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Stocks Fold in Face of Higher Oil, Weak Retail

Mike Taylor

Stocks in New York briefly flirted with positivity Wednesday afternoon but sold off into the close after an increase in crude prices and disappointing July retail sales news earlier in the day dealt a double blow to investor sentiment.

The Dow Jones Industrial Average lost 109.51 points, or 0.9%, to 11,532.96, and the S&P 500 dropped 3.77 points, or 0.3%, to 1,285.82. The Nasdaq shed 1.99 points, or 0.1%, to 2,428.62.

Crude-oil inventories for the week ended Aug. 8 decreased by 400,000 barrels, and gasoline supplies dropped by 6.4 million barrels. The price of crude oil jumped $3.27 to $116.28 a barrel following the announcement. Gold rose $16.90 to close at $831.50 an ounce.

On the economic data front, the Census Bureau reported that retail sales decreased 0.1% in July, a result that fell short of economists' projections for a flat reading. Barring automobiles, retail sales increased 0.4%, less than the expectation for a 0.5% increase.

The Bureau of Labor Statistics' import price index rose 1.7% in July. Excluding oil, the price of imported goods increased 0.9%. Export prices, excluding agricultural products, rose 0.8% in July, a smaller increase than 0.9% in June.

Peter Cardillo, chief market economist at Avalon Partners, said that the retail sales data weren't that negative, especially discounting automobile sales. He also said that the U.S. consumer is struggling, but he doesn't foresee an actual drop in spending.

"I think the market is basically ... pulling back from the strong rally, the dollar-oil rally that we had the past week or so," he said. He said that as the market decouples from the trend of a rising dollar and declining oil prices, it may try to retest its July lows.

The sales data "was reported as close to consensus as you can get," said Haseeb Ahmed, U.S. economist for JPMorgan Economics. "Things are slowing down on the consumer-spending front as the rebates are fading, but they're not collapsing." He said that the government's stimulus package did help prop up the consumer during the second quarter. The recent drop in gasoline prices will help, but will not be enough to offset the waning effect of the rebate checks in coming months, he said.

The Census Bureau also announced Wednesday that business inventories rose 0.7% in June, a larger-than-expected jump and a larger one than the 0.4% increase in May.

Traders will also be focusing on the behavior of numerous financial-services stocks, as well as mortgage giants Fannie Mae (FNM Quote) and Freddie Mac (FRE Quote), following Tuesday's expiration of a government regulation banning so-called naked short-selling of their stocks. Fannie fell 4.1% to $7.69, while Freddie added 3.4% to $5.55.

On the companies side, semiconductor firm Nvidia (NVDA Quote) said it swung to a quarterly loss because of flawed chips and a failure to anticipate the impact of a new graphics chip from rival Advanced Micro Devices (AMD Quote). However, the announcement of a share buyback gave the stock a boost. Nvidia shares ended up 11% at $12.26.

Another piece of discouraging news in the semiconductor sphere came from Applied Materials (AMAT Quote), which said its profit declined 65% for the third quarter owing to the economic slowdown. Shares nonetheless climbed 4.7% to $19.33 after the company said upcoming quarters would yield improved performance.

In other earnings news, farm-equipment maker Deere (DE Quote) reported third-quarter earnings that rose year over year but fell short of analyst expectations. Shares fell 3.2% to $67.10. Dow component and fellow equipment manufacturer Caterpillar (CAT Quote) was trading down on Deere's results, down 2.8% to $69.83. Department-store operator Macy's (M Quote) announced a decline in second-quarter profit and lowered its full-year outlook. Shares climbed 1.9% to $20.66.

On the corporate merger scene, drug store operator CVS Caremark (CVS Quote) said it would buy Longs Drug Stores (LDG Quote) for roughly $2.6 billion in an effort to expand its presence in the western U.S. CVS ended the day down 0.1% at $38.03, while Long Drug shot up 31% to $70.70.

Meanwhile, biotech firm Genentech (DNA Quote) rejected a $43.7 billion buyout offer from Swiss drug developer, which already owns a majority of Genentech shares. The stock climbed 0.5% to $98.37.

In analyst actions, Citigroup initiated ratings coverage on homebuilders Toll Brothers (TOL Quote), Pulte Homes (PHM Quote), Ryland (RYL Quote), MDC Holdings (MDC Quote), Lennar (LEN Quote) and Centex (CTX Quote). Toll and Pulte garnered buy ratings, while the remainder received hold recommendations. The bullish take wasn't enough to lift the sector, as the SPDR S&P Homebuilders (XHB Quote), an exchange-traded fund that tracks the group, lost 1% to $18.54.

Elsewhere, Merrill Lynch downgraded both Goldman Sachs (GS Quote) and Lehman Brothers (LEH Quote) to underperform. Merrill also reduced its rating on Morgan Stanley (MS Quote) to neutral from buy. Goldman lost 1.4% to $164.90, and Morgan Stanley gave up 5.5% to $40.15.

Away from stocks, U.S. Treasury prices were decreasing. The 10-year note was down 11/32 in price to yield 3.94%, and the 30-year was shedding 16/32 to yield 4.56%. The dollar was trouncing the pound, but weakening vs. the yen and the euro.

Overseas exchanges, including the FTSE in London, the DAX in Frankfurt, the Nikkei in Tokyo and the Hang Seng in Hong Kong, were mostly trading lower.

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