Central Banks Are in Line of Fire as Prices Rise

Commentary by William Pesek

May 21 (Bloomberg) -- Few central bankers would envy Lee Seong Tae's dilemma in Seoul.

Bank of Korea Governor Lee is under pressure to trim interest rates amid accelerating inflation. Lee refused to do so on May 8, arguing that commodity prices and a declining currency are stoking inflation. The policy board next meets on June 12.

That hasn't stopped government officials from raising the volume. Vice Finance Minister Choi Joong Kyung has been making the argument that inflation gains are mainly due to rising oil and grain prices and that the central bank should be supporting an economy that has ``entered a downturn.''

While Choi's concerns are well taken, Lee should beware. That goes for central bankers across Asia, too.

Central banks wield an uncomfortable amount of power in democracies. They are run by unelected economists who sometimes get interest-rate policies right and sometimes get them wrong. It's an imperfect arrangement, and central banks should be held accountable early and often.

Yet in their desire to keep monetary-policy makers honest, politicians risk interfering with the vital role they can play. Asia is at such a crossroads 10 years after the region's financial crisis. Korea is no exception.

Consumer prices are advancing at a 4.1 percent in Korea this year. The central bank aims to keep inflation between 2.5 percent and 3.5 percent. The closer it gets to 5 percent, the more investors will avoid Korea's markets.

Inflation Risks

Until recently, investors dismissed Asian inflation because ``core'' prices were reasonably tame. There comes a time when rising energy and food costs can no longer be ignored or kept from boosting so-called headline inflation. At risk is nothing less than Asia's progress over the last decade.

Central banks have spent the past 10 years becoming more independent and establishing credibility as inflation fighters. Now, officials from New Delhi to Beijing and from Jakarta to Manila are grappling with inflation that could spook investors and fan social instability. In Vietnam, for example, annual inflation is running at 20 percent.

Central bankers are in a very tough spot at a time when things are getting nasty in the global economy. Cutting rates too much will squander the last decade. Getting too stingy with monetary stimulus will unnerve politicians looking for a scapegoat. The Bank of Japan is now facing that balancing act.

Korea's Experience

Korea also is a case in point. ``The economy is faced with a number of risks, including rising oil, a weaker currency and a global slowdown,'' says Lee Sang Jae, an economist at Hyundai Securities Co. in Seoul. ``Those risks are damping domestic demand, which may hamper jobs growth.''

Korea's jobless rate rose to a five-month high of 3.2 percent in April. Yet some perspective is needed. Governor Lee predicts growth of 4.5 percent or perhaps less this year, below the government's target of 6 percent. The U.S. would kill for 4 percent growth -- or Korea's low unemployment rate.

Korea has long since left the stable of poor Asian economies. Its problems are far more of the Organization for Economic Cooperation and Development variety. Korea needs to learn how to get by on 4 percent or so growth for a while.

It's at times like these that economies either shine or lose their luster. ``Korea has a world-class economy and financial system, but it's one of many OECD economies and needs to work harder to get the world's attention,'' says Hank Morris, Seoul- based director of Industrial Research & Consulting Ltd.

Between Japan, China

At issue is what might be called the ``Korean sandwich.'' For all its merits -- healthy growth, rising standard of living, educated workforce and world-class companies -- Korea is sandwiched between wealthy Japan and low-cost China.

That partly explains why the nation's stock market is undervalued relative to Asian peers, investors argue. Spotty corporate governance doesn't help. Neither does the perception that family-run conglomerates dominate an economy that needs more start-up companies creating jobs.

It's too soon to tell if last month's resignation by Samsung Group Chairman Lee Kun Hee marked the beginning of a new chapter for Korea Inc. Lee was charged with tax evasion and breach of duty, and his departure from Korea's biggest business group shocked the nation of 50 million.

Policy makers have worked hard to control inflation and calm Korea's business cycles. They should resist the temptation to boost growth with easier credit. All that would do at a time of surging global prices is inflate domestic asset values, further fueling inflation.

Finance Minister Kang Man Soo, for example, could step up efforts to cut taxes to spur demand and investment. Reducing the tax rate to 20 percent from last year's 22.7 percent would do more to boost competitiveness than low interest rates.

If the economy truly needs more liquidity, the central bank can always act. Giving in to politicians looking for an easy way out would be a step backward for an economy that should be looking forward.

McCain Invokes POW Days to Repel Attacks, Court Votes (Update1)

May 20 (Bloomberg) -- Whether he's deflecting criticism over his health-care plan or mocking a tribute to the Woodstock music festival, Senator John McCain has a trump card: the Hanoi Hilton.

That's the nickname for the site where he spent 5 1/2 years as a prisoner of war in Vietnam, a past that McCain regularly recalls on the campaign trail to fend off policy attacks, score political points and give voters a glimpse of his sentimental side. He campaigns with squadrons of POWs and made a video to mark the 35th anniversary of his release from prison.

When Elizabeth Edwards, wife of former Senator John Edwards, rebuked McCain's medical-care proposal and noted that he'd always enjoyed government health benefits, McCain responded that he knows what it's like to get inadequate care -- ``from another government.'' During an October debate, while knocking a Hillary Clinton plan to help fund a museum celebrating Woodstock, McCain said he missed the 1969 festival because he was ``tied up at the time.'' Even his rivals applauded.

The McCain campaign brings up the war ``often enough to make sure it stays in people's minds, but not so much that it seems exploitative and crass,'' said Paul Waldman, co-author of ``Free Ride,'' a book that argues the press has treated the 71-year-old Arizona Republican gently.

No Guarantees

While military service often earns public accolades, it doesn't guarantee success in presidential politics.

In 2004, John Kerry, a decorated Vietnam veteran, lost to George W. Bush, who had enlisted in the National Guard to avoid the Vietnam War. Bush supporters raised questions about Kerry's heroic conduct that dominated the debate for weeks.

Four years earlier, Bush defeated another Vietnam veteran, Al Gore. In 1992, Bill Clinton, who evaded military service, beat out a field of Democratic contenders that included Bob Kerrey, a Medal of Honor winner. In his re-election campaign, Clinton defeated Bob Dole, a World War II hero.

McCain is aware of the limits of military heroism at the ballot box. Before the 2004 presidential race, he told Kerry that even heroes-turned-politicians need a compelling message.

McCain said former Ohio Senator John Glenn, a decorated Korean War pilot and the first American to orbit the Earth, failed in his 1984 bid for the Democratic presidential nomination even though he was ``a bigger hero than either one of us.''

``It'll get you an admission ticket,'' McCain warned Kerry. ``But then you have to have something to say.''

Reluctant to Talk

In the years after he returned from Vietnam in 1973, McCain wouldn't talk about his time as a prisoner of war. A Navy pilot, he was shot down during a bombing mission over Hanoi.

McCain discovered the political cachet of his POW experiences while running for a House seat in Arizona -- after living there for just two years.

At a candidates' forum, he dismissed accusations that he was a carpetbagger with a well-timed ad lib: ``The place I lived the longest in my life was Hanoi.''

The audience burst into applause, and ``the race was effectively over right then,'' McCain would write in ``Worth the Fighting For,'' a 2002 book about his political career.

Under fire as a senator for questionable dealings with an Arizona friend and supporter during the savings-and-loan scandal, McCain fumed: ``Even the Vietnamese didn't question my ethics.''

McCain also touted his POW years at the 1996 Republican National Convention while nominating Dole as the party's standard-bearer.

Not Holding Back

This time around, McCain and his strategists aren't holding back either. They've created posters and aired television advertisements showing him as prisoner, lying on his back, holding a cigarette.

One vignette that he tells elicits tears from audiences. It involves a now-deceased POW, Mike Christian, who wouldn't be deterred from sewing American flags out of rags, no matter how severely his captors beat him, so prisoners could recite the Pledge of Allegiance daily.

McCain also talks about a guard who covertly loosened the ropes around his arms at night; he was the one Vietnamese whom McCain had hoped to see again when he returned to the Southeast Asian nation as a congressman 11 years later.

Answering Critics

He referred to his POW days today in Miami in a response to questions from reporters about accusations from Democrats that he's changed his positions on Cuba over the years.

``My record is unchanged and consistent for 24 years,'' McCain said. ``A Cuban officer and enlisted men came to Hanoi and tortured my friends -- killed one of them. My position on Cuba has been exactly the same.''

``A big part of the campaign is about character, and the campaign sees they have in McCain a real contrast with Barack Obama on the issue of service and being prepared to be commander- in-chief on day one,'' said Scott Reed, a Republican strategist who managed Dole's presidential campaign. ``The POW references are a part of it.''

Mark Salter, McCain's longtime Senate chief of staff and adviser, said he sees nothing wrong with highlighting the candidate's POW experiences, including his refusal to be released ahead of prisoners who had been captured earlier.

``Every candidate has a narrative, a life story to tell,'' Salter said.

For McCain, touting his POW years ``is not necessarily a deal-closer,'' said Republican pollster Tony Fabrizio. But against Obama, he said, ``it puts a bright underline on a couple of key differences between the two men: experience and stature.''

Dollar Falls on Oil Surge, Speculation ECB Will Keep Rates High

May 20 (Bloomberg) -- The dollar fell the most in more than a month against the euro as the price of oil rose above $129 for the first time and speculation increased that the European Central Bank will keep interest rates high.

The euro gained after an adviser to the German government said European policy makers may raise borrowing costs as soon as the financial crisis ends. The Australian dollar rose to its highest level in 24 years after minutes of the central bank's last meeting signaled policy makers considered raising rates.

``As much as it pains me to say it, the dollar rally has been derailed for the time being,'' said Michael Woolfolk, senior currency strategist at the Bank of New York Mellon Corp. in New York, the world's largest custodian bank with more than $20 trillion in assets under administration.

The dollar slid 1 percentage point, the most since April 16, to $1.5658 per euro at 4:26 p.m. in New York, from $1.5510 yesterday. The currency declined to 103.72 yen, from 104.33. The euro was at 162.40 yen, from 161.81.

Crude oil touched a record $129.60 a barrel in New York after billionaire hedge-fund manager Boone Pickens said it will reach $150 this year. The correlation coefficient between oil prices and the euro-dollar exchange rate has been 0.95 for the past year, indicating they have moved in the same direction 95 percent of the time.

Prices paid to U.S. producers, excluding food and fuel, rose more than forecast in April, reflecting increases in automobile and furniture costs, the Labor Department said today in Washington.

`Data Worrisome'

``The data is worrisome from the inflation perspective,'' said Stephen Malyon, a currency strategist at Scotia Capital Inc. in Toronto. ``The stagflation situation is not good for the economy and the dollar.''

Traders sold dollars to reach the 50 percent retracement level of the rebound from the record low on April 22, said Marc Chandler, global head of currency strategy at Brown Brothers Harriman & Co. in New York. Retracement is a reversal of a gain. The price of $1.565 represents a halving of the rebound from the record low $1.6019 and could trigger further declines to $1.574 in the next couple of days, he said.

The U.S. currency declined to $1.9686 against the British pound from $1.9489. It dropped to 1.0369 versus the Swiss franc from 1.0533. The Dollar Index traded on ICE futures in New York, which tracks the dollar against currencies of six trading partners, fell to 72.405 from 73.045 yesterday.

``The dollar has been coming under pressure versus the euro lately, which could be the start of a new trend,'' said Neil Mellor, a currency strategist at Bank of New York Mellon Corp. in London. ``The euro is being buoyed by the continued hawkishness of the European Central Bank.''

German Producer Prices

The euro gained after Germany's Federal Statistics Office in Wiesbaden today said producer-price inflation in the nation, an early indicator of price pressures in the economy, accelerated to the fastest pace in almost two years in April on energy costs.

The single currency briefly pared gains after an industry report showed investor confidence in Germany unexpectedly fell. The ZEW Center for European Economic Research said its index of investor and analyst expectations declined to minus 41.4, from minus 40.7 in April. Economists expected a gain to minus 37, according to a Bloomberg News survey. The gauge reached a 15-year low of minus 41.6 in January.

``I would recommend that the ECB keep rates constant until there is clear evidence the financial crisis is over,'' Wolfgang Franz, one of five advisers to the German government and head of the ZEW center, told reporters in Mannheim today. ``Then the ECB might need to raise rates to take care of inflation. My expectation is that the ECB will raise rates in the near future.''

Stocks Fall

The yield advantage of a German two-year bund over a comparable Treasury rose to 1.67 percent from 1.34 percent on May 13. A widening yield gap makes the euro-denominated asset more attractive.

The yen advanced after stocks fell, prompting investors to curb so-called carry trades and repay cheap loans taken out in the currency. The Standard & Poor's 500 Index fell 1 percent.

The International Monetary Fund said the U.S. housing slump still poses ``serious risks'' to financial markets.

The Japanese currency held gains earlier after the Bank of Japan kept its benchmark interest rate at 0.5 percent. Governor Masaaki Shirakawa told a press conference inflation risks are rising globally. The Federal Reserve has cut its benchmark rate seven times since September, bringing it to 2 percent.

Australia's dollar touched 96.19 U.S. cents, the strongest since 1984, before trading at 95.82 cents.

Australian Minutes

The nation's central bank minutes ``immediately prompted the buying of Australian dollar against the U.S. dollar,'' said Kenichi Yumoto, senior currency dealer at Societe Generale SA in Tokyo. ``This led to dollar-selling against other major currencies.''

The Australian currency will advance after climbing above a trend line passing through its Oct. 31 high of 107.87 yen and its May 7 high of 99.84 yen, according to Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo.

The Norwegian krone rose 0.7 percent to 4.9994 against the dollar as oil prices rose. It has gained 1.9 percent over the past three trading days. Norway is the fifth-biggest oil exporter.

Oil Rises to a Record After Pickens Says Prices May Reach $150

May 20 (Bloomberg) -- Crude oil rose above $129 a barrel in New York for the first time after billionaire hedge-fund manager Boone Pickens said oil will reach $150 a barrel this year because supply isn't keeping up with demand.

Producers are ``running out of oil,'' Pickens, the founder and chairman of Dallas-based BP Capital LLC, said on CNBC today, reiterating comments he made to Bloomberg News on April 29. Goldman Sachs Group Inc. and Deutsche Bank AG also said in the past month that prices would rise.

``It's not just Boone Pickens; just about every big global bank has raised its price forecast in recent weeks,'' said John Kilduff, vice president of risk management at MF Global Ltd. in New York. ``When prices last fell below $20 in 2001 there was a surplus. That's no longer the case. There's now a deficit.''

Crude oil for June delivery rose $2.02, or 1.6 percent, to settle at a record $129.07 a barrel at 2:56 p.m. on the New York Mercantile Exchange after reaching an all-time high of $129.60. Prices have doubled from a year ago. A strengthening of the euro against the dollar added to the gains.

The June contract expired today. The more-active July futures contract rose $2.26, or 1.8 percent, to settle at $128.98 a barrel. Contracts for delivery in 2011 and 2012 rose more than 4 percent, a signal that investors don't expect prices to drop. The contract for December 2016 climbed $9.52, or 7.3 percent, to $139.50 a barrel.

Oil advanced above $127 for the first time on May 16 when Goldman Sachs boosted its estimate for the second-half of the year to $141 a barrel, from $107, citing supply constraints. Credit Suisse Group AG and Societe Generale SA raised their oil price forecasts for 2008 and 2009 today, citing investor flows and limited supply.

The weakening dollar prompted the purchase of commodities as a hedge against the currency's decline. The European Central Bank may keep rates at a six-year high to curb inflation.

German Prices

German consumer prices rose 2.6 percent in April from a year earlier after jumping 3.3 percent the previous month, the most in 12 years, according to the Federal Statistics Office in Wiesbaden.

The dollar has declined since Sept. 18, when the Federal Reserve began cutting rates to ease financial-market strains and stave off a recession. The U.S. central bank cut rates seven times while the ECB left rates unchanged. The dollar fell 1 percent to $1.5664 per euro at 3:37 p.m. in New York.

``Oil is up because the dollar is being pounded on the bigger-than-expected increase in German inflation,'' said Addison Armstrong, director of market research at TFS Energy LLC in Stamford, Connecticut. ``The likelihood that the ECB will cut rates to be more in line with those in the U.S. is reduced by the German inflation numbers.''

Winners and Losers

The Organization of Petroleum Exporting Countries' oil- export revenue will be over $1 trillion this year, the U.S. Energy Information Administration said on May 6. The estimate is $80 billion, or 8.2 percent, more than the agency forecast in a report published in April.

Exxon Mobil Corp., Chevron Corp. and ConocoPhillips, the largest U.S. energy companies, gained along with the price of oil. Exxon added 20 cents to $94.56. Chevron added 89 cents to $103.09 and ConocoPhillips rose 85 cents to $93.55.

The price of jet fuel, the largest expense at many airlines, has climbed 87 percent in the past year and traded at a record $3.9475 a gallon in New York Harbor today. Air carriers fell, with the Bloomberg U.S. Airlines Index sliding 3.2 percent. All 14 stocks in the index declined.

Earlier Loss

Pickens's BP Capital Energy Equity Fund fell 14 percent in the first two months of the year amid soaring prices for natural gas and crude oil. He told CNBC on Feb. 21 that he was short on both oil and natural gas. A short is a bet that prices will fall.

``Pickens is well respected in the industry, even though he made the mistake of shorting oil in February,'' said Brad Samples, commodity analyst for Summit Energy Inc. in Louisville, Kentucky.

Brent crude oil for July settlement rose $2.78 or 2.2 percent, to settle at a record $127.84 a barrel on London's ICE Futures Europe exchange after reaching an all-time high of $128.07 today.

The May 15 earthquake in China, the most powerful temblor to strike the country in 58 years, damaged power infrastructure and hampered coal transportation in the southwest. China has dispatched 33,000 kilowatts of diesel generators to help boost electricity supply to the quake-hit areas, the country's industry regulator said yesterday.

Coal Shortage

``There a coal shortage in China because of the earthquake, which is increasing the call on diesel,'' Kilduff said. ``That's why heating oil and gasoil were the first markets to move higher today.''

Heating oil for June delivery climbed 9.99 cents, or 2.7 percent, to settle at a record $3.775 a gallon in New York, after reaching $3.792 a gallon, the highest since trading began in 1978. Some traders use heating-oil futures to hedge purchases of diesel and jet-fuel, which are chemically similar.

President George W. Bush prefers to prevent Iran from obtaining a nuclear weapon through ``peaceful diplomatic means,'' White House spokeswoman Dana Perino said today, dismissing a report by Israel's Army Radio that said Bush intends to attack Iran in the months ahead.

``Worries about Middle East supply have increased because of Israeli reports about U.S.-Iran policy,'' said Bill O'Grady, director of fundamental futures research at Wachovia Securities in St. Louis. ``Outside of a war it's difficult to see how these price gains can continue because at some point the economy will implode.''

Iran has the second-biggest proved oil reserves and is the second-biggest producer in OPEC. Almost a quarter of the world's oil flows through the Strait of Hormuz, a narrow waterway between Iran and Oman at the mouth of the Persian Gulf.

U.S. Stocks Drop on Credit Concern, Producer Prices; Banks Fall

May 20 (Bloomberg) -- U.S. stocks fell, dragging down the Standard & Poor's 500 Index from a four-month high, as analysts forecast more credit losses and faster inflation and record oil prices threatened to reduce profitability.

Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co. led financial shares to a third straight decline as Oppenheimer & Co. analyst Meredith Whitney said banks may write off more than $170 billion of additional reserves by the end of 2009. American International Group Inc., the world's largest insurer, slid to the lowest level since 1998 on plans to raise more capital. Home Depot Inc. had its worst tumble in nine months after profit slumped 66 percent.

The S&P 500 lost 13.23 points, or 0.9 percent, 1,413.4, its biggest drop since May 7. The Dow Jones Industrial Average sank 199.48, or 1.5 percent, to 12,828.68. The Nasdaq Composite Index decreased 23.83, or 1 percent, to 2,492.26. More than two stocks retreated for each that rose on the New York Stock Exchange.

``There are still some serious credit issues that need to be worked through in a weakening economy driven by a weaker consumer,'' Leo Grohowski, who helps oversee $162 billion as chief investment officer at Bank of New York Mellon Wealth Management, told Bloomberg Television. ``Some of the liquidity fears that were really driving the market down have been minimized, but we are in the midst of a credit crunch.''

Inflation Concern

Seven of 10 industries in the S&P 500 dropped after the Labor Department reported a 0.4 percent gain in producer prices excluding food and fuel in April, twice as big as economists had forecast. A gauge of U.S. stock-market volatility rose the most in almost two weeks. Shares fell in Europe and Asia as record oil weighed on the outlook for earnings.

The S&P 500 is still 11 percent above its 19-month low reached March 10 after the Federal Reserve helped bail out U.S. banks and earnings at two-thirds of the companies in the index beat analysts' estimates.

JPMorgan lost $2.29, or 5 percent, to $43.70. Whitney, who correctly predicted on Oct. 31 that Citigroup Inc. would cut its dividend and has a ``perform'' rating on JPMorgan, lowered earnings estimates for the U.S. banking sector ``significantly.''

``The real harrowing days of the credit crisis are still in front of us and will prove more widespread in effect than anything yet seen,'' analysts including Whitney wrote in a research note.

Whitney's Call

The Oppenheimer analysts cut their estimates for 2008 earnings for Bank of America, Citigroup, JPMorgan, Wachovia Corp. and Wells Fargo & Co. by an average of 17 percent, and reduced their 2009 estimates by 20 percent. In all, the banks' earnings will be 72 percent lower than the Thomson First Call consensus forecast, Oppenheimer estimates.

Citigroup lost 3.8 percent to $22.11. Bank of America retreated 2 percent to $35.39. Wells Fargo slid 1.5 percent and Wachovia tumbled 2.3 percent. The S&P 500 Financials Index retreated 2.2 percent as 87 of its 92 companies fell.

AIG dropped 2.1 percent to $38.12. The insurer will raise a total of $20 billion, 60 percent more than it originally said it needed to protect against further writedowns, Chief Executive Officer Martin Sullivan said.

Goldman Sachs Group Inc. slipped $1.97 to $182.43 and Morgan Stanley lost $1.40 to $44.80. Losses from hedging may weigh on Goldman and Morgan Stanley, according to analysts at smaller rival Lehman Brothers Holdings Inc., who cut their second-quarter earnings estimates for the two biggest U.S. securities firms. Goldman will probably earn about $3.18 a share in the period, down from an earlier estimate of $3.75, Lehman said in a report. Morgan Stanley's per-share estimate was reduced to 87 cents from $1.31.

`Serious Risk'

Asset writedowns and credit losses have climbed to $379 billion since the beginning of 2007 at the world's largest banks and securities firms, data compiled by Bloomberg shows.

The financial-market turmoil stemming from the collapse of the U.S. subprime mortgage market may have yet to run its course, the International Monetary Fund's deputy chief said in Tokyo today.

``We still see serious risks to global financial stability,'' Deputy Managing Director John Lipsky said in a speech that was delivered by Daniel Citrin, the IMF's deputy director for Asia Pacific.

Federal Reserve Vice Chairman Donald Kohn said that economic growth should strengthen over the next 18 months as the current level of interest rates promotes growth and moderates inflation. Kohn's remarks, given in a speech in New Orleans, suggest the Fed is likely to leave its benchmark interest rate unchanged at 2 percent at its June 24-25 meeting.

Tech Surpasses Financials

Today's slide allowed technology companies to surpass financials as the group with the biggest weighting in the S&P 500 for the first time since 2002. The S&P 500 Financials Index comprised 16.19 percent of the overall index's market value at the close, compared with a 16.26 percent weighting for the S&P 500 Information Technology Index, according to Bloomberg data.

The Chicago Board Options Exchange Volatility Index, or VIX, increased 3.4 percent to 17.58 today after falling to as low as 15.82 yesterday. The VIX has tumbled by almost half since March as stocks rallied from their lows of the year after the Federal Reserve backed the bailout of Bear Stearns Cos.

`Couple Breathers'

``It comes as no surprise to have a couple breathers in this rally we've had over the last six weeks or so,'' said Jennifer Ellison, a principal at Bingham, Osborn & Scarborough, which manages $2 billion in San Francisco. ``The strength of the rally and the length of it surprised us. There is more bad news to come on the economy.''

Home Depot, the world's largest home-improvement retailer, fell the most in the Dow average, losing $1.50, or 5.2 percent, to $27.37. Net income declined 66 percent as consumers grappling with the deepest U.S. housing slump in more than 25 years cut back on remodeling projects.

Target Corp. slumped 63 cents to $54.29 after the second- largest U.S. discount chain reported its third straight decline in quarterly profit. First-quarter net income dropped 7.5 percent to $602 million.

First-quarter earnings at retailers in the S&P 500 have tumbled 19 percent on average, according to data compiled by Bloomberg, as record energy prices and slumping home values reduce spending on non-essential items.

Energy Rally

Crude today rose above $129 a barrel for the first time after billionaire hedge-fund manager Boone Pickens said that oil will reach $150 this year. Prices will climb because supply isn't keeping up with demand, Pickens, the founder and chairman of Dallas-based BP Capital LLC, told CNBC.

Exxon Mobil Corp., Chevron Corp. and ConocoPhillips, the largest U.S. energy companies, also gained after Credit Suisse Group AG and Societe Generale SA raised their oil prices forecasts for 2008 and 2009, citing supply limitations. Exxon added 20 cents to $94.56. Chevron added 89 cents to $103.09 and ConocoPhillips rose 85 cents to $93.55.

An index of energy companies in the S&P 500 climbed to a record.

Micron Technology Inc. fell the most in the S&P 500, leading makers of computer chips and related equipment to the second- steepest decline among 24 industries, after Lazard Capital Markets LLC said the company may spend about $1 billion to expand production capacity, reducing its cash reserves. Micron dropped 6.3 percent to $8.21.

Broadcom Corp., which makes chips used in Nintendo Co.'s Wii video-game console, fell 5.6 percent to $26.23. Intel Corp., the world's largest semiconductor maker, dropped 79 cents, or 3.2 percent, to $24.09.

Humana's Rally

Humana Inc. gained the most in the S&P 500, rising 7.4 percent to $48.06. The second-largest seller of U.S.-funded health coverage was added to the ``conviction buy'' list at Goldman Sachs Group Inc., which said Medicare Advantage plans should drive ``solid'' earnings in the second quarter.

Cigna Corp., the insurer that specializes in employer- sponsored health benefits, lost 25 cents to $39.55 after Goldman removed it from the list.

SLM Corp. gained 5.2 percent to $20.78. The biggest U.S. education lender climbed the most in more than two weeks on speculation that terms of a U.S. student loan industry rescue will help the company.

The Russell 2000 Index, a benchmark for companies with a median market value about 95 percent smaller than the S&P 500's, fell 0.4 percent to 735.64. The Dow Jones Wilshire 5000 Index, the broadest measure of U.S. shares, dropped 0.8 percent to 14,309.89. Based on its retreat, the value of stocks decreased by $141.5 billion.

The dollar fell the most in a month against the euro as oil rallied and speculation increased that the European Central Bank will keep interest rates high.