Dow Falls Below 11000 as Fears Rattle Market

The Dow industrials dropped below 11000 for the first time in nearly two years after Treasury Secretary Henry Paulson said he sees no bailout on the horizon for Fannie Mae and Freddie Mac. Another $5 surge in oil prices fanned the market flames.

The Dow Jones Industrial Average dropped by triple digits in the first few minutes of trading and never looked back. The blue-chip index dropped below 11000 twice during the session, a level not seen since the end of July 2006.

The S&P 500 index, which crawled -- barely -- out of bear-market territory on Thursday, plunged back into the clutches of the bear, joining the Dow and Nasdaq.

Fannie Mae and Freddie Mac were off nearly 50 percent at point, before paring that back by about half, as the market was gripped with fear that a Fannie and Freddie bailout would wipe out investors.

Not even perennial optimist Jack Bouroudjian, of Brewer Investment Group, could find a positive spin on the Fannie and Freddie situation.

"The only optimism today is the fact that if you’re long GE stock, you’re probably the only one smiling," Bouroudjian said on CNBC. "What we’re looking at right now … is a lack of response … confidence that is completely washed away from these stocks but more importantly, the market collectively is holding its ear out, waiting for something to be done," he said.

"Sometimes, I feel as if we're in ancient Rome and Nero is playing the fiddle while Rome is burning around us," Bouroudjian said.

Paulson said the Treasury Department is intent on supporting Fannie and Freddie "in their current form" and that he sees no government bailoutfor the troubled pair.

General Electric shares ticked higher after the parent of CNBC met earnings expectations-- a welcome relief after last quarter's dismal miss -- but said it expects its third-quarter profits to be flat or down at its finance arms.

Just before the numbers, GE announced that it has agreed to sell its Japanese consumer-finance operation for $5.4 billion to Japan's Shinsei Bank. This comes a day after the conglomerate announced plans to spin off its consumer and industrial units, which include the appliances and lighting divisions.

Among other financials in traders' crosshairs today: Lehman Brothers tumbled 18 percent.

The whole sector took a hit -- even JPMorgan , whose exposure to credit issues is less than many of the other Wall Street titans, dropped more than 3 percent.

Banks fell sharply, with Bank of America, Washington Mutual and Wachovia all down more than 4 percent.

Adding to the market's jitters, again jumped more than $5 a barrel, briefly topping $147 a barrel, amid fears of supply disruptions and weakness in the dollar.

CNBC's Jim Cramer noted on "Squawk Box" this morning a trade that seems to be working lately: Steer clear of oil stocks in the morning, but then jump in at midday. "It works over and over -- it's made people hundreds of thousands of dollars," Cramer said.

(Cub or bear market: Is the carnage almost over? Click on the video at left.)

On the upside -- yes, there was one today -- consumer confidence rosein early July as retail discounts buoyed the mood of shoppers. Reuters and the University of Michigan reported their consumer-sentiment index ticked up to 56.6 in a mid-July reading from 56.4 at the end of June. The uptick was a nice surprise but the survey showed that most of the country believes the economy is in a deepening recession.

In other economic news, the U.S. trade deficit narrowed unexpectedlyin May, as both exports and imports hit record highs and the average price for imported oil surged. The trade gap narrowed to $59.8 billion in May, from a slightly downwardly revised estimate of $60.5 billion for April.

A separate report showed import prices rose 2.6 percent in June, though most of that was due to energy prices. Excluding energy, import prices were up 0.9 percent. Export prices climbed 1 percent.

Citigroup also looked to streamline its operations and raise capital by selling its German retail business to France'sCredit Mutuel for $7.7 billion. Citigroup shares fell more than 2 percent.

Meanwhile Apple's "second coming" iPhone got a hot reception, with buyers storming stores in Asia and queues forming in European cities. Investors were less enthused, though, sending shares down 1 percent.

That's par for the course with Wall Street, jazzed up until the big day, then already wondering what's next before the guys who spent the night in lawnchairs get to the cash register.

One of the buzz points out of Sun Valley is a Google phone is due out later this year.

gPhone, anyone?