Stocks fell sharply as oil's resurgence fanned inflation fears and a downgrade on Alcoa dragged on the Dow.
The Dow Jones Industrial Average was hovering around a three-month low and the S&P 500 index broke below the key 1350 mark.
"I thought this summer would start the turning back into the market -- it’s obviously not happening," Peter Costa, a trader with Eckhart & Co., told CNBC. Still, "I’m still optimistic for the end of the year," Costa said.
Costa is in the camp that the U.S. economy is, in fact, in a recession and says now is a good time to jump into the market.
"Recessions traditionally are a good investment starting point," Costa explained. "Look at the last 4-5 recessions: The market has gone up 7.5%, on average, from lower part. I do think that’s where we’re at right now," Costa said.
The U.S. economy remained weak in May, according to the Federal Reserve's beige-book report, so named for the color of its cover. The report, a quilt of reports from regional Fed branches, showed that inflation was rampant, but businesses were limited in their ability to pass on those costs to already-pinched consumers.
Mortgage applications rose after falling for three straight weeks, but there was some concern in the market of a domino effect: If the Fed raises rates due to soaring inflation, it could trigger another round of mortgage defaults.
Inflation concerns have gripped markets world-wide -- China's stock market dropped 7.7 percent yesterday after the government announced plans to take some money out of its financial system to curb inflation. The inflation rate there is 8 percent; in Vietnam, it's a whopping 25 percent, resulting in a move by the government that effectively devalued the currency. Federal Reserve and European Central Bank officials have begun to ratchet up the volume on inflation concerns. The topic will take center stage at a meeting of G-8 finance ministers at the end of the week.
Energy stocks were mostly higher, with ExxonMobil among the only Dow gainers.
Dupont led Dow gainers on news that the company plans to double the capacity of a China plant in order to propel its solar-energy business.
In yet another sign of how strong the agriculture sector is, ADRs of Canada's Agrium soared after the Canadian fertilizer company sharply raised its second-quarter earnings forecast amid high crop prices and "unprecedented" demand.
Alcoa was the biggest decliner on the Dow after JPMorgan downgraded its rating on the stock to "neutral" from "overweight" and slashed its 2008 earnings target to $2.18 a share from $2.70 a share. A weekend article in Barron's had suggested Alcoa might be an attractive takeover target but JPMorgan analysts said that the company has no such plans, much to the disappointment of investors.
"We believe the market will be disappointed with both the strategic direction from the new chief executive, Klaus Kleinfeld, and the company's near-term earnings due to higher-than-expected input costs," JP Morgan said.
After a lot of back and forth, news emerged today that office supplier Stapleswill buy Dutch company Corporate Express for $2.6 billion. Staples raised its initial offer twice before Corporate Express acquiesced.
"Any takeover activity these days that gives any indication that the mergers and acquisitions activity is alive is a positive," Paul Mendelsohn, chief investment strategist at Windham Financial Services in Charlotte, Vt., told Reuters. "The focus will also be on oil and the Fed's Beige Book."
Lehman Brothers shares fell more than 6 percent as news of another possible capital-raising deal increased the intensity of the swirl of concern surrounding the firm. Lehman has sought capital from Korean banksand could strike a deal later this year, the Financial Times reported. That news comes two days after Lehman raised $6 billion in stock and convertible preferred securities and said it expects to post a $2.8 billion loss when it reports earnings next week.
Bank shares in Europe got a boost from a report that a Russian tycoon is building stakes in major Western banks and is urging other Russian billionaires to do the same.
Suleiman Kerimov has been selling his Russian assets, including stakes in the country's biggest bank Sberbank and gas giant Gazprom, to buy stakes in Deutsche, UBS, Morgan Stanley and Credit Suisse, Kommersant business daily reported.
Another investor looking to take advantage of the market slump is former New York Gov. Eliot Spitzer, according to Reuters. Spitzer went to work for his father's real-estate firm after resigning as governor. He's now mulling ways to invest in depressed real estate, Reuters reports. One possibility being kicked around is starting a vulture fund for such investments.
Elsewhere in the financial sector, some Countrywide executives are likely to move to Bank of America's mortgage unit when the merger deal will be completed, the Wall Street journal reported.
Bank of America recently completed the sale of its brokerage unit to France's BNP Paribas for what some say is around $300 million.
Apple shares declined two days after the debut of the new 3G iPhone, which can roam in 70 countries. Investors sold off the stock the minute the product was announced, after running up the stock in the months leading up to the announcement. Another factor that may be playing into the stock's decline is concern about CEO Steve Jobs's health. The blogosphere was abuzz with comments about how sick he looked during the announcement. Jobs, who is one of the rare CEOs who is fervently linked to his company and its success, was diagnosed with pancreatic cancer in October 2003.
Ford shares slipped despite news that the auto maker plans to move quickly to shift its North American truck plants to car plants. Plant managers and local union leaders were summoned to meet at Ford's headquarters on Friday, the Detroit News reported. Details of the plan are expected in July.
Talbot's shares jumped after the women's apparel retailer said Aeon, its largest shareholder, has agreed to provide a $50 million credit facility to help the struggling chain with its restructuring plan.
Gap , meanwhile, skidded amid news that the chain, which has seen revenue fall in three of the last four quarters, plans to reduce the size of some of its stores to cut costs.
Martha Stewart Living Omnimediaskidded more than 7 percent following news that the Susan Lyne is stepping down as CEO of the domestic conglomerate. No reason was offered for Lyne's departure. The company said it will name Wenda Harris Millard, a former Yahoo executive who now serves as president of media, and Robin Marino, president of merchandising, as co-CEOs.
Still to Come:
WEDNESDAY: Fed's beige book; Treasury budget; Fed's Kohn, Bullard speak
THURSDAY: Import/export prices; retail and food sales; jobless claims; business inventories; natural-gas inventories
FRIDAY: CPI, consumer sentiment
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