An Ugly Day for Stocks

A record surge in crude prices and a jump in the May jobless rate fueled declines of nearly 3% for each of the major indexes Friday

Major U.S. stock indexes each tumbled nearly 3% Friday as a surge in crude oil prices to fresh record highs and a weaker-than-expected May U.S. jobs report heightened investors' worries about inflation and the economy.

Bonds, which plunged Thursday as stocks rallied, soared in a flight to safety from the weakness in equities. Gold finished higher.

The dollar index was lower, while the euro was higher as the European Central Bank indicated it may raise interest rates.

On Friday, the blue-chip sank 394.64 points, or 3.13%, to end the session at 12,209.81. Transportation issues were among the hardest hit, although all Dow components fell. The broader shed 43.37 points, or 3.09%, to finish at 1,360.68. The tech-heavy declined 62 points, or 2.43%, to close at 2,487.94.

Activity in the broader market was resoundingly negative. On the New York stock exchange, 26 stocks were lower in price for every six that gained. The ratio on the Nasdaq was 23-5 negative.

“It was a fairly quiet week until Thursday and Friday, when all hell broke loose,” says S&P chief technical strategist Mark Arbeter. “The rebound in crude, along with the

spike in the May unemployment rate, was too much for the stock market to take in one day, so today was just plain ugly.”

Among the groups suffering significant losses in Friday’s rout: The S&P Airlines index was down 4.3% as the industry, which had a couple of days of positive results, felt renewed pressure from the spike is crude oil.

The S&P Homebuilders index fell 6.4% amid pres reports of record levels of mortgage delinquencies and foreclosures in the first quarter.

The S&P Regional Banks index fell 4.1% on a Wall Street Journal report that National City’s (NCC) banking unit, which has been buffeted by rising bad loans, has recently entered into a "memorandum of understanding" with federal regulators, effectively putting the bank on probation.

The S&P Multi-line Insurance index sank 3.9% on weakness in shares of American International Group (AIG) on reports that the SEC is investigation whether AIG overstated the value of contracts linked to subprime mortgages.

Crude oil staged an extraordinary recovery from its recent slump. July West Texas Intermediate crude-oil futures were up $11.13 a barrel in late trading Friday to a record $138.92, spurred by heightened tensions in the Middle East and Asia and a weaker US dollar.

Market watchers said crude oil scored one of its biggest one-day gains ever after Shaul Mofaz, Israel's transportation minister and a contender for the post of prime minister, told the daily newspaper Yediot Ahronot that Israel will have to attack Iran if it doesn't abandon its nuclear development. In addition, Morgan Stanley issued at note stating current crude oil shipping patterns are suggesting WTI oil could reach $150 per barrel by July 4.

The oil run-up was a carryover of Thursday's late $5.49 surge that had Rep. Bart Stupak (D., Mich.) complaining oil and products markets were being "manipulated" by the biggest trading houses in the futures markets. But he said a probe hasn't uncovered illegal activity. Wall Street firms denied the charges.

U.S. nonfarm payrolls fell 49,000 in May, in line with market expectations. Both April and May were downwardly revised to -28,000 and -88,000, respectively (-20,000 and -81,000 previously).

The big surprise in the report: The unemployment rate jumped to 5.5% from 5.0% in April, and was well above the 5.1% expected.

Average hourly earnings rose 0.3%, and the workweek was steady at 33.7. Manufacturing and construction payrolls lost an additional 26,000 and 34,000 jobs, respectively. Service producing jobs gained 8,000, but business services lost 39,000. While the drop in payrolls was as expected, it continues to indicate a weak jobs market.

“Together with the big jump in the unemployment rate, the report may put downward pressure on stock prices and bond yields today,” says S&P Economics.

“Employment indicators continue to point to recession with private payrolls down

for six consecutive months and the unemployment rate up 1.1% from its cycle low in March 2007,” said Bear Stearns economist John Ryding.

U.S. wholesale sales surged 1.4% in April, while inventories climbed 1.3%, with higher oil prices contributing to some extent, though grocery prices added significantly to the sales gain as well (excluding petroleum, sales were up 1.5%). As for inventories, non-durable inventories rose 1.7%. The 1.6% sales jump in March was revised higher to 1.8%. March's surprising 0.1% dip in inventories was revised up to 0.1%. The inventory-sales ratio remained at a record low of 1.09, from an upwardly revised 1.10 in March (previously 1.09).

A Reuters report said the interbank cost of borrowing three month euro funds jumped on Friday, posting the biggest one-day rise in over seven years as money market traders adjusted to the prospect of an interest rate hike next month.

Federal Reserve Governor Randall Kroszner said strains in financial markets have eased somewhat but securitizations of non-agency mortgage products remain stalled and will recover only gradually. In remarks prepared for delivery to a finance conference hosted by Boston College, Kroszner said additional capital raisings by financial institutions would support the extension of credit to households and businesses, which would boost economic activity.

St. Louis Fed President Bullard sees monetary policy "appropriately calibrated" currently following preemptive rate cuts, with patience now required as the Fed begins to address inflation concerns for the balance of the year. Accordingly, he appears to be against further rate cuts from here, which cannot be justified by slow growth.

Looking at next week’s data calendar, Monday brings April data on pending sales of existing homes. Tuesday offers an update on April foreign trade. The April retail sales report is due on Thursday. The week’s final key report will be Friday’s consumer price index for May.

The markets will also be very interested in what a number of Fed officials have to say in several speeches next week, including Monday’s remarks by Chairman Ben Bernanke. On Wednesday, the Fed’s Beige Book report, a summary of economic conditions in each of the Fed’s 12 districts, will also receive special attention in advance of the Fed’s next policy meeting on June 29-30.

Among Friday’s stocks in the news, Take-Two Interactive Software (TTWO) reported better-than-expected second-quarter non-GAAP EPS of $1.52, vs. 41 cents one year earlier, on a sharp sales rise, led by Grand Theft Auto IV for the Xbox 360video game and entertainment system and the PLAYSTATION 3 computer entertainment system. The company raised its fiscal 2008 guidance to $1.65-$1.85 non-GAAP EPS on sales of $1.4-$1.5 billion.

National Semiconductor (NSM) reported fourth-quarter EPS of 34 cents, vs. 28 cents one year earlier, on a 1.3% sales rise and fewer shares outstanding. The company sees first-quarter sales of $460-$475 million.

Lubrizol (LZ) announced a global price increase for all its product lines, effective June 16. The company said the majority of the increases will be in the range of 12% to 20%.

Inspire Pharmaceuticals (ISPH) said top-line results from a 352-patient, double-blind, 24-week placebo-controlled portion of its Phase 3 trial (TIGER-1) with denufosol tetrasodium inhalation solution for treatment of cystic fibrosis (CF) demonstrated statistical significance for its primary efficacy endpoint.

Quiksilver (ZQK) posted second-quarter EPS from continuing operations of 30 cents, vs. 25 cents one year earlier, on 15% higher revenue. Net revenues and income from continuing operations for both periods exclude the results of the Rossignol winter sports equipment and apparel business as well as the golf equipment business which are reported as discontinued operations. The company sees 10% fiscal 2008 revenue growth, with EPS slightly below fiscal 2007's 90 cents.

Major European indexes finished lower Friday. In London, the FTSE 100 index fell 1.48% to 5,906.80. In Paris, the CAC 40 index declined 2.28% to 4,795.32. Germany’s DAX index shed 1.99% to 6,803.81.

Major Asian indexes finished higher Friday. In Japan, the Nikkei 225 index gained 1.03% to 14,489.44. Hong Kong’s Hang Seng index climbed 0.61% to 24,402.18.

Treasury market

Bonds rallied Friday after higher-than-expected unemployment data and soaring fuel prices heightened speculation the U.S. faces a protracted recession. In late trading, the 2-year Treasury note was up 07/32 to 100-16/32 for a yield of 2.385%, the 10-year note was up 29/32 to 99-29/32 for a yield of 3.93%, and the 30-year bond surged 1-14/32 to 95-23/32 for a yield of 4.645%.

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