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AIG Worries Drag on Dow; Autos Gain

Cindy Perman|CNBC.com
Friday, 12 Sep 2008 | 3:59 PM ET

You know Wall Street, always on to the next thing before the last one is even finished.

There hasn't even been a deal on Lehman Brothers yet and already the Street is looking ahead to who's next, setting its crosshairs on AIG.

AIG was an albatross around the Dow, falling 25 percent as traders have started to raise questions about its viability.

Meanwhile, they're bidding up auto makers amid hopes that they're the next to get a handout from the federal government. General Motors was the top gainer on the Dow.

As a result, all three major indexes -- the Dow Jones Industrial Average and S&P 500 -- spent the day wandering around.

Two-thirds of the Dow 30 were lower at the open amid uncertainty about Lehman Brothers and a disappointing reading on retail sales; that was pared to about half by midday as investors weighed the auto optimism against uncertainty surrounding the financials. (Track the Dow winners & losers.)

General Motors jumped more than 5 percent, making it once again the Dow's top performer, as Goldman Sachs joined the bailout chorus, saying it is "more likely than not" that government money is coming for U.S. auto makers before Congress adjourns at the end of the month. That echoed sentiment a day earlier from JPMorgan.

GM shares are up nearly 40 percent since they hit $10 at the end of August. Shares of rival Ford are up roughly 14 percent in that amount of time.

Financials were the primary source of discontent.

Lehman Brothers shares dropped more than 10 percent, to the mid-$3 range, as the investment bank continues to work toward finding a buyer. Several big names have been bandied about, including Barclays, Bank of America and HSBC . Sources tell CNBC that Lehman expects a deal Sunday night.

The Price We'll Pay
Discussing the risks involved if Lehman fails and isn't merged, with David Kotok, Cumberland Advisors chairman/CIO

Officials from the Federal Reserve and the Treasury are involved in negotiations going on behind closed doors at Lehman, but sources say U.S. Treasury Secretary Henry Paulson is "adamant" that no government money be used in any Lehman deal, the way it was used in the JPMorgan purchase of Bear Stearns in

(What will happen to the market if Lehman fails? Click on the video at left.)

AIG shares plummeted 25 percent, making it the biggest drag on the Dow, as many say it's the next shoe to drop, given its exposure to the mortgage market. The world's largest insurer has half a billion invested in Fannie Mae and Freddie Mac and may need to raise additional capital. CEO Robert Willumstad is expected to unveil a turnaround plan on Sept. 25.

An anomaly in the sector, Washington Mutual shares advanced after the company issued a statement saying it has enough capital. Earlier, the stock was down more than 8 percent after Moody's downgraded it to "junk" status following the bank's announcement that it would add $4.5 billion to its loan-loss reserves.

WaMu shares have lost more than 92 percent of its value in the past 52 weeks.

Other financials were mixed as many investors are reluctant to take any chances on the sector.

Among other financials in traders' crosshairs today was Merrill Lynch, which tumbled more than 10 percent.

But stocks appeared poised to finish higher for the week, with the Dow on track for a 200-point gain.

You have to look at the big picture, Tobias Levkovich, chief U.S. equity strategist at Citi, told CNBC.

"There are different things going on in the market than there are at individual companies," Levkovich said. "The market is actually kind of looking past this," he said, referring to worries about the financial sector.

Levkovich sees the problem areas as energy, materials and industrials, with oil trading down near $100 a barrel and other economies around the world heading for a slump. He's overweight on health-care equipment and services, banks, insurance, chips and chip equipment.


Crude oil flitted below $100 a barrel before settling at $101.18 a barrel amid concerns about Hurricane Ike, which is barreling toward the Texas Gulf Coast.

For the week, oil shed about $5 a barrel.

Retail sales fell 0.3 percent, when economists had expected a 0.2-percent rise amid a drop in gasoline prices and weak consumer spending. Excluding autos, sales were off 0.7 percent, lower than the 0.2-percent drop expected.

In other economic news: Producer prices fell 0.9 percentin August, nearly double the 0.5-percent decline expected, but core prices rose 0.2 percent, as expected. Consumer sentiment hit an eight-month highin a mid-August reading, blowing past expectations, amid relief over lower gasoline prices. Business inventories increased by 1.1 percent in July, the highest in more than four years and more than double of what was expected, as auto inventories ballooned.

NEXT WEEK:

Monday: Empire State manufacturing survey; industrial production
Tuesday: CPI; Fed meeting; Earnings from Goldman Sachs, Best Buy, Adobe Systems
Wednesday: Weekly mortgage applications; current account; housing starts; oil inventories; Earnings from Morgan Stanley and General Mills
Thursday: Weekly jobless claims; leading indicators; Philly Fed; natural-gas inventories; Earnings from FedEx, Oracle and Palm
Friday: Quadruple witching

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