Stocks Slide Amid Oil, Credit Worries

US stocks declined Thursday as oil surged and worries about the future of Fannie Mae, Freddie Mac and Lehman Brothers weighed on the market.

Crude oil surged past $121 a barrel, climbing for a third straight session, as the dollar weakened, Tropical Storm Fay threatened Gulf operations and tensions with Russia escalated after a U.S. missile-shield deal with Poland.

Short sellers once again roughed up Fannie Mae and Freddie Mac . The stocks tumbled more than 10 percent at the opening bell, had a violent rebound about a half hour later, then resumed their descent. Short selling occurs when a buyer borrows stock at a higher price, betting it will decline, then buying it back at the lower price to profit from the difference.

"It's short covering — that's all it is," Dave Rovelli, managing director of equity trading at brokerage Canaccord Adams, said of the rebound in Fannie and Freddie stocks. "That’s why you see the voiolent snapback — everyone’s chasing to cover their shorts," he said. "It's gonna be like that every day — they're gonna press it, press it, press it."

Fannie and Freddie stocks have been battered throughout the week, suffering declines of more than 20 percent two days this week, amid speculation that they may be taken over by the Treasury and the stocks wiped out.

A collapse of Fannie and Freddie could spark panic selling in the market but market pros say that may be just what the market needs to hit rock bottom and get back on the road to recovery.

CNBC's Jim Cramer aimed his rant Wednesday at Fannie and Freddie, saying trading in the stocks should be halted because they're being manipulated by people with insider information.

Lehman Brothers was down more than 3 percent as the firm found itself under the gun once again. One newspaper report suggested that an asset sale to China's largest brokerage fell through and a separate report suggested the Fed was probing market rumors that Credit Suisse was about to pull a credit line out from under Lehman.

A Citigroup analyst significantly widened his projected loss for Lehman, as well as Goldman Sachs and Morgan Stanley .

Citi analyst Prashant Bhatia said he now expects Lehman to post a third-quarter loss of $3.25 a share, compared with his initial estimate of 41 cents a share.He also expects Lehman to suffer the biggest writedowns of the brokerages, pegging that number at $2.9 billion.

Both Bhatia and Ladenburg Thalmann's Dick Bove have "buy" ratings on Lehman Brothers. Bove just raised his rating to a "buy," saying a hostile takeover of Lehman is possible.

Analyst estimates for third-quarter earnings are coming down across the board, according to Thomson Reuters. S&P 500 company earnings are now expected to rise 3.2 percent during the quarter, down from the prior estimate of 3.4 percent. Financials and consumer-discretionary firms are, not surprisingly, the biggest drag.

Research In Motion ticked higher amid the premier of the company's new BlackBerry, dubbed the BlackBerry "Bold." On the Fast Money midday hit, Pete Najarian, co-founder of optionMONSTER.com, said keep an eye on this stock, there could be a breakout to the upside.

When RIMM has popped above the 100-day moving average ahead of a big product launch like this one, eight out of ten times, the stock has rallied 49 percent in the next 50 trading days, Najarian said, citing markethistory.com.

Gap made Tom Wyatt's interim president of Old Navy title permanent, hoping he will revive the low-cost brand. The company also made Art Peck permanent president of the Gap/Banana Republic division after his interim stint.

The Fed's handling of the credit crisis will come under the microscope this weekend as the central bank kicks off its kicks off its annual meeting in Jackson Hole, Wyo. The main attraction — a speech by Bernanke on financial stability — comes Friday morning.

In economic news, jobless claims fell by 13,000 last week to 432,000; economists had expected a sharper drop of 15,000. The four-week moving average, however, was the highest since the week ended Dec. 1, 2001.

The Philadelphia Federal Reserve reported that manufacturing activity in the region remains week. The branch's manufacturing gauge improved to minus-12.7 in August from minus-16.3 in July. The index has been negative for nine straight months.

The Conference Board reported its measure of the economy's leading indicators fell 0.7 percent in July.

Asian stocks closed lower as investors feared exporters will not be able to weather a world economic slowdown, while in Europe banks dragged stocks down and inflation worries came back into the limelight.

STILL TO COME:

THURSDAY: GM announces investment plans for Ohio plant; Earnings from Gamestop, Heinz, Hormel, Aeropostale, Gap and Intuit
FRIDAY: Fed conference in Jackson Hole begins; Earnings from WPP, AnnTaylor

WATCHERS: Obama is expected to select a running mate this week ahead of the convention

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