Stocks End Lower on Oil, Earnings News

The Dow nearly ended in bear-market territory amid higher crude prices, poor earnings news, and worrise about more bank writedowns

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U.S. stocks extended the prior day's losses on Friday amid mounting fears about rising inflation and the damage higher oil prices are inflicting on the economy. The benchmark Dow industrials briefly dropped into official bear-market territory after falling more than 20% from last October's peak, spurred by some gloomy earnings reports and concerns over further asset writedowns by banks.

On Friday, the Dow Jones industrial average finished 106.91 points, or 0.93%, lower at 11,346.51, after hitting an intraday low of 11,297.99 earlier in the session. The broader Standard & Poor's 500-stock index ended down 4.77 points, or 0.37%, at 1,278.38. The tech-heavy Nasdaq composite index slid 5.74 points, or 0.25%, to 2,315.63.

On the New York Stock Exchange, 20 stocks posted losses for every 12 that traded higher, while on the Nasdaq the ratio was 17-12 negative.

A day after Goldman Sachs (GS) downgraded Merrill Lynch & Co (MER) to neutral from attractive, an analyst at Lehman Brothers (LEH) issued a report saying Merrill is likely to incur $5.4 billion of write-downs in the second quarter, mainly from its exposure to bond insurers. Until now, analysts had expected write-downs to range from $3.5 billion to $4.2 billion. Merrill will probably have to raise capital if it does write down these positions, because the charges will leave it with low capital levels relative to the industry, an analyst at Sanford C. Bernstein said.

There may be some capital relief for struggling banks on the horizon with the Federal Reserve now considering giving private-equity firms more leeway to invest in financial institutions. Regulators have been concerned about banks' ability to shore up their balance sheets amid continued asset writedowns, and accessing the private-equity pool is one way to do it.

While fear of the financial stocks caused overly aggressive selling of the entire equity market, "we haven’t yet seen the full impact of the stimulus checks or the interest rate cuts we got in January and February," says Bill Rutherford, president of Rutherford Investment Management in Portland, Ore. "We should start seeing that in the early fall."

Rutherford also thinks the presidential campaign is weighing on the markets with Sen. Barack Obama the apparent leader at this point talking about re-negotiating the North American Free Trade Agreement and other possibly protectionist measures, as well as about raising taxes.

Capping the week's economic reports, personal income surged 1.9% in May, substantially ahead of a median estimate of a 0.4% gain, while consumption jumped 0.8%, slightly more than the anticipated 0.7% increase. A hefty $48.1 billion tax rebate distorted the report, after a $1.9 billion rebate in April.

These payments reduced personal current taxes and increased government social benefit payments, leaving disposable income surging 5.7%, vs. a 0.4% gain in April. Without these special factors, disposable income would have risen 0.4% in May after a 0.2% increase in April. The rebates also provided strength for spending, as seen in May retail sales, Action Economics said.

It's possible that the tax rebate checks have delayed a recession, but the markets were unmoved by the better-than-expected personal income and consumption figures, S&P MarketScope said.

The final University of Michigan consumer sentiment index came in at 56.4 in June, down from the May reading of 59.8.

Oil prices extended their gains above $140 a barrel as the dollar dropped to three-week lows. Trading firm MF Global said it's seeing money shifting out of equities and into commodities as investors are seeking higher returns.

Natural gas prices jumped to a 30-month high after oil broke out of its recent trading range.

WTI crude oil futures for August delivery topped $141 a barrel but slid back to settle 41 cents higher at $140.21.