Stocks: A Barrage of Bad News

Indexes slumped Tuesday amid record oil prices, a worse than expected PPI report, weak results from retailers, and a gloomy forecast for banks

The bear-market rally ran into a serious roadblock Tuesday. While stocks had enjoyed a period of relative calm over the past few weeks -- with the S&P 500 creeping comfortably above the 1,400 mark and the Dow industrials moving back above 13,000 – a cascade of bad news Tuesday reminded investors of why the bear showed his claws in the first place.

Among the factors that knocked the market on its heels Tuesday: A report showing a hotter than expected rise in wholesale inflation in April; a fresh run-up in oil prices to record levels; and weak earnings from marquee retailers Home Depot (HD) and Target (TGT). Their results reminded Wall Street of the fragile state of the U.S. consumer.

And finally, a bearish call on U.S. banks from the financial sector’s favorite equity analyst, Oppenheimer’s (OPY) Meredith Whitney, called into question the tentative optimism that had emerged around the industry in the past few weeks.

On Tuesday, the Dow Jones industrial average fell 199.48 points, or 1.53%, to 12,828.68. The broader S&P 500 index declined 13.23 points, or 0.93%, to 1,413.40. The tech-heavy Nasdaq composite index lost 23.83 points, or 0.95%, to 2,492.26.

On the New York Stock Exchange, 20 stocks fell for every 11 that moved higher. On the Nasdaq, the ratio was 17 to 11 negative.

"This is one of those markets where you take three steps forward and two steps backward," says Georges Yared of Yared Investment Research.

Oppenheimer's Whitney lowered her earnings estimates on Bank of America (BAC), Citigroup (C), JP Morgan Chase (JPM), Wachovia (WB), and Wells Fargo (WFC).

"Our view is that the credit crisis will extend well into 2009 and perhaps beyond," Whitney wrote, "and although the complexion will change, the net effect will be the same: three years of multi-billion dollar revenue reversals." Banks may write off more than $170 billion of additional reserves by the end of 2009, she said.

On Tuesday, June NYMEX crude oil futures last traded up $1.75 per barrel at $128.80, after ranging between $127.36 and a new record $129.60. Comments from investor T. Boone Pickens, who said oil would touch $150 in 2008, along with a weaker dollar, combined to buoy crude prices.

Inflation worries were raised by the April U.S. producer price index report. The price index rose 0.2% last month, but the core rate of inflation -- excluding food and energy -- jumped 0.4%, which Action Economics called "disconcerting."

"Businesses will have difficulty passing higher costs through to consumers," said Aaron Smith of Moody's But rising producer prices raise the threat of inflation once the economy recovers, he added.

Bonds were higher as Federal Reserve Vice Chairman Donald Kohn suggested the Fed is worried about inflation and won't cut rates again. Fed-watchers are awaiting the release on Wednesday of minutes from the Fed's late April meeting. The minutes may give more clues to the Fed's future interest rate policy.

The dollar index was lower on Tuesday, and gold futures were higher.

Under a deal reached in the U.S. Senate, the government would insure up to $300 billion in refinanced loans for Americans having trouble meeting mortgage payments.

Home Depot posted earnings of 41 cents per share, vs. 53 cents a year ago. Same-store sales dropped 6.5% and total sales fell 3.4%. Housing and home improvement markets remained difficult and worsened in many parts of the country, the firm said.

Target reported earnings of 74 cents per share, vs. 75 cents a year ago, as same-store sales fell 0.7%. Total sales were 5% higher. To raise capital without going to the debt markets, Target will sell 47% of its credit card receivables to JP Morgan Chase JPM for $3.6 billion.

Among other stocks in the news, Staples (SPLS) posted earnings of 30 cents, vs. 29 cents a year ago, as North American same-store sales dropped 6%. Total sales were up 6.4%. The retailer expects the weak economic climate to continue throughout the year.

Saks (SKS) reported lower-than-expected earnings of 13 cents per share, vs. 7 cents a year ago. Same-store sales rose 8.4%, while total sales were up 8.8%.

Medtronic (MDT) posted earnings of 78 cents for the last quarter, vs. 66 cents a year ago, as sales rose 18%.

Major European indexes fell sharply Tuesday. In London, the FTSE 100 index lost 2.9% to 6,191.60. Paris' CAC 40 index fell 1.7% to 5,054.88, and Germany's DAX index moved 1.49% lower to 7,118.50.

In Asia, Japan's Nikkei 225 fell 0.77% to 14,160.09, while Hong Kong's Hang Seng index lost 2.23% to 25,169.46.

Treasury market

Treasuries rose as investors sought safety from the declining stock market. Ten-year notes rose 13/32 to 100-26/32 for a yield of 3.78%, and the 30-year bond was up 21/32 at 97-14/32 for a yield of 4.53%.

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