If you were holding your breath for a big Warren Buffett-inspired rally today, now is probably a good time to exhale.
Stocks made a modest advance at the open but gains quickly fizzled as congressional hearings on the government's $700-billion bailoutresumed.
Warren Buffett's $5 billion infusion into Goldman Sachs "certainly added some confidence to the financial sector," said Art Hogan, chief market analyst at Jefferies. But then, the congressional hearings delivered the "harsh reality that nothing moves fast through the House and Senate," Hogan said.
Wall Street wanted to see the plan passed this week — "That was the understanding last week," Hogan said, adding that the market will remain in limbo until the bailout is approved.
Stocks got an afternoon pick-me-up during a break in the hearings as investors rummaged around and found some optimism that a bailout would boost tech spending. Rumors that a cap on executive pay could be added as a condition for passing the bailout plan also spurred some buying.
Hogan said the rally in tech stocks was probably more about hope for more buybacks and dividend payouts.
Among technology stocks, Oracle , Apple rose more than 1 percent, while Dell gained more than 2 percent.
By the closing bell, all three major indexes flattened out: The Dow Jones Industrial Average shed 29 points, or 0.3 percent to close at 10825.17, while the S&P 500lost 0.2 percent and the tech-heavy Nasdaq gained 0.1 percent.
Financials gave up their Buffett-fueled gains, ending the session down more than 1 percent.
The top three gainers on the Dow were: Merck , Procter & Gamble and Microsoft .
Citigroup , General Motors and Caterpillar were the biggest Dow decliners. (Track the Dow winners losers.)
Goldman Sachs, among a handful of financials left standing by the closing bell, jumped 6.4 percent. Under terms of the deal, Buffett's Berkshire Hathaway will buy $5 billion of perpetual preferred stockthat carries a 10 percent dividend. It also will receive warrants to buy $5 billion of common stock at $115 per share, exercisable within five years, which could give it a roughly 10 percent stake in Goldman. Last week, Goldman said it averaged 448.3 million common shares in the quarter ended Aug 29.
Sumitomo Mitsui Financial Group, Japan's third-largest bank, plans to invest several billion dollars in Goldman, Kyodo news agency reported. An SMFG spokesman said he couldn't confirm the Kyodo report.
Shares of Wachovia Bank dropped more than 6 percent after reports that merger talks with Morgan Stanley have ended. Morgan Stanley shares skidded 12 percent.
Investors may have failed to keep the faith in financials through the closing bell but the market was peppered with "Buy banks!" sentiment all day.
Commercial banks are not the problem, Ladenburg Thalmann's Richard Bove told CNBC. What we’ve seen fail, Bove said, are investment banks, home-financing companies and an insurance company – not a major bank. That’s because banks are funded by deposits and their investments are diversified.
(Time to buy banks? Click on the video at left.)
Plus, look at the numbers: We’ve seen a number of smaller banks including Wells Fargo and PNC Financial hit all-time highs recently, Bove said.
Going forward, “What you're looking at is a commercial-bank system and you gotta be buying commercial-bank stocks,” Bove advised.
Jack Bouroudjian of Capital Markets Technology agrees – he’s been pro-financials for a couple of weeks now. “Transactional banking is where you want to be,” Bouroudjian said, offering Bank of America as an example. “We’ll be be looking back on [BAC] and saying they made all the right decisions at the right time.”
Bouroudjian also likes the exchanges like CME Group because banks will need leverage and that’s where they’ll start to look, he said.
Meanwhile, questions continue to mounton the fate of the government's $700 billion bailout package under debate in Congress, with some traders disappointed of the way the Federal Reserve has presented the case to lawmakers.
The proposal has received an icy reception on Capitol Hill as both parties have demanded changes in the White House-backed proposal and conservative Republicans have recoiled at the prospect of federal intervention into private capital markets.
The Securities and Exchange Commission's ban on short-selling to prevent speculation should be followed by similar actions in the oil market, where speculative trading is rife, some traders say, according to Ben Liechtenstein, president at Tradersaudio.com.
"Why are we accepting long positions in crude oil and not expecting delivery?" Liechtenstein told CNBC.
Crude oil fell 88 cents to settle at $105.73 per barrel, after the EIA reported that crude supplies declined by 1.5 million barrels last week. Earlier, oil was up more than $2 a barrel.
On the home front: Mortgage applications fell 10.6 percentlast week and existing-home sales fell 2.2 percent in August after a July jump. However, the supply of homes on the market dropped by 7 percent last month, the biggest drop since a 9.4-percent decline in December 2006.
Homebuilder stocks finished higher, including Hovnanian, Toll Brothers , KB Homes and Lennar, which shot up 16 percent.
STILL TO COME:
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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