U.S. MARKET AVERAGES

U.S. stock averages traded in the negative Tuesday morning, hurt by surging crude oil prices over $65 a barrel, a 2.8% drop in Japan's Nikkei stock average and disappointing bank earnings. Investors also awaited earnings reports from major companies like Intel Corp., International Business Machines Corp. and Yahoo Inc, hoping they would provide a spur to push the market higher following a strong 2006 start.

Crude prices hit a 3 1/2-month high above $65 a barrel amid worries of supply disruptions on Iran's plans to resume uranium production and after militants said they would broaden attacks on Nigeria's oil industry.

Rising oil pressured the broader market but boosted stocks of energy companies like Exxon Mobil Corp. (XOM: chart) whose shares were among the biggest gainers in both the Dow average and the S&P 500.

The airline sector continued to move to the downside, extending its last-week decline to fall by 4.7%. With Tuesday's retreat, the airline sector marked its lowest level since the first half of November. Technology stocks with the semiconductor and disk drive sectors in particular continued to post significant weakness.

Guidant (GDT: chart) jumped to a new 52-week high on news of Boston Scientific's (BSX: chart) increased offer. BioCryst (BCRX: chart) broke to a new high with the stock climbing more than 15% on FDA fast track status for its flu drug. Rambus (RMBS: chart) extended recent gains to set a new high.

Apollo Group (APOL: chart) set a new low, continuing a decline started last week. Lear (LEA: chart) also added to last week's weakness to set a fresh nadir. Impac Mortgage (IMH: chart)ticked to a new low as well.

In midday trading, the Dow Jones industrial average fell 55.53, or 0.51%. The Standard & Poor's 500 index fell 5.77, or 0.45%, and the Nasdaq composite index fell 14.00, or 0.6%.

Bonds were flat, with the yield on the 10-year Treasury note at 4.36%, even the yield late Friday.

MOVERS AND SHAKERS

Boston Scientific (BSX: chart) lifted its proposal to acquire Guidant Corp. (GDT: chart) to roughly $27 billion, or $80 a share from earlier $25 billion. Boston Scientific noted its bid represents a premium of $3.3 billion, or $9 per share, over the competing offer of Johnson & Johnson (JNJ: chart). Boston Scientific said its amended offer expires at 5:00 pm ET unless its offer is declared ‘superior’ by Guidant''s board, a condition that would move the offer''s expiration back to Jan. 25. Boston Scientific’s shares fell 4.8%. Guidant’s stock rose 7.6%.

Quanex Corp. (NX: chart), maker of engineered materials for vehicles and the construction industry, raised its Q1 earnings outlook by 35%, citing better-than-expected results. The company said it expects adjusted earnings of $1.00 to $1.05, above the average forecast for earnings of 84 cents a share. The stock climbed 12%.

Furniture Brands (FBN: chart) dropped over 6% after CS First Boston downgraded the furniture seller to underperform from neutral, citing valuation and lofty expectations for margin improvement. The stock dropped 7.9%.

Innovex (INVX: chart) reported Q1 loss of $9.77 million, or 51 cents a share, vs. a net loss of $1.01 million, or 5 cents a share, in the year-ago period. Excluding 52 cents a share in restructuring charges, the company earned $160,000, or a penny a share on 26% revenue growth to $50.5 million from $40 million last year. Innovex said it plans to move all prototyping and high volume manufacturing to its Thailand manufacturing facility over the next 12 months. The company expects to reduce its workforce and see annual cost savings of $8 million once the transition is complete. The company’s shares slipped 9.3%.

Toll Brothers (TOL: chart) was downgraded to sell from neutral by Banc of America Securities, citing lower demand on higher prices. The stock fell 1.4%.

SanDisk Corp. (SNDK: chart) dropped 3% after it was downgraded to hold at Citirgroup.

ECONOMIC NEWS

Tuesday morning, the Federal Reserve released its report on industrial production and capacity utilization in the month of December. The report showed that industrial production growth and the capacity utilization rate both came in slightly above economist estimates.

The Fed said that industrial production grew by 0.6 percent in December after an upwardly revised increase of 0.8 percent in November. Economists had expected industrial production to grow by 0.5 percent compared to the 0.7 percent growth originally reported for November.

The report showed that the December industrial production growth reflected a 0.2 percent increase in manufacturing output as well as a 2.7 percent increase in output from utilities and a 2.5 percent increase in output from mines.

The Fed added that industrial production rose 2.8 percent over the twelve months of 2005, rising to 109.8 percent of its 2002 average. Total industrial capacity rose 1.7 percent in 2005.