Stocks Tumble on Rising Oil, Bad Corporate News

Disappointing earnings from Morgan Stanley, a brokerage downgrade on Cisco Systems and a new spike in oil prices sent stocks tumbling Wednesday as investors' worries over third-quarter earnings increased.

All three major U.S. stock indexes marked their biggest percentage declines since early August.

The blue-chip Dow Jones industrial average (searchended down 135.75 points, or 1.33 percent, at 10,109.18, its lowest close in more than three weeks. The Standard & Poor's 500 Index (searchended down 15.74 points, or 1.39 percent, at 1,113.56. The technology-heavy Nasdaq Composite Index (searchfinished down 35.47 points, or 1.85 percent, at 1,885.71.

The stock of Fannie Mae (FNM), the nation's largest mortgage finance company, fell 6.6 percent after a U.S. government review questioned its accounting methods.

More than two stocks fell for every one that advanced on the New York Stock Exchange. On the Nasdaq, about 3 stocks declined for every one that advanced.

"It is oil driven," said Jay Finkel, senior equity trader at Lord Abbett & Co. "The bad news from the brokerage stocks is certainly not helping — and throw in Cisco and the fact some tech stocks are selling off."

U.S. crude oil for November delivery rose $1.59 to settle at $48.35 a barrel on the New York Mercantile Exchange (search) after the U.S. government reported a sharper-than-expected drop in weekly crude inventories following supply disruptions due to Hurricane Ivan last week. Oil came within a dollar of its record high hit on Aug. 20.

High energy costs generally depress stock prices because of their impact on corporate profit margins and consumer spending.

The Philadelphia Stock Exchange index of oil services firms touched its highest level in more than three years as commodity-related stocks were boosted. And the stock of Chicago Mercantile Exchange Holdings Inc., the parent of the Chicago Mercantile Exchange, the largest U.S. futures mart, hit an all-time high of $154.90.

Morgan Stanley (MWD) shares declined $3.66, or 7 percent, to $48.72 after it said quarterly profit fell on reduced trading revenue.

Bear Stearns' (BSC) stock was down 2.4 percent, or $2.14, at $87.95 after it said quarterly profit fell 10 percent but still beat estimates, hurt by lower investment banking revenue and higher expenses.

"Morgan Stanley certainly brought about some profit taking today after the recent runup in stock prices we've seen over the past several weeks," said Michael Sheldon, chief market strategist at Spencer Clarke LLC. "The question now for the markets, for the near term, is whether we give back most of the gains since August or just half of the gains. And oil will play a big part in that."

Morgan Stanley's troubles surprised Wall Street, which had seen positive earnings earlier in the week from Goldman Sachs Group Inc. (GS) and Lehman Brothers Holdings Inc. (LEH). Morgan Stanley posted a 34 percent drop in third-quarter profits, missing Wall Street forecasts by 17 cents per share.

Cisco (CSCO), the largest maker of gear for directing traffic over the Internet, fell 3.5 percent, or 69 cents, to $18.96 after Deutsche Bank cut its rating to "hold" from "buy."

Computer Associates International Inc. (CA) slipped 38 cents to $25.30 after the company agreed to a $225 million settlement with the federal government in the company's accounting scandal.

FedEx Corp. (FDX), the world's top air-express shipper, said quarterly earnings more than doubled on strong revenue growth in its international, ground and freight services.

Still, FedEx shares shed $3.48, or almost 4 percent, to $85.21 as the company stood by its full-year earnings forecast, which it raised last month. But the outlook was weighted toward the low end of analysts' expectations.

Fast-food chain Wendy's International Inc. (WEN) slid $2.16 to $33.34after the company cut its 2004 profit forecast due to hurricane damages and a resulting drop in business in Florida, along with high beef prices.

Eastman Kodak Co. (EK) reiterated its previous 2004 earnings guidance, citing strong sales of digital cameras and digital imagery for businesses. Kodak was up 51 cents at $32.18.

Interstate Bakeries Corp. (IBC), maker of Wonder bread, filed for bankruptcy after struggling with more than $1.3 billion in debt and weak demand for bread products. Its shares were halted on the New York Stock Exchange.

Shares of Fannie Mae (FNM), the No. 1 U.S. mortgage finance company, fell after the board said a U.S. government review charged it with using "cookie jar" accounting to smooth earnings. The review also called into doubt past financial results. Fannie Mae shares slipped $5.22, or 7 percent, to $70.42.

Trading was active, with 1.4 billion shares changing hands on the New York Stock Exchange, matching the 1.4 billion daily average for last year. About 1.6 billion shares were traded on Nasdaq, close to the 1.69 billion daily average last year.

The Russell 2000 index of smaller companies was down 11.03, or 1.9 percent, at 565.89.

Overseas, Japan's Nikkei stock average fell 0.6 percent. In Europe, Britain's FTSE 100 closed down 0.4 percent, France's CAC-40 dropped 1.1 percent for the session and Germany's DAX index lost 1.2 percent.

Reuters and the Associated Press contributed to this report.