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Banks Lead Decline as Credit Worries Linger

Stocks declined Monday, led by financials, as investors waited for some resolution on Fannie Mae, Freddie Mac and Lehman Brothers following rampant speculation last week.

"It still is about the financials," Steve Grasso, a broker for Stuart Frankel, told CNBC. "There's absolutely nothing that's attractive about this whole sector going forward in the near term."

But let the investor beware: Light end-of-summer volume can burn you like too much time on the beach without sunscreen.

"If you have no volume, this market's going to move around like a paper airplane," Grasso said, explaining that a trader could be up 10 percent, then down 10 percent within 1-2 days in a market like this.

All three major indexes -- the Dow Jones Industrial Average, the S&P 500 and the Nasdaq — were all down nearly 2 percent.

AIG hit a 13-year low and was the biggest drag on the Dow after Credit Suisse cut its third-quarter estimate and price target for the insurer, citing hefty losses at the company's derivatives business.

Credit Suisse said, given AIG's credit-default swap portfolio, it's one of the most exposed to recent credit deterioration. And, Credit Suisse estimates that AIG is facing a $6.5 billion loss, more than twice the firm's prior estimate of $2.6 billion.

Among other Dow components, Caterpillar , an industrial conglomerate with heavy overseas exposure, tumbled amid worries that the U.S. slowdown is now spilling across the globe.

The International Monetary Fund trimmed its outlook for 2008-2009 world economic growth, taking 2008 down to 3.9 percent from last month's estimate of 4.1 percent, and 2009 down to 3.7 percent from 3.9 percent. The IMF left unchanged its forecast for U.S. growth of 1.3 percent this year but cut its 2009 U.S. forecast to 0.7 percent from 0.8 percent. The IMF's concerns were said to be high and volatile commodity prices as well as market turbulence through 2009.

More speculation about Lehman Brothers: Private-equity firm Kohlberg Kravis Roberts has a "high level of interest" in buying Lehman's crown jewel, the Neuberger & Berman money-management firm, CNBC has learned.

Earlier, a top South Korean regulator expressed concern about the potential buyer bandied about last week, state-run Korea Development Bank.

(Should Lehman CEO Dick Fuld be fired? Click on the video at left.)

Fannie Mae and Freddie Mac continued to get pressed by short sellers amid the increased likelihood of a federal bailout of the home-funding giants.

Citigroup said it is unlikely that the home-financing giants will be nationalized and slashed its price targets on the stocks, cutting Freddie to $6 from $16 and Fannie to $9 from $21, according to theflyonthewall.com.

Freddie Mac sold $2 billion of debt Monday, aiming to reassure investors that it can stay afloat without a government takeover.

Adding to the credit jitters, regulators shuttered Columbia Bank, the ninth U.S. bank to fail this year, and Indiana sued Countrywide Financial, becoming the latest state to take the mortgage lender to court over its lending practices.

Crude oilslipped below $115 a barrel after the biggest one-day percentage drop in nearly four years on Friday, when crude fell more than 5 percent to settle at $114.59.

The dollar was lower against the yen and steadied against the euro. The U.S. currency hit a two-year high against the pound amid increased worries about a UK recession.

General Motors and Ford slipped following a report that U.S. auto makers are likely to post big declines in August sales despite a slight improvement in industrywide sales.

The big news of the past week has been that U.S. auto makers are seeking a bailout from the U.S. government. The Big Three plan to urge Congress to support funding of up to $50 billion in low-interest loans over three years to help them modernize their assembly plants and develop next-generation fuel-efficient vehicles, with representatives of the industry insisting this is not a bailout but a response to the new market conditions.

Shares of Advanced Micro Devices rose amid news that the company will sell its TV-chip division to Broadcom for $192.8 million. The sale is part of AMD's plan to pare debt and boost profitability.

In economic news, existing-home sales rose 3.1 percent to a 5 million annual rate, the highest level in five months, as discounts lured buyers, the National Association of Realtors said. The national median existing-home price dropped 7.1 percent from a year earlier to $212,400.

THIS WEEK:

MONDAY-THURSDAY: Democratic National Convention in Denver

MONDAY: Existing-home sales; Reports from Chicago, Dallas Fed branches; Earnings from China Unicom
TUESDAY: ICSC chain-store sales; Case-Shiller home-price index; New-home sales; Richmond Fed report; consumer confidence; Fed minutes; Census bureau releases 2007 stats; Earnings from Smithfield Foods, Big Lots
WEDNESDAY: Weekly mortgage applications; durable goods; Fed's Lockhart speaks; weekly crude inventories; Report from Chicago Fed; Earnings from American Eagle, Dollar Tree
THURSDAY: Jobless claims; GDP, corporate profits; natural-gas inventories; Earnings from Sears Holdings, Tiffany and Dell; Barack Obama's acceptance speech
FRIDAY: Personal income and spending; Chicago manuf. report; consumer sentiment; farm prices

WATCHERS: McCain VP announcement

Send comments to cindy.perman@nbcuni.com.

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