Stocks declined Monday as a more than $16 jump in oil prices exacerbated the selloff on Wall Street started by worries about the ability of the government bailout to revive the financial system.
"It's the fear of the unknown," said Al Goldman, chief market strategist at Wachovia Securities. "We got used to writeoffs ... we had so many shoes drop that it didn't mean anything. Then, over the weekend, we get Wall Street has changed forever," Goldman said. "This is a real shock."
The Dow Jones Industrial Average lost nearly 373 points, or 3.3 percent, to close at 11015.69. Much of that was due to financial stocks, which accounted for three of the top four decliners. (Track the Dow winners & losers.)
The S&P 500 fell 3.8 percent, while the tech-heavy Nasdaq skidded 4.2 percent despite enthusiasm for stock buybacks in the sector.
Crude oil rocketed $16.37, or 16 percent — the biggest one-day move in both dollar and percentage terms — to settle at $120.92 a barrel amid a massive short squeeze. (See a list of the top 10 oil moves by dollar and percent.)
The October crude contract expires today and a big reason for today's oil rally was short covering. Short covering occurs when a buyer borrows a stock, betting it will go down, then has to buy it back at that lower price. A lot of traders were short oil, assuming the only way it could go was down, then had to cover their bets before the contract expired.
The big shock this weekend was that the last two pillars on Wall Street — Goldman Sachs and Morgan Stanley — are being converted into commercial bank-holding companies instead of stand-alone investment banks. The two banks will now be able to create commercial banks, but will be subject to tighter regulation.
Goldman shares fell 7 percent. Morgan Stanley eased just 0.4 percent after Japan's largest bank, Mitsubishi UFJ Financial Group, said today that it plans to buy a 10 to 20 percent stakein the firm.
Morgan Stanley had been in talks to merge with Wachovia but sources close to the deal say these latest developments put any such deal on the back burner — possibly forever.
Wachovia shares shed 12 percent after being downgraded by Stifel Nicolaus to "hold" from "buy." Analysts said the stock's recent run up was "too much, too soon."
JPMorgan was the Dow's biggest drag, shedding about 13 percent, after Sandler O'Neill downgraded the stock to "hold" from "buy."
Wells Fargo ws also downgraded by Sandler O'Neill. Its stock 12 percent.
Meanwhile, Japanese brokerage house Nomura Holdings reached a deal to buy the Asian operations of Lehman Brothers, . UK bank Barclays has already snapped up the core US business held by Lehman.
The short-selling ban did little to help financials — even after it was expanded.
York Stock Exchange announced Monday plans to add 30 more stocks to the short-selling ban list, including CNBC parent General Electric , CIT Group , Legg Mason and American Express . (See a list of the 30 stocks added and the original 799.)
(What is the impact of this global "war on shorts?" Click on the video at left.)
Washington Mutual tumbled 22 percent, while Wachovia and Wells Fargo were off more than 11 percent.
The government bailout plan was chugging along. The Bush administration and Congress stepped up talks on the $700 billion-plus plan, which will give the Treasury powers to buy toxic assets. Congressional Democrats want to add provisions to include aid for homeowners. The plan could ultimately wind up costing $1.8 trillion.
While the financials continued to flail, a trio of cash-rich firms -- Microsoft , Hewlett-Packard and Nike -- launched stock buybacks and dividend increases.
Investors will be watching other cash-saturated companies such as Apple , Google and Research In Motion to see if they are willing to share the love, too.
Adding pressure to Apple stock, JPMorgan slashed its price target on the stock.
Kraft Foods skidded more than 4 percent on its Dow debut. The snack maker's stock was added to the Dow today, replacing AIG , which jumped 23 percent.
TUESDAY: Richmond Fed manuf. report; Earnings from Lennar
WEDNESDAY: Bank Reserve Settlement; Fed's Bernanke and Lacker speak; weekly mortgage applications; existing-home sales; weekly oil inventories; Earnings from Bed, Bath & Beyond and Nike
THURSDAY: Paulson testifies; Chicago, Dallas Fed presidents speak; jobless claims; durable goods; new home sales; natural-gas inventories; Kansas City Fed manuf. report; Earnings from Discover, Rite Aid and Research In Motion
FRIDAY: St. Louis Fed pres. speaks; Last look at Q2 GDP, corporate profits; consumer sentiment; Earnings from KBHome
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