Stocks tumble, oil rises

Stocks fell sharply for a second straight session Tuesday after the government reported a higher-than-expected jump in wholesale prices and a drop in new-home construction. The Dow Jones industrial average dropped 130 points.

The Labor Department said its producer price index rose 1.2% in July, doubling the expected rate and lifting inflation over the last 12 months to the highest level in 27 years. Even after stripping out food and energy, prices rose by a higher-than-expected 0.7%, the biggest increase since November 2006.

“Maybe investors were hoping to shrug off the challenges of high commodity prices and inflation,” said Jack A. Ablin, chief investment officer at Harris Private Bank. “But now we find out that perhaps the inflation situation is worse than we thought.”

A rebound in oil prices Tuesday added to investors’ anxiety, which had abated slightly in recent weeks as crude tumbled from its July 3 record close of $145.29 a barrel. Oil futures rose $1.66 to $114.53 a barrel on the New York Mercantile Exchange.

The Commerce Department added to the heap of downbeat news Tuesday, reporting that July housing starts fell to an annual rate of 965,000 units -- a bit higher than analysts predicted but still the lowest level in more than 17 years.

And the financial sector took another hit after one Wall Street analyst estimated that Lehman Bros. Holdings would have to write down its investments in the third quarter by $4 billion, and another analyst advised against buying the stock of American International Group.

The Dow fell 130.84 points, or 1.1%, to 11,348.55, after losing 180 points Monday. It was the worst two-day performance for the blue-chip index since late June.

Broader stock indicators also declined. The Standard & Poor’s 500 index fell 11.91 points, or 0.9%, to 1,266.69, and the Nasdaq composite index fell 32.62 points, or 1.3%, to 2,384.36.

The Russell 2,000 index of smaller companies fell 11.94 points, or 1.6%, to 730.03.

Declining issues outnumbered advancers by about 5 to 2 on the New York Stock Exchange.

Government bond yields were mixed. The benchmark 10-year Treasury note rose to 3.83% from 3.81% late Monday.

The dollar fell against other major currencies. Gold prices turned higher.

Among financial stocks, Lehman fell $1.96, or 13%, to $13.07 on the concerns about more write-downs by the Wall Street investment bank.

AIG fell $1.28, or 5.9%, to $20.32 after Goldman Sachs predicted $9 billion to $20 billion in losses in the insurer’s portfolio of securities known as credit default swaps.

Several retailers reported weak second-quarter results, reflecting a broad pullback in consumer spending.

Home Depot posted a 24% decline in profit. Its shares fell $1, or 3.7%, to $25.96.

Target dropped 33 cents to $49.72 after it reported a 7.5% decline in earnings.

And Saks incurred a wider-than-expected loss in the second quarter as its affluent shoppers cut back on apparel. The luxury goods retailer also issued a downbeat forecast for the year. Its stock slid 93 cents, or 8.3%, to $10.29.

Stock markets tumbled overseas. Key indexes fell 2.3% in Japan, 2.4% in Britain, 2.3% in Germany and 2.6% in France.