Dow Drops Below 12000; Upgrade Boosts AIG

Stocks declined Thursday, with the Dow dropping below the key 12000 mark after a dismal manufacturing reading, but were cushioned by AIG's advance.

The Dow Jones Industrial Average started the day at its lowest point since March, then dropped at the opening bell, falling below 12000 after the Philadelphia Federal Reserve reported regional manufacturing activity slowed more than expected in June.

Economic indicators -- especially those from June -- are being watched extra closely ahead of the Federal Reserve's policy-setting meeting next week.

AIG , the top gainer on the Dow, rose 2 percent after Citigroup raised its rating on the stock to "buy" from "hold," saying the insurer is undervalued -- even if its earnings don't grow -- and the stock is poised for a 35 percent jump in the next 12 months.

Initial jobless claims fell by 5,000 last week. However, the four-week moving average, which smooths out weekly fluctuations, ticked higher for a second straight week.  

"Jobless claims have been trending upward, albeit very slowly, but they remain low enough to suggest the contraction in the economy has thus far been shallow," Tony Crescenzi, of Miller Tabak, wrote in a guest-blog post.

Leading indicators rose for a second straight month, climbing 0.1 percent in May, the Conference Board reported.

U.S. light, sweet crude oil slipped about $2, trading between $134 and $135 a barrel. Shares of energy stocks, including Dow components ExxonMobil and Chevron , declined.

Treasury Secretary Henry Paulson is speaking later today and is expected to urge that, in the wake of the Bear Stearns' collapse, the Fed be given new powers to regulate Wall Street, the Wall Street Journal and the Washington Post reported.

Paulson will likely say that the fall of Bear Stearns has expedited the need for the government to address the "outdated" regulatory oversight structure while not intervening too much in the functioning of markets, the two papers said.

Meanwhile, two former Bear Stearns hedge-fund managers were arrested on charges of securities fraud and are expected to be indicted for their role in the collapse of two hedge funds that helped kick off the credit crisis last year.

Also in the financial sector, Morgan Stanley will take a $120 million revenue hit after a suspected rogue trader incorrectly valued his positions in the credit-derivatives market, the Financial Times reported on Thursday.

In merger and acquisition news, Anheuser-Busch's board plans to meet this week for the first time since rival brewer InBev formally bid $46 billion for the company, the Financial Times reported, in a signal the U.S. company may not be ready to completely reject the Belgium brewer's bid.

A slew of downgrades swirling around the market:

Chemical products manufacturer Huntsman saw its shares tumble 40 percent at the open after the company was downgraded by Jefferies to "underperform" from "hold" and had its price target lowered from $28 to $15.

Kraft Foods shares fell after a downgrade from UBS.

UBS fell 4 percent after a downgrade from Credit Suisse.

Still to Come:

THURSDAY: Philly Fed survey; leading indicators; natural gas inventories; Fed advisory panel meets to discuss credit-card regulation

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