Stocks Weighed Down by Oil, Bonds

NEW YORK – Stocks tumbled Wednesday, hurt by sky-high oil prices and a jump in bond yields to seven-month highs that sparked concerns of higher interest rates.

Based on the latest available data, the Dow Jones industrial average (search) fell 105.82 points, or 0.97 percent, to 10,807.32 and the Standard & Poor's 500 Index (search) was down 12.31 points, or 1.01 percent, at 1,207.12. The Nasdaq Composite Index (search) was down 11.76 points, or 0.57 percent, at 2,061.79.

It marked the third session in a row that the Dow has declined, and was the largest percentage drop in the Dow and S&P since Feb. 22.

"Oil prices have stayed high even after the inventory data and treasury yields are worrying investors about higher interest rates, which in turn is hurting homebuilders and financials," said Paul Cherney, chief market analyst at Standard & Poor's.

Oil futures came within 2 cents of their all-time intraday high, but fell back late in the session, settling up just 6 cents at $54.65 per barrel on the New York Mercantile Exchange (search). The rise came despite the government's weekly supply data, which showed a better-than-expected rise in crude inventories. Some traders were betting oil prices would climb higher still, amid supply concerns and as cold weather causes shudders in the Northeast.

"Profit margins have peaked, inflation is on the way up, and those aren't generally good things for stocks," said John Caldwell, chief investment strategist for McDonald Financial Group, part of Cleveland-based KeyCorp. "So weakness in the bond market on top of that tends to make people skittish. ... It just makes people question their thinking that much more."

A gradual acceleration of inflation measures and a rally in commodities have combined to make investors nervous about stocks, as many on Wall Street predict a slowdown in corporate profits for 2005. The feeble U.S. dollar and bearish bond market, combined with a rise in gold prices, underscored those concerns Wednesday.

The yield on the 10-year Treasury rose to its highest level since July, settling at 4.51 percent, up from 4.39 percent late Tuesday. The selling stepped up after the Federal Reserve (search) released its survey of business conditions, known as the Beige Book; the report said the economy was strong, but suggested inflation may be starting to rise. Some saw this as a hint that the Fed might take a more aggressive posture on raising short-term rates at its March 22 meeting. Higher rates threaten to slow growth by raising borrowing costs for consumers and businesses. They also can hurt stocks as investors switch to bonds, seeking higher returns.

Bond traders had already moved to bearish positions as the Treasury auctioned $15 billion in five-year notes Wednesday, and prepared to sell $9 billion in 10-year notes Thursday. Some of the nervousness was related to an ongoing debate about foreign buyers' appetite for U.S. debt, especially in the face of a weaker dollar. Further widening the currency gap, a sharp rise in industrial production in Germany and good economic news out of Japan contributed to the strength of the euro and the yen.

Shares of rate-sensitive stocks such as those of financials and homebuilders slipped. Citigroup Inc. (C) slipped 1.2 percent, or 59 cents to $47.88, and Banc of America Corp. (BAC) fell 1.2 percent, or 56 cents to $45.70, weighing on the Standard & Poor's 500 index.

Homebuilders were lower and included KB Home (KBH) , which fell 3.4 percent, or $4.16 to $116.74 and Pulte Homes Inc. (PHI), down 3.3 percent, or $2.54 to $75.45.

Among industrials falling was Caterpillar Inc. (CAT) off $2.19 at $96.81, while package delivery company United Parcel Service Inc. (UPS) was $1.44 lower at $77.11.

Chip maker Xilinx Inc. (XLNX) shed 19 cents to $31.27, despite raising its revenue forecast for the March quarter. The company now expects sales to be up 5 percent to 8 percent sequentially, above prior estimates for 1 percent to 5 percent growth.

McDonald's Corp. (MCD) fell 3 percent to $32.53 after CSFB reduced its rating to "neutral" from "outperform," citing weakness in the fast-food company's European business.

Canadian mining company Noranda Inc. (NRD) was down 23 cents at $19.02 after announcing plans to merge with Falconbridge Ltd., a major nickel and copper producer in a deal that would create one of the largest base-metal companies in North America. Noranda already owned 60 percent of Falconbridge.

Polymer and specialty chemicals producer Crompton Corp. (CK) added 14 percent, or $1.85, to $15.31 after saying it had agreed to purchase Indianapolis-based Great Lakes Chemical Corp. (GLK) in a stock swap transaction valued at $1.8 billion. Great Lakes gained 24 percent, or $6.42, to $33.60.

Kmart Holding Corp. (KMRT) gained 2.2 percent, or $2.42, to $111.66, after the retailer posted a $309 million profit for the fourth quarter, a 14 percent increase over the previous year. Kmart is expected to close its acquisition of Sears, Roebuck and Co. in the coming weeks.

In a Reuters interview, Oracle Corp. (ORCL) chairman Jeff Henley said the company is targeting billion dollar-plus acquisitions even as it opens a fight to buy retail software provider Retek Inc.. Oracle fell 1.3 percent to $13.45 and Retek soared nearly 20 percent to $10.27.

International Securities Exchange Inc. jumped 57 percent to $28.30 a day after the electronic options market place raised nearly $181 million in an initial public offering.

Trading was active, with 1.7 billion shares changing hands on the New York Stock Exchange, above the 1.46 billion daily average for last year. About 1.9 billion shares were traded on Nasdaq, above the 1.81 billion daily average last year.

Decliners outnumbered advancers on the New York Stock Exchange by about 4-to-1 and by about 2-to-1 on Nasdaq.

The Russell 2000 index, which tracks smaller company stocks, shed 6.90, or 1.08 percent, to 631.08.

Overseas, Japan's Nikkei stock average added 0.67 percent. In Europe, France's CAC-40 shed 0.46 percent, Britain's FTSE 100 fell 0.30 percent and Germany's DAX index declined 0.48 percent.

Reuters and the Associated Press contributed to this report.