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U.S. Stocks Erase Gains to Close With Losses

Mike Taylor

After a sharply higher open, stocks in New York petered out in afternoon trading to close with losses Tuesday, even as crude-oil prices posted a substantially decline.

The Dow Jones Industrial Average, up as much as 230 points earlier, ended down 26.63 points, or 0.2%, at 11,516.92, and the S&P 500 closed down 5.26 points, or 0.4%, to 1277.57. The Nasdaq gave back 18.28 points, or 0.8%, to finish at 2349.24.

Even as stocks in the financial and consumer-goods sectors advanced while oil prices fell, minerals and oil-related companies got hit, causing the major indices to jerk closer to the baseline.

Tony Dwyer, equity market strategist at FTN Midwest Securities, said that the release of minutes to the Federal Reserve's Aug. 5 Federal Open Market Committee meeting suggested that three of the Fed districts requested an increase in the target interest rate. "I guess the market didn't like that so much," he said.

Dwyer also pointed out that volume was low, and that energy stocks have dragged down the indices. "It's kind of hard to maintain strong momentum when a sector that makes up 13% of the market cap is down 5%." He added that intraday volatility from mid-August through today has been enormous.

The price of crude oil plummeted $5.75 to settle at $109.71, after Gustav hit the Louisiana coast but largely spared New Orleans and energy-production facilities in the area. Gold dropped $24.70 to $810.50.

"I think you're going to see a continuation of the selloff [in oil], which obviously is beneficial to equities in the short term," said Chris Johnson, CEO and chief investment strategist at Johnson Research. He said that on a technical basis, the next important price levels for crude are $100, then $90.

Johnson said that speculative money has largely left the oil trade. "This group ... went from being net long to net short in about a week or so," he said. "The speculators are the first ones out. Now everybody else is going to get out." He said that the decline in oil prices will benefit equities as money that had sat on the sideline or been in commodities will need to find another place to go.

As for corporate news, Internet company Google (GOOG Quote) said it will develop its own Web browser, called Chrome, in an effort to compete with Microsoft (MSFT Quote). Google ended the day up 0.4% at $465.25, and Microsoft was down 0.7% to $27.10.

Elsewhere in technology, Alcatel-Lucent (ALU Quote) appointed Ben Verwayyan, former head of BT Group, as its new CEO. Alcatel-Lucent also selected Philippe Camus to be its nonexecutive chairman. Shares slumped 4.7% to $5.89.

In another shakeup, Ford (F Quote) appointed Stephen Odell to head up its Volvo brand. Odell replaces Frederik Arp. Its stock added 1.1% to $4.51.

On the M&A front, Chesapeake Energy (CHK Quote) and BP's (BP Quote) American business announced a deal that would give BP 25% interest in Chesapeake's Fayetteville Shale development for $1.9 billion. Chesapeake declined 6.5% to $45.24, and BP lost 6.3% to $54.01.

Shares of Sciele Pharma (SCRX Quote) were rising after Japanese company Shionogi said it would buy the drugmaker for $1.1 billion. The stock rose 59% to $30.67.

Meanwhile, a Korea Development Bank executive confirmed the bank is holding discussions to buy a stake in struggling brokerage Lehman Brothers (LEH Quote), adding fuel to recent reports of a possible buyout. Lehman ended the day up 0.3% at $16.13.

Wachovia Capital Markets, on the other hand, issued a bearish forecast for investment banks Lehman, Goldman Sachs (GS Quote) and Morgan Stanley (MS Quote). Wachovia cited seasonality, investor trepidation and declining valuations in equities as well as fixed-income markets as it reduced earnings estimates on the three brokerages. Goldman climbed 0.8% to $165.32, and Morgan Stanley was up 1.2% to $41.30.

Fellow financial-sector member Bank of America (BAC Quote) saw shares rise on a Goldman Sachs buy recommendation. Shares jumped 4.8% to $32.63.

Airline manufacturer Boeing (BA Quote) has been unable to reach an agreement with its largest union over a new labor contract, raising the chances of a strike by the International Association of Machinists and Aerospace Workers. Boeing shares ticked up 0.5% to $65.87.

Equipment maker Deere (DE Quote) announced it would close its factory in Welland, Ontario, a move that will result in 800 job cuts. Shares lost 2.6% to $68.71.

Away from stocks, longer-dated U.S. Treasury securities were ticking upward. The 10-year note was up 21/32 to yield 3.73%, and the 30-year was climbing 1-6/32, yielding 4.35%. The dollar was rising sharply against the euro, yen and pound. The dollar index, which tracks the dollar against a basket of foreign currencies, was up 0.6% at 78.077.

Turning to the day's economic data, the U.S. Census Bureau's look at July construction spending showed a 0.6% decline for July, down from a 0.3% increase in June and a wider decline than the 0.4% economists were expecting. The Institute for Supply Management's August manufacturing index registered 49.9, vs. estimates for a read of 50.

Overseas, European indices were looking strong, as the FTSE in London and the Dax in Frankfurt posted gains. In Asia, Japan's Nikkei was dropping, while Hong Kong's Hang Seng was slightly higher.

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