Wall St tumbles as oil prices bite

US STOCKS tumbled on concerns over the health of car makers as oil prices jumped and amid fears about the troubled financial sector.
After already warning about the effect of fuel prices on its future earnings prospects, struggling auto maker Ford and the rest of the market couldn't escape another jump in crude oil prices.

The financial sector also took a big hit, with declines ranging from a sell-off for regional and commercial banks such as Bank of America, as well as large investment banks like Merrill Lynch.

Still, the biggest dent to stocks on the session was the jump in oil that helped send the Dow Jones Industrial Average to a closing level not seen since March 10, a week before the collapse of Bear Stearns. Ever since oil cracked $US130 a barrel in May and corporations like General Motors and American Airlines parent AMR Corp warned of the stresses from fuel prices on their business models, commodity prices have pushed stocks around.

That was particularly true on Friday, with Deutsche Bank equity strategist Binky Chadha issuing a note that said the US stock market was a "hostage to oil," saying the negative correlation between oil prices and the stock market is the closest in at least 18 months.

Oil stormed higher ahead of a weekend meeting of the major players in the market in Saudi Arabia aimed at discussing skyrocketing prices. New York's main oil futures contract, light sweet crude for July delivery, leapt $US2.69 to close at $US134.62 per barrel.

“Each day the Street is seeing similar news -- such as higher energy costs, financial losses, worries of inflation, and continuing housing slumps,” said Colleen King at Schaeffer's Investment Research.

“The bleak news is keeping investors from stepping into the market.”

With earnings preannouncements on tap in the coming weeks across the spectrum of consumer and other companies, many investors are positioning themselves for the expected jump in costs associated with oil's gain.

"We are getting close to preannouncement, with commodity prices keeping people skittish," said Craig Peckhamn, managing director for equity trading at Jefferies.

Among the biggest individual names to fall, in part, on the jump on oil was Ford. The down-trodden car maker, damped by a decline in sales of trucks and sport-utility vehicles, disclosed deeper production cuts and further scaled back its earnings expectations for this year and next. For the session, the company slid US51 cents, or 8.1 per cent, to $US5.81.

Rival General Motors lost $US1, or 6.8 per cent, to $US13.79, with Standard & Poor's Ratings Services warning it is likely to cut the credit ratings on three US-based auto makers amid the continued weakening of the domestic sales market and worries about cash flows. The fall on Friday sent General Motors to its lowest closing price in more than 26 years.

“We have renewed concerns about all three automakers' future cash outflows in light of the prospects for US sales for the rest of 2008 and into 2009,” said S&P analyst Robert Schulz.

“The erosion of demand for SUVs and pickups has been particularly troubling. Although these segments have been weak for some time, the exodus of demand that began in April, caused by escalating petrol prices and consumer preferences for smaller vehicles, is gathering speed.”

The Dow Jones Industrial Average closed down 220.40 points, or 1.83 per cent, to 11,842.69, marking its worst close since March 10. The broad Standard & Poor's 500 fell 24.90 points, or 1.85 per cent, to 1317.93, while the technology-heavy Nasdaq Composite slid 55.97, or 2.27 per cent, to 2406.09.

For the week, the Dow slid 464.66 points, or 3.78 per cent, its fifth-worst week-long performance for the year. The S&P 500 declined 42.10 points, or 3.1 per cent, for the week, while the Nasdaq fell 48.41 points, or 1.97 per cent.

The financial sector also took another hit, with the Financial Select Sector SPDR, an exchange-traded fund that many traders use as a proxy for banks and lenders, closing down 1.7 per cent at 22.18, its lowest close in more than five years.

Leading the declines was Merrill Lynch after credit-rating downgrades of bond insurers' MBIA and Ambac Financial stirred fears of more write-downs. The bond insurers are a crucial cog in the financial system, and the loss of their crucial AAA ratings has long been feared to threaten the value of debt they guaranteed for banks and brokers. Also hurting the bank was a warning from Citigroup that it may have to take "substantial" further write-downs on troubled assets.

Citigroup lost US87c, or 4.3 per cent, to $US19.30, while Merrill closed down $US1.74, or 4.6 per cent, to $US35.95.

Options traders took bearish positions in Merrill Lynch, picking up nearly six times as many "puts," which allow them to sell the stock, than "calls" that allow them to buy it. They focused on July $US35 puts, which cost $US2.60 and make money if Merrill stock dips below $US32.40 before July 18.

Bank of America and Wachovia both had pressure on their share prices as Merrill analysts predicted that regional banks will resort to further dividend reductions. Merrill also slashed its median earnings estimate for 2008 for the group by 15 per cent.

For the session, Bank of America fell $US1.04, or 3.7 per cent, to $US27.10, and Wachovia lost US34c, or 1.9 per cent, to $US17.43.

And, the fact that credit markets remain under stress and more corporate and consumer loans are going sour all the time indicates to many that problems could be extended.

"We are not out of the hole yet," said Himanshu Raval, an independent trader. "Sometimes it appears we have not even stopped digging yet."

With two Wall Street analysts on Friday saying home price declines and rising credit costs will deepen losses at Fannie Mae and Freddie Mac, the government-backed mortgage lenders that support many Americans financing new homes both fell. Shares of Fannie Mae lost $US1.19, or 4.8 per cent, to $US23.81, while Freddie Mac declined $US1.83, or 7.7 per cent, to $US21.82.

Bucking the trend for regional banks, Huntington Bancshares tacked on $US1.53, or 30 per cent, to $US6.67 as investors expressed relief that the bank's charge-offs this year won't be worse than prior projections.

In addition, after falling in the early part of the session, SunTrust closed up $US1.94, or 5.5 per cent, at $US37.27. The bank rallied after backing its own second-quarter credit-loss guidance and saying it has no plans to cut its dividend and raise capital.

Although many oil-related stocks gained on Friday, refiners China Petroleum & Chemical was off $US11.03, or 9.8 per cent, to $US101.39 and PetroChina was down $US7.01, or 5 per cent, to $US133.48. Some analysts and observers said the move by Beijing to hike fuel prices, and possibly reduce demand, wouldn't fully offset recent losses for the firms.

Also on the decline, Ashland fell $US2.79, or 5.2 per cent, to $US50.55 after the chemical company said May revenue for its Valvoline division fell 15 per cent to $US130.8.

In the tech sector, Yahoo fell 3.26 per cent to $US21.99 on reports the internet giant was planning a shake-up in management.

Moving lower on a downgrade, information-technology provider Cognizant Technology slipped $US1.74, or 4.7 per cent, to $US34.97 after being cut to neutral from buy by Goldman Sachs.

In addition, SanDisk fell $US2.28, or 9.7 per cent, to $US21.16 on the Nasdaq. The memory-card maker was cut to hold from buy by Citigroup, which said recent card and drive end-demand erosion in Asia, and still-modest embedded handset orders have gone against the company.

Bonds firmed in a move to safety. The yield on the 10-year US Treasury bond fell to 4.137 per cent from 4.199 per cent late yesterday and that on the 30-year bond dropped to 4.702 per cent from 4.751 per cent. Bond yields and prices move in opposite directions.

European stock markets were dragged down by a surge in oil prices and weakness in the banking and telecom sectors.

The London FTSE 100 index shed 1.53 per cent to end the week at 5620.80, while in Paris the CAC 40 lost 1.79 per cent to close at 4509.27. The Frankfurt the Dax finished at 6578.44, down 2.12 per cent.

The Euro Stoxx 50 index of leading eurozone companies fell 1.72 per cent to close at 3436.58