Stocks fell sharply as an unexpected drop in crude supplies pushed oil to a record near $132 a barrel.
Crude oil popped above $132 a barrel after a report showed crude stocks shrunk by 5.4 million barrelslast week. Analysts surveyed by Dow Jones had projected a 500,000-barrel increase.
Crude's relentless ascent -- often by $1 to $2 a barrel per day -- is threatening to eclipse the tax-rebate stimulus, notes Tony Crescenzi, chief bond-market strategist at Miller Tabak. When Bush signed the stimulus act into law back in February, oil was at $93 a barrel -- a $40 increase. According to Crescenzi, if this keeps up, it would translate to a $300-billion increase in consumer energy costs for the year, far outpacing the $130 billion being distributed through the stimulus plan.
Airlines again took a beating, hitting fresh lows, due to soaring oil. Shares of American parent AMR skidded more than 10 percent after the carrier announced plans to cut domestic capacity 11 to 12 percent. It also took an unprecedented move in the industry, saying it would now charge $15 for the first checked bag.
United and Continental were among other notable decliners in the sector.
Mortgage applications felllast week to the lowest level of the year, reversing a trend in which applications had risen in recent weeks. The association's adjusted index of mortgage application activity fell 7.8 percent to 621.6 in the week ended May 16, a drop likely triggered by a rise in interest rates.
Financial stocks were the biggest decliner among 10 key S&P sector indexes, piling on to Tuesday's 2.1-percent decline.
There was some concern about fallout from a computer glitch at Moody's that may have resulted in some debt securities incorrectly being assigned triple-A ratings.
Hewlett-Packard was the biggest drag on the Dow after the computer and software maker beat earnings expectations, as strength overseas offset weakness in the U.S. The report, which came out after the bell Tuesday, held little new from HP's preannouncement last week: HP earned 87 cents a share, as expected, and kept its guidance at 82 or 83 cents a share in its fiscal third quarter.
Also in the tech sector, Microsoft CEO Steve Ballmer said the software company is "not bidding to buy Yahoo," but is trying to have discussions about deals with the Web portal. Microsoft is reportedly interested in buying Yahoo's search business and taking a minority stake in the rest of the company. Shares of Microsoft and Yahoo slipped 0.2 percent in Germany.
Investors cheered Time Warner's decision to splinter off Time Warner Cableas a separate company. Time Warner Cable shareholders will get a $10.9 billion dividend in the deal.
As conditions get tougher for brick-and-mortar shops, Barnes & Noble is said to be considering a bid for rival booksellerBorders , the Wall Street Journal reported.
A trio of retailers offered a bright spot with decent earnings reports.
BJ's Wholesale Club reported its earnings jumped 25 percent to $17.2 million, or 29 cents a share. The company also raised its full-year forecast to $2.04 to $2.14 a share from its prior range of $1.98 to $2.08 a share.
Ross Stores rose after the off-price retailer reported its profit increased amid strong sales of dresses and shoes and better inventory and expense management.
Women's clothing retailer Talbots also reaped the benefit of better back-office management; the company posted an increase in earnings and backed its full-year forecast.
WEDNESDAY: Fed's Warsh speaks; Fed minutes; Earnings from BJ's Wholesale
THURSDAY: Jobless claims; Fed's Kroszner speaks; Earnings from Gap; Libertarians choose presidential candidate
FRIDAY: Existing-home sales; Bond market closes early for Memorial Day holiday
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