mileage."

The Census Bureau said that May factory orders rose 0.6%, ahead of analysts' expectations of a 0.5% increase and down from a 1.3% increase in April.

Treasuries were rising. The 10-year note was up 10/32 to yield 3.97%, and the 30-year added 20/32, yielding 4.51%. The dollar was gaining on the euro and the pound, but softening against the yen.

Abroad, markets were lower. London's FTSE, Japan's Nikkei and Hong Kong's Hang Seng were all down at least 1%, while Frankfurt's DAX was off 0.2%.

Breadth was discouraging. Decliners beat advancers 4-to-1 on volume of 1.52 billion shares at the New York Stock Exchange. On the Nasdaq, losers outpaced winners 4-to-1 on volume of 2.4 billion shares.