What’s wrong with this picture: Oil falls, and so do stocks

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On Wall Street, you always have to be careful what you wish for.

Many investors have been praying for a drop in crude oil prices, and we got that today, thanks in part to Federal Reserve Chairman Ben S. Bernanke’s move to boost the dollar (explained here).

Near-term oil futures slid $3.45, or 2.7%, to end at $124.31 a barrel -- the lowest closing price since May 15. Crude now has fallen 6.6% from its all-time high of $133.17 on May 21. Fire up the Hummer!

But the pullback in oil triggered the same action in energy stocks today, and that hit the broad market: Energy issues were the worst performers of the 10 major industry sectors in the Standard & Poor’s 500 index, falling 1.8% on average. The S&P index overall dropped 8.02 points, or 0.6%, to 1,377.65, recovering from a loss of 1.1% at the day’s low.

Wait a minute, though. Shouldn’t investors have been shifting their energy-stock profits into other sectors, betting that what’s bad for oil will be great for most of the market?

Maybe they would have made that shift -- except for the sudden fear that brokerage Lehman Bros. could follow Bear Stearns Cos. into oblivion. Lehman shares were briefly down nearly 15% today on rumors that it was having funding problems and was forced to borrow from the Federal Reserve as a last resort. Shades of the March market meltdown all over again.

The company denied the rumors, however, and said it ended May with $40 billion in liquid assets, up from $34 billion three months earlier. The stock recovered somewhat but still lost 9.5% for the day, ending at $30.61, down $3.22 -- below the previous multiyear closing low of $31.75 on March 17.

The possibility of another big financial-company failure was too much for the bulls to handle today, despite oil’s gift, said Art Hogan, veteran market analyst at Jefferies & Co. in Boston. ‘They were thinking, ‘Maybe this is the next shoe to drop,’ ‘ he said.

And the suspense may not lift soon: Lehman won’t report its full results for the fiscal quarter ended May 31 until mid-June.

So we’re left to ponder: How low does oil have to go to more than offset another round of serious doubts about the financial system’s health?