Stocks wobbled Friday as investors weighed a potential S&P downgrade on Fannie Mae and Freddie Mac against some encouraging economic reports, including consumer confidence and durable-goods orders.
Standard & Poor's warned it may cut its ratings on subordinated debt and preferred stock of Fannie Mae and Freddie Mac, citing concerns that the government rescue of the mortgage-finance giants may subordinate their debt.
In economic news, consumer sentiment improved in July from the prior month, when sentiment was at the lowest since in the early 1980s, helped by the tax-rebate checks. Reuters and the University of Michigan said their gauge of consumer sentiment jumped to 61.2 in July from 56.4 in June. Economists had expected the measure to be little changed.
Durable-goods orders rose 0.8 percent in June, the Commerce Department reported. That was much better than the 0.3-percent drop economists had expected. Excluding transportation, orders rose 2 percent. A gauge of business spending increased 1.4 percent.
Robert Brusca of FAO Economics cautions not to "judge a book by its cover -- or a durable-goods report by its headline." He points out that, excluding defense, orders rose just 0.1 percent and declined for the prior two months.
Still, the durables report, delivered before the opening bell, snapped futures out of their morning meander that resulted from concerns that stocks won't be able to escape the claws of a bear market without the foundation of a solid housing market to build on.
Friday also brought some new insight on the housing market: New-home sales fell 0.6 percent in June, the seventh decline in the past eight months, but it was a smaller-than-expected drop.
“New home sales look to be reaching a bottom and that is good news for everyone,” Joel Naroff of Naroff Economic Advisors, wrote in a note to clients. "We have moved up from the truly awful March number and seem to be settling on a somewhat higher base," he said, noting that the prior two months were revised up sharply.
So, the question becomes: Will the market move higher or get bogged down in housing worries?
"I think we can kind of grind higher," Art Hogan, managing director at Jefferies, said on CNBC. However, "I think it’s going to be predicated on two things: We can’t have a major skeleton fall out of the closet on the financial side -– we can’t have a company come out that absolutely blows up the financial sector. And then the other piece is we need to have this benign to downward motion in crude pricing."
Crude dropped more than $2 a barrel to settle at $123.26 a barrel.
Washington Mutual shares were down as much as 10 percent on the New York Stock Exchange, after an 8 percent jump in German trading after the savings-and-loan giant responded to an analyst note that said creditors are pulling funds from the company.
Shares of Wachovia fell after Morgan Keegan cut its rating on the bank's stock to "underperform."
Other financial shares also skidded as investors locked in profits from the sector's recent rally.
Bank of America was one of the biggest drags on the Dow and S&P, though is still up about 7 percent for the week.
General Motors was the biggest decliner on the Dow.
Meanwhile, members of Merrill Lynch's brokerage sales force might be poached by rivalMorgan Stanley as the Wall Street bank pushes on with a major recruitment drive.
And officials at Lehman Brothers have been mulling the sale of part or all of its Neuberger Berman asset management unit, sources told CNBC.
Qualcomm helped lead gains on the Nasdaq after several brokerages raised their price targets on the chip maker's stock.
Shares of Abercrombie & Fitch skidded after the teen apparel retailer's CFO resigned.
On Tap for Next Week:
MONDAY: Dallas Fed branch reports on manufacturing; Fed's Mishkin speaks; Earnings from Kraft, Verizon
TUESDAY: Case-Shiller home-price index; consumer confidence; Earnings from Colgate-Palmolive, Electronic Arts, Northrop Grumman, Sony, US Steel and Viacom
WEDNESDAY: Mortgage applications; crude inventories; Earnings from Comcast, Disney, Interpublic, Starbucks and Visa
THURSDAY: Q2 GDP; Chicago and Kansas City Fed branches report on manufacturing; Earnings from Aetna, Altria, ExxonMobil and Motorola
FRIDAY: Auto sales; Jobs report; construction spending; ISM manufacturing report; Earnings from Chevron
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