Stocks declined, but finished off earlier lows, as a fresh wave of dour financial news offered a reminder that the credit crunch is far from over.
The Dow Jones Industrial Average fell 134.50, or 1.1 percent, erasing nearly all of last week's 1.3-percent gain. The S&P and Nasdaq also shed more than 1 percent. The CBOE Volatility Index, a gauge of fear in the market, shot up 11 percent.
S&P slashed its rating on several big U.S. banks, including Lehman Brothers , Merrill Lynch and Morgan Stanley .
One of the things weighing on financials is concern about overseas banks, which haven't yet taken any large write-downs, said Michael Cohn, chief investment strategist at Atlantis Asset Management.
"Europe is going to have to go through their own pain," Cohn said. "People are once again realizing that ... the worst isn't over yet."
"It's a waiting game," Cohn said, adding, "you shouldn't touch a financial with a ten-foot pole!"
New signs of trouble across the Atlantic emerged Monday.
U.S. private equity group Texas Pacificagreed to buy a 23 percent stakein Bradford & Bingley, providing a much-needed boost for the troubled UK lender as conditions in the UK mortgage market deteriorate.
There were also a few shake-ups on the executive floor.
Wachovia shed 1.7 percent after the fourth-largest U.S. bank announced that it hasousted CEO Ken Thompson, who has come under fire as the firm suffered through a series of credit-related problems. Wachovia said Chairman Lanty Smith will serve as interim CEO until a successor is found.
Washington Mutual , which has taken a hit from the mortgage slump, announced that it would strip CEO Kerry Killinger of his chairman title. WaMu shares, which have plunged 79 percent in the past year, finished flat.
Financials were the biggest decliners of 10 key S&P sector indexes, sliding 1.5 percent.
In still more financial news, General Electric, CNBC's parent company, said GE Commercial Finance will acquire Banco Santander's Italian commercial bank Interbanca. In turn, the Spanish bank agreed to buy GE Money's businesses in Germany, Finland and Austria, and its card and auto businesses in the U.K. Both deals are valued at about 1 billion euros ($1.55 billion).
Economic data didn't help stocks either, fanning concerns about inflation.
The Institute for Supply Management reported its manufacturing-activity index unexpectedly rose in May to 49.6, just shy of the 50 mark, which indicates expansion. That was up from 48.6 in April. However, an inflation gauge in the report surged to its highest level since April 2004.
"Manufacturers find themselves caught between rising costs and weakening demand in many industries," the ISM said. "Exports continue strong due to the weak dollar -- without the weak dollar the story would be much more negative in manufacturing."
Meanwhile, construction spending slipped 0.4 percent in April, but came in better than expected.
Auto makers were on the radar ahead of May sales, due out Tuesday. Analysts expect to see steep declines.
Last week, Ford warned that it no longer expects to post a profit in 2009 amid sluggish sales of its pickups and SUVs. Toyota is also mulling lowering its U.S. sales outlook.
Shares of General Motors , however, rose 2 percent, making the stock the biggest gainer on the Dow, after a weekend report in Barron's that said GM shares could triple over the next few years.
"I"m skeptical," Cohn said, of the optimism-fueled buying. U.S. auto makers "don't have a snowball's chance of making money more than one year in a row -- something always comes back to conspire against them," he said. "It's going to take years and years" for them to recover.
Shares of Harris Corp. tumbled after the defense-communications and information-technology company said it is not for sale and is not pursuing a merger. The announcement, which broke weeks of speculation, was uncharacteristic as the company doesn't usually respond to rumors. But CEO Howard Lance said the company felt obligated to issue a statement as the rumors could be damaging to the company and fuel speculation in its stock. Shares had risen more than 6 percent on Friday after a report in the Wall Street Journal suggested that preliminary bids were in the low $70s per share.
Biotechs including Genentech and Amgen were among the day's few bright spots as promising treatments emerged from ASCO, the world's biggest cancer conference, being held in Chicago.
Shares of budding biotech firm Acorda Therapeutics soared 31 percent after the company said it planned to submit its most promising drug for FDA approval as soon as next year. The drug, called fampridine, was encouraging in a second late-stage trial for helping patients with multiple sclerosis walk better.
ImClone Systems , shares skidded 6.1 percent after a study showed the company's Erbitux cancer drug helped lung-cancer patients live just one month longer when added to standard chemotherapy.
TUESDAY: Auto sales; factory orders; Bernanke speaks; Earnings from Toll Brothers, Hovnanian; Montana, New Mexico primaries
WEDNESDAY: MBA mortgage applications; productivity; ISM services index; crude inventories; Bernanke, Lockhart speaks
THURSDAY: Jobless claims; Fed's Plosser speaks; Earnings from Nat Semi
FRIDAY: Jobs report; wholesale trade; consumer credit; Fed's Evans, Bullard speak
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