Bad Day Turns Worse

The major stock averages end lower Monday. Yahoo! falls hard, but Sprint Nextel rises. Gold and oil prices are stronger. Frank Curzio reviews the action in The Real Story (above).
By Sarina Penn ,

Updated from 4:14 p.m. EDT

Stocks in New York finished lower Monday as prospects unraveled for at least one big proposed merger, and oil prices again charged into uncharted territory.

The

Dow Jones Industrial Average

spent virtually the entire day in the red before closing off 86.66 points, or 0.68%, at 12,969.54. The

S&P 500

gave up 6.41 points, or 0.45%, to 1407.49, and the

Nasdaq Composite

lost 12.87 points, or 0.52%, to 2464.12.

Breadth was negative to start the week. Declining issues outpaced advancers by nearly a 3-to-2 margin on both the

New York Stock Exchange

and the Nasdaq, as volume on the bourses reached 1.67 billion shares and 2.05 billion shares, respectively.

Even amid the apparent collapse of an anticipated tie-up between

Microsoft

(MSFT) - Get Report

and

Yahoo!

(YHOO)

, however, Peter Cardillo, chief market economist with Avalon Partners, believes that stocks' broader movements represent "a normal pullback after last week's healthy run-up."

Doug Roberts, chief investment strategist at ChannelCapitalResearch.com, agreed that the market's seeming reaction is probably, in essence, an incidental move. "It's more that everybody doesn't trust what's happening," he said. "They're looking for any excuse they can to take tips under the table. If you were looking to trade something totally on fundamentals, there were as many excuses last week for stocks to go down when they rallied."

Bruce Zaro, chief technical strategist with Delta Global Advisors, agreed. "I think

the merger news is probably as good of an explanation or an excuse as any," he said. "This is pretty typical from what I've seen, that Mondays at least start with some weakness. But certainly I think the market will continue to exhibit this two-steps-up and one-step-back phenomenon."

Zaro added that the "old highs," roughly 1,000 points away on the Dow, are on his radar screen. "The upside from here on out might be a little bit slower than what we've had over the past month or so," he said, tentatively predicting that the current run-up will take several months to unfold. "I would expect this rally to play itself out in fairly dramatically overbought conditions. Right now we're only slightly overbought."

Cardillo moreover pointed out that the jump in oil was acting as a further drag on the market, and Roberts remarked that the development was "really the key" today. Last week's equities rally, he pointed out, was accompanied by a tumble in oil prices.

Crude futures hit a record high of $120.36 earlier before easing back to a $3.65 gain at $119.97 a barrel. At the same time, the U.S. dollar yielded 0.5% to the euro at $1.5496 and sank 0.4% against the yen.

The inflation of crude prices, believes Roberts, is demand-driven, and he said that -- barring a "major exogenous supply interruption, not just short-term disruptions" -- it will remain that way. So, eventually, he predicted, a ceiling will be placed on gas prices as people begin to pare back on their gas usage and look to new alternatives. He noted, however, that such changes will probably take awhile to materialize on a grand scale.

As for the M&A news on the corporate front, over the weekend Microsoft announced it had

thrown in the towel

on its months-long efforts to take out Yahoo!. The software maker said it was willing to sweeten its offer by some $5 billion, to $33 a share, but claimed Yahoo! wanted at least $5 billion more than that.

Regarding Microsoft's prior threats that it would go hostile if Yahoo! didn't accept its original bid, the company decided against that path, believing that Yahoo! would in that case try to make itself unattractive as a buyout target.

On the heels of the news, Yahoo! was downgraded to sell by Citigroup, Soleil Securities and ThinkPanmure. RBC Capital Markets and Stanford Research each slashed their price targets on the stock. Yahoo! shares were plummeting 15% to $24.37. Microsoft investors

reacted positively

to the development in the early going, though shares of the Dow component ended down 0.6%.

Also having a rough day was

Countrywide

(CFC)

, which sank 10.4% a trading day after

Bank of America

(BAC) - Get Report

disclosed it might not assume part of Countrywide's debt in its deal to take out the struggling mortgage lender.

Friedman Billings cut Countrywide to underperform, saying that BofA should abandon the merger entirely, or at least sharply lower the buyout price. On Friday, Standard & Poor's downgraded Countrywide's credit rating to junk. Dow member BofA was down 2.1%.

Sprint Nextel

(S) - Get Report

was one of the winners, after separate reports emerged that it was considering spinning off its Nextel division and that

Deutsche Telekom

(DT) - Get Report

was mulling a bid for the entire company. Sprint Nextel rose 10.5%.

As for the day's earnings reports, gold miner

Goldcorp

(GG)

topped the consensus profit estimate by 2 cents a share in a quarter that saw gold prices reach record-breaking levels. The company's income soared 84% to $229.5 million, or 32 cents a share. Shares bumped up 2.2%.

In the wake of Goldcorp's results, as well recovering gold futures, peers

Barrick Gold

(ABX)

,

Kinross Gold

(KGC) - Get Report

, and

Newmont Mining

(NEM) - Get Report

climbed between 2% and 4%.

Gold settled the day up $16.10 at $874.10 an ounce.

Entertainment company

Marvel Enterprises

(MVL)

ramped up 9.4% after

sailing past first-quarter analyst targets

and lifting its full-year guidance. Marvel also announced that its

Iron Man

movie took the top spot in its opening weekend, raking in $100.75 million in domestic box-office receipts.

In the red was poultry concern

Pilgrim's Pride

(PPC) - Get Report

, which lost $111.4 million last quarter as it suffered from ballooning feed costs that CEO Clint Rivers blames squarely on "the federal government's deeply flawed ethanol policy." Pilgrim's Pride said its costs for corn and soybean meal have surged $200 million from last year. Shares gave up 0.8%.

Elsewhere,

Apple

(AAPL) - Get Report

added 2.1% on an upgrade to buy at AmTech Research. In more analyst calls, Stifel Nicolaus brought

Google's

(GOOG) - Get Report

price target up $65 to $675, after which the search giant's shares climbed 2.3%.

Lehman Brothers shaved down

Nortel's

(NT)

price target, pressuring the stock by 2.2%, but lifted its price targets on mining-equipment makers

Joy Global

(JOYG)

and

Bucyrus International

(BUCY)

. Shares advanced 2.2% and 3.8%, respectively.

On the data side, the Institute for Supply Management said its April nonmanufacturing index came in at 52, indicating expansion -- albeit slight -- for the first time in four months. Improved employment, among other things, buoyed the reading, which has a break-even point of 50. Economists were projecting slight contraction to 49.1.

Treasury prices were little changed. The 10-year note rose 3/32 in price to yield 3.85%, and the 30-year bond slipped 3/32 in price, yielding 4.58%.

Markets abroad were mixed. Hong Kong's Hang Seng Index slipped 0.2%. In Europe, Germany's Xetra Dax was up 0.1%, and the Paris Cac dipped by roughly that same amount. Tokyo's Nikkei 225 and London's FTSE 100 were each closed for a public holiday.

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