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Economic Data Weigh on Stocks

The major indices decline further following the release of the latest FOMC minutes, in a day marked by choppy trading and the release of home-sales and consumer data.

Updated from 1:37 p.m. EDT

Stocks in the U.S. continued to churn in murky action Tuesday as traders digested home-sales data that was as bad as expected, encouraging consumer confidence reports and hawkish notes from an August

Fed

meeting.

Lately, however, the major indices were slumping lower. The

Dow Jones Industrial Average

was down 34 points at 11,352, and the

S&P 500

lost 2.8 points to 1,264. The

Nasdaq

was shedding 18 points at 2,348.

Investors continued to wring their hands over the previous day's reports of a potential takeout of

Lehman Brothers

(LEH)

, whose exposure to bad credit has left its stock on the ropes and management facing questions about its strategy.

Fitch's worries about insurance giant

AIG

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and investment losses at

JPMorgan Chase

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also hurt sentiment in the previous session.

The angst over U.S. financial institutions persisted Tuesday.

The Wall Street Journal

reported that federal regulators have sent "memorandums of understanding," documents that can force banks to raise capital or reduce exposure to high-risk assets, to as many as six banks, including

National City

(NCC)

,

Imperial Capital

(IMP)

,

First State

undefined

and

BankUnited Financial

(BKUNA)

.

The memorandums represent efforts by the Federal Reserve and the Office of the Comptroller of the Currency to head off failures, the report said. Nine banks have failed this year, and five of those have gone under since mid-July. The most recent casualty occurred last week, when a Kansas bank was shut down.

In the technology space, PC maker

Hewlett-Packard

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has completed its purchase of

Electronic Data Systems

(EDS)

. H-P had announced the $13.3 billion deal in May.

Ahead of its merger with

Northwest Airlines

(NWA)

,

Delta

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said it took out a $1 billion loan to increase its cash position as it finalizes the joining of the two companies.

In earnings news, mining company

Rio Tinto

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announced earnings for the first half of 2008 that increased from a year ago and beat analyst estimates.

Specialty retailers

Chico's FAS

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and

American Eagle

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reported quarterly results that declined year over year but came in ahead of expectations. Meanwhile, discount-store operator

Big Lots

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posted rising profits and beat the Street's forecasts.

Smithfield Foods

(SFD)

appeared headed for a tougher day after it swung to a first-quarter loss on rising commodity costs.

As for economic data, the Conference Board's measure of August consumer confidence came in at 56.9, showing an improvement in sentiment from July's reading of 51.9 and a better look than economists had been expecting.

Because consumer confidence is highly correlated with gasoline prices, the decline in gasoline prices in recent weeks has contributed to the bolstered consumer, wrote Ian Shepherdson, chief U.S. economist for High Frequency Economics, in an email. He said the August bump in confidence pales in comparison with the substantial decline of the last year, however.

The June Standard & Poor's/Case-Shiller home-price index fell 15.4% from a year ago. The index declined 0.5% from May to June.

Meanwhile, the Census Bureau said that new-home sales in July rose to an annual rate of 515,000 units, an increase of 2.4% over June's revised figure of 503,000. The initial June reading had homes selling at an annual pace of 530,000 units. "We still can't say with any confidence that sales have hit bottom, though the rate of decline has certainly slowed," wrote Shepherdson. He said that a decline in inventories is an encouraging sign.

Chris Johnson, chief executive officer of Johnson Research Group, said that analysts were expecting a similar decline in home sales. He said that in the short term, the result doesn't pose much selling pressure for the market, but as lenders continue to reduce credit lines to consumers and face exposure to assets that are devaluing, risks to financial institutions increase. Meanwhile, homeowners will feel a pinch on the consumer side as their lines of credit dwindle, he said.

The Fed also released the minutes from its Aug. 5 policy meeting. At that gathering, the central bank elected to keep its target interest rate at 2%, which is where it's been since April. The minutes indicated that the Fed was concerned over the slowing global economy and saw continued downside risks to growth. According to the minutes, the Fed is looking to raise interest rates the next time it makes a change.

Chris Johnson said that the hawkish tone wasn't a surprise to investors, because the Fed and Chairman Ben Bernanke have been talking about shifting concern to inflation for a while now. He said that although the average investor may not see inflation as a large risk to investment dollars, inflation does pose a much more substantial risk on the consumer side.

In commodities, the price of crude oil was rising $1.18 to $116.29 a barrel. Gold was climbing $1.70 to $829.80 an ounce. The

United States Oil Fund

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, an exchange-traded fund that tracks the commodity, was gaining 1.3% to $94.35.

In the fixed-income area, Treasuries were edging downward. The 10-year note down 4/32 and yielding 3.8%. The 30-year was giving back 6/32 to yield 4.4%. The dollar was gaining against the euro, yen and pound.

Overseas markets were mixed, as the FTSE in London, the Nikkei in Japan and the Hang Seng in Hong Kong all trading lower. The Dax in Frankfurt was posting gains.