Stocks declined Monday, led by financials after two more banks folded. Oil ticked higher after three straight weeks of decline.
"It's all about financials right now," Paul Nolte, director of investments at Hinsdale Associates, told Reuters. "We saw a couple of small banks go 'belly up' over the weekend. Now people are wondering what's going to happen next and when," Nolte said.
All three major indexes -- the Dow Jones Industrial Average, the S&P 500 index and the Nasdaq -- ended off about 2 percent, falling back into bear-market territory, defined as 20 percent below their recent high.
Oil bounced back , rising $1.47 to settle at $124.73 a barrel, after militants sabotaged two oil pipelines in Nigeria and Iran rattled some cages, saying it had doubled the size of its nuclear program. Oil fell more than $6 last week and is down about 14 percent from its record close of $145.29 set on July 3.
Oil's resurgence slammed consumer-discretionary stocks, including homebuilders, airlines and retailers.
The heavy-hitting economic data don't come until later in the week but Minneapolis Fed President Gary Stern offered some cause for concern, saying that headwinds to economic growth may be picking up, while inflation is still a rising too rapidly.
The Dallas Fed branch said its gauge of regional manufacturing activity dropped to minus-27.4 in July from minus-42.1 in June.
The national reading on manufacturing from the ISM is due out on Friday, along with the July employment report and auto sales.
The market was buzzing after major buyout firm KKR said it would go public this year in a complicated transaction that involves delisting a publicly-traded fund in Amsterdam through a buyout.
Financials were the day's biggest loser after more shoes dropped in the sector this weekend: Federal regulators shut down two more banks, First National Bank of Nevada, and First Heritage Bank, based in Newport Beach, Calif. Customer accounts were sold to Mutual of Omaha Bank.
This move came two weeks after the FDIC seized IndyMac bank, also based in California.
And market pros say more banks are likely to failbefore the financial sector can recover.
"My real concern is that we're not finished," says Kathy Boyle, president of Chapin Hill Advisors in New York. "Wall Street would like to think that the worst is over, but we've been saying that for a while."
The S&P financial-sector index dropped 4.8 percent. AIG and Citigroup were among the top drags on the Dow, falling 12 percent and 7.5 percent, respectively. Among other notable decliners in the sector, Merrill Lynch lost 12 percent.
Treasury Secretary said the nation's four largest banks -- Bank of America, Citigroup, JPMorgan Chase and Wells Fargo -- are ready to launch a market for covered bondsto help boost the home-mortgage market. Covered bonds are issued by banks and secured with assets. Paulson said the covered bond was a "promising financing vehicle."
"Mad Money" host Jim Cramer said Paulson's bonds don't offer much cover-- at least not the kind the market needs right now.
Meanwhile, Fannie Mae fell 11 percent and Freddie Mac shed 6.6 percent after Congress on Saturday approved a housing-rescue bill.
Merrill Lynch said Lehman Brothers is likely to post a loss for the third quarter and take an additional $2.5 billion in writedowns for home loans. Lehman shares lose more than 10 percent.
In today's earnings news, Dow component Verizon said its earnings rose 12 percent, helped by strong wireless sales, which offset a drop in landline users. Verizon shares fell 2.5 percent.
Shares of Kraft Foods rose 5 percent after the maker of Oreo cookies and Kraft cheese beat expectations and raised its full-year forecast.
But Tyson Foods skidded 7 percent after the meat producer reported a 92-percent drop in net incomeas results were hurt by a jump in grain prices.
Amgen jumped 12 percent after the pharmaceutical company on Friday said its experimental osteoporosis drug significantly reduced the risk of bone fracturein post-menopausal women. One analyst dubbed the drug a "future blockbuster."
Stocks in Europe were lower across the board, after the region's largest low-cost airline said profit plunged 85 percent in the latest quarter. Asian indexes were mostly higher, with shares in exporters following a rise in the U.S. dollar.
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; Yahoo annual shareholder meeting; Earnings from Chevron
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