Wall Street stumbles on oil and inflation

Wednesday, May 21, 2008

NEW YORK — Wall Street stumbled Tuesday after oil prices spiked to a new record above $129 a barrel and a government report raised investors' concerns about the effect of inflation on consumer spending. The Dow Jones industrials fell nearly 200 points.

Crude jumped after OPEC's president was quoted as saying his organization won't raise its output before its next meeting in September. That sent a barrel of light, sweet crude to a trading high of $129.60 before it finished just above $129 a barrel on the New York Mercantile Exchange.

Meanwhile, the Labor Department's producer price report indicated higher energy and food prices might be seeping into other parts of the economy — compounding investors' concerns raised by higher oil. The department said wholesale inflation edged up by 0.2 percent in April following a 1.1 percent jump in March, but outside of food and energy, prices rose by a faster 0.4 percent — double what analysts expected.

Wall Street is worried that a drop-off in consumer spending could ensue if wholesale price increases are passed along; consumer spending is critical because it accounts for more than two-thirds of the U.S. economy.

Analyst Stephen Leeb believes escalating oil prices and their fallout have now replaced the health of the financial sector as the market's biggest worry. He said rising energy costs create a "very vicious circle" through the economy and thinks the government must take some kind of action to bring down prices.

"Stock investors are watching oil, period," said Leeb, whose New York-based Leeb Capital Management focuses on crude and its effect on equities. "The events that moved the market before revolved around write-offs and foreclosures, but all that's changed."

The Dow fell 199.48 to 12,828.68, logging its biggest daily slide since a 206-point drop May 7.

Broader market indexes also retreated. The Standard & Poor's 500 index fell 13.23 to 1,413.40, and the Nasdaq composite index dropped 23.83 to 2,492.26.

Bond prices rose as investors sought the relative safety of government securities. The yield on the benchmark 10-year Treasury note, which moves opposite its yield, fell to 3.78 percent from 3.83 percent late Monday.

Gold gained, and the dollar fell against other major currencies.

Concerns about rising inflation, spurred by higher prices for commodities, were the topic of a speech by Kohn. The policymaker said he was cautiously upbeat that the economy will recover, and that the central bank "appears to be appropriately calibrated" to manage inflation over the medium term.

Meanwhile, the Federal Reserve Bank of Chicago reported that U.S. economic activity weakened further in April and reached its lowest level since the 2001 recession.

But some analysts believe the market's slide gave investors an opportunity to collect profits. Peter Cardillo, chief market economist at New York-based brokerage Avalon Partners, said Tuesday's decline doesn't change the market's long-term prospects.

"The oil price rise is being done by speculators and does not reflect market fundamentals," he said. "But, it still has an effect on the consumer — and investor confidence is equal to consumer confidence, which has been having swings as of late."

Cardillo is watching to see any kind of indicator about how much Americans are spending to get a better idea of how Wall Street views the economy. "It's a battle between prices and the consumer," he said, "and the consumer usually does win."

Investors did get some data on consumer spending during the session. The International Council of Shopping Centers and UBS Securities showed chain-store sales fell 0.4 percent during the week of May 17, down from 1 percent the previous week.

Investors also mined earnings reports from Home Depot Inc., Target Corp., and Staples Inc. for clues about consumers.

Home Depot fell $1.50, or 5.2 percent, to $27.37 after it reported first-quarter profit fell 66 percent amid a continued housing slump.

Target reported that profit dropped almost 8 percent on higher costs, but it beat expectations. Shares fell 63 cents to $54.29.

Staples said profit rose 1.5 percent during the quarter, and reaffirmed its outlook. Shares rose 4 cents to $23.61.

Banking stocks fell after Oppenheimer & Co. analyst Meredith Whitney said she expects the credit crisis to extend into 2009, and "perhaps beyond." She said firms like JPMorgan Chase & Co. and Citigroup Inc. have set aside $25 billion to cover losses, but might have to set aside about $170 billion by the end of next year.

Citi fell 88 cents, or 3.8 percent, to $22.11, and JPMorgan dropped $2.29, or 5 percent, to $43.70.

Declining issues led advancers by nearly 2 to 1 on the New York Stock Exchange. Consolidated volume came to 3.74 billion shares, up from 3.55 billion on Monday.

The Russell 2000 index of smaller companies fell 2.81, or 0.38 percent, to 735.64.

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