Stocks Skid as Bailout Fails to Sway Investors

Stocks finished lower, led by financials, as investors worried that the bailout of Fannie Mae and Freddie Mac might not be enough to prevent further turmoil in financial markets.

The Dow Jones Industrial Average ended down about 45 points, or 0.4 percent, after surging more than 120 points at the opening bell in a burst of relief over the Fannie-Freddie rescue.

The S&P 500 index shed 0.9 percent and the tech-heavy Nasdaq fell 1.2 percent.

All three major indexes remained in bear-market territory, more than 20 percent below their October highs.

The U.S. Treasury and Federal Reserve announced late Sunday a plan to rescue Fannie Mae and Freddie Mac in order to boost confidence in the troubled mortgage-finance giants and stave off a meltdown in the market.

Under terms of the plan, Fannie Mae and Freddie Mac will be allowed to borrow directly from the Fed's emergency-lending discount window as regular banks do.

The news had initially calmed market jitters but it quickly became apparent that investors weren't convinced.

The Fed's rescue of Fannie and Freddie "was an important policy step but the reason for the bailout combined with the closing of IndyMac suggests that there is more bad news to come," said Alan Gayle, senior investment strategist for RidgeWorth Capital Management. "It seems like the news just keeps on coming," he said. "Some investors may just be throwing up their hands."

The Federal Deposit Insurance Corp seized the $32 billion IndyMac bank, headquartered in Pasadena, Calif., on Friday. The FDIC assured customers that their deposits remained safe and that it would operate IndyMac as a federal bank. It will then probably try to sell it as a whole or in pieces.

Analysts say more banks may follow in IndyMac's footsteps as credit losses once concentrated in subprime mortgages spread to other home loans and debt once thought safe.

(Which bank could be next? Click on the video at left.)

Richard Bove, a bank analyst at Ladenburg Thalmann, said BankUnited Financial of Coral Gables, Fla., was high on his "danger-zone" list, as was Downey Financial .

The regional banks at greatest risk for a dividend cut are Zions Bancorp , Regions Financial and Suntrust Banks , Goldman Sachs analyst Richard Ramsden said. He also cut his price target on Regions Financial to $10 from $22, and, according to theflyonthewall.com, cut Zions Bancorp to "sell" from "neutral."

National City finished down 15 percent, about half of its decline earlier in the session. The stock was briefly halted but when it resumed trading, investors seemed unconvinced by the bank's statement that it isn't experiencing any unusual depositor or creditor activity.

The selloff in financials is similar to the fall off the cliff techs took after the tech bubble burst in 2000, said Citigroup chief strategist Tobias Levkovich.

"Indeed, it seems as if any trade into financial names has been the equivalent of catching falling knives, irrespective of historical valuation, sentiment or earnings revision guideposts. Investors with longer term investment time horizons should not bail out now," Levkovich said in a note to clients.

Fannie and Freddie shares experienced a 20-percent pop at the open but the gains quickly evaporated and the stocks finished down 5.1 percent and 8.3 percent, respectively.

The stocks had plunged more than 40 percent last week amid fears that the firms, which own or back $5 trillion of debt, accounting for nearly half of the value of all U.S. mortgages, were undercapitalized.

Both Merrill Lynch and Citigroup slashed their price targets on the pair: Merrill cut Fannie to $9 and Freddie to $7, while Citigroup lowered Fannie to $21 and Freddie to $16.

The bailout could put more pressure on the U.S. dollar and analysts said an intervention to prop up  the U.S. currency could come soon.

Merrill Lynch CEO John Thain is considering selling other investments to drum up capital, not just Merrill’s stakes in financial-information powerhouse Bloomberg and money manager BlackRock , CNBC has learned. Merrill, which reports earnings on Thursday, is expected to post a hefty loss and writedowns that could top $6 billion.

Washington Mutual was the biggest decliner on the S&P 500, tumbling 35 percent.

Bank of America and Citigroup were the top two decliners on the Dow, followed by General Motors .

GM announced after the closing bell that it will disclose further details of its restructuring effort in a conference call on Tuesday morning.

Technology stocks had initially opened higher but quickly retreated as Yahoo and Google dragged on the sector.

This just in: Yahoo has rejected Microsoft's offer AGAIN.

Yahoo Chairman Roy Bostock called the latest offer from Microsoft and billionaire investor Carl Icahn "ludicrous," setting the stage for a showdown at Yahoo's annual shareholder meeting on Aug. 1.

Of course, Wall Street is watching how this shakes out for Google , but Google is a little busy at the moment, defending and defining its position on YouTube user identity in a lawsuit brought by Viacom , parent of MTV and Comedy Central.

Apple , meanwhile, bobbed higher in the sea of red in the tech sector, as the company announced that it sold one million units of its new 3G iPhone in its debut weekend.

There are a slew of tech earnings on tap this week, including Intel on Tuesday, eBay on Wednesday and IBM , Microsoft and Google on Thursday.

This is a big week for earnings overall, with reports also due out from Coca-Cola , JPMorgan and Merrill Lynch, among others. Analysts will be watching the outlooks closely for signs of what to expect in the second half.

"Summer is typically difficult for the market anyway but we've seen a fairly aggressive selloff here," Gayle said. "I think investors are going to be looking for something that they've heard the worst of it. If that's the case, it would be setting ourselves up for the traditional summer rally," he said.

Meanwhile, the bitter war between Bud-maker Anheuser-Busch and Belgian brewer InBev ended with Anheuser embracing an improved, $70-a-share offer from InBev that would create the world's biggest beer maker.

Investors must like the taste of Belgian beer: Bud shares rose.

FedEx may be in talks to buy Dutch mail company TNT, the Financial Times reported.

Asian markets closed lower as the Fannie-Freddie news failed to alleviate all the fears over the health of the financial sector, while European stocks advanced as UK bank Alliance & Leicester jumped more than 50 percent on news that it had reached a deal to be bought out by Spain's Santander.

This Week:

TUESDAY: PPI; retail sales; NY Fed manufacturing report; business inventories; Fed's Bernanke, Yellen speak; Earnings from J&J, State Street, US Bancorp, Intel, CSX
WEDNESDAY: Mortgage applications; CPI; industrial production; Bernanke speaks; oil inventories; Fed minutes; Fed's Hoenig speaks; Earnings from Delta, Wells Fargo, eBay and Yum
THURSDAY: Jobless claims; housing starts; Philly Fed manufacturing report; natural-gas inventories; Earnings from Coke, JPMorgan, Nokia, PNC Bank, IBM, Google, Microsoft, Capital One and Merrill Lynch
FRIDAY: Earnings from Citigroup, Honeywell

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