High Oil, Low Dollar Leave Stocks Drooping

The major indices lose ground as the market digests mixed earnings. Frank Curzio reviews the action in The Real Story.
By Sarina Penn ,

Updated from 4:10 p.m. EDT

Stocks in New York were weak for the entire session Tuesday and closed to the downside as a batch of mixed earnings reports, another record low in the dollar and soaring oil prices put selling pressure on the major averages.

At its worst point the

Dow Jones Industrial Average

took a slide of nearly 170 points, but the index recovered a bit to end down 104.79 points, or 0.82%, at 12,720.23. The

S&P 500

lost 12.23 points, or 0.88%, to 1375.94, and the

Nasdaq Composite

slid 31.1 points, or 1.29%, to 2376.94.

Though the market was sluggish from the outset, the weakness intensified after the greenback fell through the $1.60 mark against the euro for the first time ever.

Still, Win Thin, senior currency strategist with Brown Brothers Harriman, pointed out that there was minimal follow-through after the initial break. "The move is really slow and steady. But the euro is holding onto its gains, and I think it'll keep chipping away and moving higher," he added. "Right now, the market is basically betting that the

Federal Reserve is going to be done cutting interest rates after this month."

Echoing that sentiment was Joseph Balestrino, fixed-income market strategist with Federated Investors, who predicted another quarter-point Fed cut at the end of the month. The easing cycle, though, is "nearly over," he believes. He said that language in the central bank's statement next week "probably will suggest that the medicine the Fed has administered to this point should work with the passage of time."

The Fed's rate-easing, which has taken down the fed funds rate by 300 basis points since September, has been one of the main downward drivers on the dollar. Exacerbating the situation is the European Central Bank's reluctance to lower its own benchmark lending rate.

The dollar finished at $1.5996 against the euro for a loss of 0.5%, and slipped 0.1% against the yen to 102.96. The dollar index, which tracks the U.S. currency against a basket of major competitors, was down 0.4%.

At the same time, crude oil rocketed to another intraday record of $119.90 a barrel as concerns persisted about production disruptions in Nigeria. Crude closed up $1.89 to $119.37, and gas prices at the pump touched a new high of $3.511, according to AAA. Gold futures ended $7.60 higher at $925.20 an ounce.

Breadth was poor for the day. Roughly 1.94 billion shares changed hands on the

New York Stock Exchange

, with decliners trouncing advancers by a 7-to-2 margin. Volume on the Nasdaq reached 1.93 billion shares, as losers outran winners 7 to 3.

"The market tends to be somewhat manic," said Jason Pride, director of research at Haverford Investments. Citing last week's massive rally, he remarked, "Before that, people thought we were going into a wholehearted recession. Afterwards, people may have gotten a little excited that we were coming back to growth immediately, and any time the market gets that sort of thought process behind it, it'll be disappointed."

"Everyone's impatient," he added, "and everyone would like to see the market rebound 1,000 points on the Dow in an instant. But things don't tend to happen quite that quickly in the economy."

Corporate earnings, which helped the market advance last week, provided little aid for equities.

McDonald's

(MCD) - Get Report

, one of three Dow components reporting, retreated by 0.6% despite

smashing analyst expectations

with income that leaped 24% in the first quarter, propelled by soaring global sales and favorable currency-exchange rates.

Another industrial benefitting from the weak U.S. dollar was

DuPont

(DD) - Get Report

, which bested first-quarter projections with earnings growth of 22%, on an adjusted basis. Sales were

slightly below estimates

. Shares of DuPont lost 4% at $50.16.

Stephen Carl, head equity trader with Williams Capital, pointed out that exchange-rate gains, while strong at the moment, "aren't the most fundamentally sound aspect of future revenue streams."

Further, Bruce Zaro, chief technical strategist with Delta Global Advisors, commented that a number of stocks have already had healthy numbers baked into their shares. As a result, he said, "unless they're getting blowout earnings, investors are using earnings reports to sell."

He added that this earnings season is among the most important in the last three years. "Investors are really starting to see what the corporate results will look like in a slowdown or recessionary period," he said.

Also reporting was

AT&T

(T) - Get Report

, which tacked on 0.6% after adjusted earnings climbed 10.3% to $4.5 billion on sales of $30.7 billion,

meeting the consensus analyst target

.

Away from the Dow names,

Royal Bank of Scotland

(RBS) - Get Report

dropped 4.7% after saying that it wrote off another $11.75 billion in bad assets and plans to cut its 2008 dividend and

launch a $23.9 billion equity offering

.

Elsewhere in the financial space,

SunTrust

(STI) - Get Report

missed Wall Street's targets

with dwindling earnings of 81 cents a share, but the stock still gained 0.6%.

Similarly,

Fifth Third

(FITB) - Get Report

climbed 8% even though the regional bank sustained further damage from its housing-market exposures, which helped take down its first-quarter profit down by 19%. The numbers nonetheless

topped analyst projections

.

"Those financials are so resilient," Carl said. "I guess it's the lesser of two evils. Everyone's expecting horrible things, and the numbers coming in are not good, but they're also not as anemic as people think."

Over in the tech sector,

Texas Instruments

(TXN) - Get Report

pegged its second-quarter results at the

lower end

of analyst targets and said it's pulling back on manufacturing activity at its factories, citing economic concerns. First-quarter earnings were in line with expectations, but shares still sank 5.8%.

Also taking its lumps was

Netflix

(NFLX) - Get Report

, which plunged 23.7% after the movie-rental company shaved a penny off its full-year outlook and predicted that new-customer growth would

slow down

in the current quarter. For the first quarter, the company saw surges both in income and in new-customer acquisitions.

United Airlines parent

UAL Corp.

(UAUA)

plummeted 36.8% as increasing fuel costs spurred a steeper-than-expected shortfall, and the company announced it will

lay off 1,100 workers

.

JetBlue

(JBLU) - Get Report

managed to

tighten its quarterly loss

to 4 cents a share, topping analysts' views, but its shares were still down 5.7%.

In another sign that the housing crisis is probably a long way from over, the National Association of Retailers reported that March existing-home sales slipped by 100,000 from the prior month to a 4.93 million annual rate, a hair better than what economists were expecting.

Based on current sales trends, housing inventory, which ticked up 1% last month, should take about 9.9 months to work through. Also, the median price for existing homes slid 7.7% year over year to $200,700.

Following that news, homebuilders

D.R. Horton

(DHI) - Get Report

Lennar

(LEN) - Get Report

,

Pulte Homes

(PHM) - Get Report

and

Centex

(CTX)

all lost 2% or more.

As for notable analyst actions, Lehman Brothers began

IBM

(IBM) - Get Report

,

Apple

(AAPL) - Get Report

and

Hewlett-Packard

(HPQ) - Get Report

with overweight ratings, but shares of the companies still lost ground for the day.

Treasury prices were rising. The 10-year note added 10/32 in price to yield 3.69%, and the 30-year bond jumped 26/32 in price, yielding 4.44%.

Markets abroad were mostly lower. In Asia, Tokyo's Nikkei 225 sank 1.1%, but the Hang Seng Index in Hong Kong rose 0.9%. Among European exchanges, the FTSE in London eased by 0.3%, Germany's Xetra Dax fell 0.9%, and the Paris Cac gave back 0.8%.

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