Auto Gains Help Offset Drag of Financials

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

Increasing optimism about loans to the U.S. auto industry helped drive major indexes out of negative territory, albeit fleetingly. General Motors was the top gainer on the Dow Jones Industrial Average and S&P 500, while Ford was among the top gainers on the Nasdaq.

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 a growing chorus of analysts say it's increasingly likely that government money is on the way for U.S. auto makers to help ease liquidity concerns.

Goldman Sachs today said it is "more likely than not" that government money is coming 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.

Crude oil briefly dropped below $100 a barrel after trading close to $102 earlier as Hurricane Ike barreled toward the Texas Gulf Coast.

Financials were the primary source of discontent but turned mixed by midday as some banks -- including Washington Mutual -- turned higher.

The market breathed a sigh of disappointment as 6 a.m. ET came and went with nary an announcement from Lehman Brothers.

"Bear Stearns was supposed to end it. … Now they’re talking about Lehman," Art Cashin, director of floor operations at UBS Financial, told CNBC. "With no deal when the Asian markets opened, people think the negotiations are going to be pushed into the weekend to give them a couple of more hours to look at things. And already, they’re looking for the next rumor-monger victim behind Lehman."

"The frustration is palpable," Cashin said. The real problem is that "everybody’s got to be very careful with their words. Because, even if somebody’s in reasonably good condition, you can cause a run on a bank … This is a very dangerous business," Cashin said.

Lehman Brothers shares dropped more than 10 percent, to the mid-$3 range, after gaining as much as 25 percent premarket amid hopes of a buyout.

The investment bank is still actively working toward finding a buyer, with several big names being bandied about including Barclays, Bank of America and HSBC . Company officials are trying to get a deal wrapped up and announced by Sunday night, people close to the deal tell CNBC.

Officials from the Federal Reserve and the Treasury are involved in the negotiations, these people say, but as of right now, there are no plans for the government to provide financial assistance to facilitate a purchase of Lehman in the way that the Federal Reserve provided a backstop to JPMorgan Chase when the brokerage agreed to purchase Bear Stearns in March.

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

U.S. Treasury Secretary Henry Paulson is "adamant" that no government money be used in any Lehman deal, sources familiar with the situation said.

Meanwhile, Ladenburg Thalmann's analyst Richard Bove said Bank of America is likely to win the auction for Lehman Brothers as it is a "natural fit."

Washington Mutual shares skidded more than 8 percent, then popped into positive territory, 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. The stock has lost more than 92 percent of its value in the past 52 weeks.

Among other financials in traders' crosshairs today were AIG , which plummeted 15 percent, making it the biggest drag on the Dow and S&P, and Merrill Lynch, which tumbled 10 percent.

AIG has caught Wall Street's attentionas it has half a billion invested in Fannie Mae and Freddie Mac, which are now being taken over by the government, and may need to raise additional capital. If Fannie, Freddie and Lehman are any example, good luck with that. CEO Robert Willumstad is expected to unveil a turnaround plan on Sept. 25.

You have to look at the big picture, cautioned Tobias Levkovich, chief U.S. equity strategist at Citi. "There are different things going on in the market than there are at individual companies," Levkovich said. He sees the problem areas as energy, materials and industrials, and is overweight on health-care equipment and services, banks, insurance, chips and chip equipment.

Andrew Busch, global FX strategist at BMO Capital Markets agreed, but with a caveat.

"This is not a systemic risk per se for the entire financial sector. Otherwise we would’ve seen the whole sector sell off," Busch said. However, he points out that the spreads between the three-month Libor and overnight index swaps are back at March highs, which means banks are leary of lending to one another.

"Yes, they may be looking past it but you have to think this can’t be good," Busch said.

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.