Stocks Can't Shake Financial Worries

The major indices end the session in the red after early choppy trading leads to an afternoon slide. Lehman is among the day's big losers.
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Updated from 4:18 p.m. EDT

New York's major averages closed lower Tuesday after

Federal Reserve

chairman Ben Bernanke voiced disquiet on the sorry state of the U.S. dollar and investors appeared increasingly spooked by negative chatter about

Lehman Brothers

(LEH)

.

The

Dow Jones Industrial Average

bobbed in and out of the green earlier before reversing course sharply to sink 100.97 points, or 0.81%, to 12,402.85, though the index finished well off its low for the day. Broader indices had held their own for most of the session, but in the end the

S&P 500

surrendered 8.02 points, or 0.58%, to 1377.65, as the

Nasdaq Composite

lost 11.05 points, or 0.44%, to 2480.48.

"Investors have been trying to question whether the economy is really going to recover as strongly as the market had predicted, and that stocks had likely run a little too far, too fast," said Chip Hanlon, president of Delta Global Advisors and contributor to

RealMoney.com

, a sister site to

TheStreet.com

. The S&P and, in particular, the Nasdaq, gained substantial ground in May.

Among the day's big news items was a

Wall Street Journal

report that

Lehman Brothers

(LEH)

may attempt to raise between $3 billion and $4 billion in order to shore up its frail balance sheet, serving as yet another reminder that the credit crunch continues to simmer despite being mostly out of the spotlight in recent weeks. The paper said Lehman will probably announce this, together with its quarterly results, later this month.

Rumors were also circulating that Lehman has been forced to borrow at the Fed's discount window, but

CNBC

reported that the brokerage has not accessed that facility since April 16, according to Lehman's treasurer. Nevertheless, the stock plunged 9.5% to finish at $30.61.

Overall, stocks' breadth was poor. Roughly 2.15 billion shares changed hands on the

New York Stock Exchange

, with declining issues outpacing advancers by a 3-to-2 margin. Volume reached 2.17 billion shares on the Nasdaq as losers topped winners 5-to-4.

Equity measures had started off higher today after Bernanke highlighted the harmful weakness of the dollar in a speech in Madrid, Spain, which seemed to signal that the central bank will indeed pause its rate-cutting campaign. "Over time," he said, "the Federal Reserve's commitment to both price stability and maximum sustainable employment and the underlying strengths of the U.S. economy -- including flexible markets and robust innovation and productivity -- will be key factors ensuring that the dollar remains a strong and stable currency."

The U.S. dollar ramped up following those remarks, though the gains tapered off a bit toward the end of the session. The greenback firmed by 0.5% against both the euro and the yen to close at $1.5467 and $104.86, respectively.

Win Thin, senior currency strategist with Brown Brothers Harriman, noted that Bernanke's stated concern on the dollar is unusual. "If nothing else, these dollar comments do suggest that the Fed, while on extended pause right now, remains concerned about price pressures even though Bernanke acknowledged 'downside risks' until house prices stabilize," he wrote.

Paul Nolte, director of investments with Hinsdale Associates, noted that the Fed chief's remarks seemed to prop up the greenback but said, "I don't anticipate that the dollar is done bottoming out, and we go straight up from here because Bernanke said so."

He also believes Bernanke's comments were a "nonevent" for equities, even as they seemed to influence currency and commodities markets. After all, he noted, the assumption that the Fed will pause its rate-cutting had already been built into the market over the last two to three weeks.

The central bank has eased its fed funds target rate by 325 basis points since September in an effort to pull the slowing U.S. economy from the brink, but lower rates can also exacerbate inflation, so traders tend to see any emphasis of inflation worries as a sign that the Fed will employ a more moderate policy.

Nolte, however, remains unconvinced that the door has been shut entirely to further easings. "There's still a fair amount of economic weakness yet to be seen, and the Fed may want to cut rates again," he said.

Hanlon, for his part, said, "I'm not sold on how quickly or aggressively they're going to return to the rate-hike table. The credit markets are still pretty stuck. If they return to raising interest rates, I'd be all for that, but it would be a very, very clear statement by the Fed that's quite concerned about the dollar, and any such hikes would be all about the U.S. dollar."

The fed funds rate currently stands at 2%.

Bernanke also expressed worry that commodities prices will continue to rise, calling that possibility "an important risk to the inflation forecast" and noting that the American public's inflationary expectations could get out of hand as commodities skew overall inflation numbers. Those expectations, he warned, "could ultimately become self-confirming."

Crude oil on Tuesday remained at extraordinarily high levels, but futures were nonetheless in acute retreat, shedding $3.45 to settle at $124.31 a barrel.

Still, as the national average for gas at the pump continues edging ever closer to the $4 mark,

General Motors

(GM) - Get Report

has said it will

shutter four North American manufacturing plants

that make gas-guzzling trucks and SUVs, as well as consider a sale of the Hummer brand. "Higher gasoline prices are changing consumer behavior, and they are significantly affecting the U.S. auto industry sales mix," said CEO Rick Wagoner. Shares of GM, a Dow component, ended up 0.8%.

Gas prices reached another all-time high of $3.978 a gallon on Tuesday.

Elsewhere on the corporate front,

The Wall Street Journal

reported that billionaire investor Carl Icahn, who has bulked up on

Yahoo!

(YHOO)

stock lately and has

lined up 10 directors

to replace current members of the board, will seek to oust Yahoo! CEO Jerry Yang if he wins that proxy battle. Icahn said last month that the Internet-portal operator had "acted irrationally" in spurning a sweetened takeout bid by

Microsoft

(MSFT) - Get Report

.

Yahoo! shares closed down 1%.

As for earnings, homebuilder

Toll Brothers

(TOL) - Get Report

said it swung to a

fiscal second-quarter loss

of $93.7 million, or 59 cents a share, thanks to hefty asset writedowns. Still, that was better than Wall Street had anticipated, and shares added 3.5%.

Clothing maker

Lululemon Athletica

(LULU) - Get Report

meanwhile trimmed down its earnings outlook for 2008, even as the company simultaneously posted a more-than-doubled first-quarter profit that matched the average analyst estimate. Shares gave up 6.1%.

Separately,

FedEx

(FDX) - Get Report

announced it will

drop the Kinko's name

from its retail business and incur a charge as it writes down the value of that operation. Tough economic conditions should bring total quarterly charges to some $891 million. Shares dipped 0.8%.

Office-supplies retailer

Staples

(SPLS)

boosted its buyout bid for Dutch-based

Corporate Express

(CXP) - Get Report

to $14.13 a share (9.15 euros), or $2.6 billion, from the prior $11.17 (7.25 euros) a share. Staples said that the offer is contingent on the rejection of Corporate's pact to buy France-based Lyreco, which was meant to deflect the original Staples bid.

Staples shares were advancing 1.3%; Corporate bounced 4.7%.

Back in commodities, gold futures sank $11.50 to $885.50 an ounce

Treasury prices were again on the rise, with the yield on the 10-year note dropping back under the 4% mark, as investors ventured back to the safe shores of government bonds. Recently, the 10-year added 12/32 in price, bringing the yield down to 3.91%. The 30-year bond lifted by 20/32 in price, yielding 4.63%.

Foreign exchanges were mixed. In Asia, Tokyo's Nikkei 225 slid 1.6% overnight, and Hong Kong's Hang Seng Index plunged 1.8%. Among European bourses, London's FTSE 100 was climbing 0.8%, and Germany's Xetra Dax rose 0.2%. The Paris Cac was higher by 1%.