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Stocks Can't Shake Negativity

Investors are chewing on rampant and often conflicting reports about potential suitors for Lehman and even WaMu.
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Updated from 1:11 p.m. EDT

On a volatile day, stocks in the U.S. traded mixed following a mixed bag of reports about the fate of harried brokerage

Lehman Brothers




Dow Jones Industrial Average

was down 41 points at 11,392, and the

S&P 500

was up 1.2 points at 1250. The


was gaining slightly at 2259.

Traders have leveled an intense gaze at the financial sector this week following the government takeover of mortgage giants

Fannie Mae



Freddie Mac


. Throughout the week, investor jitters were evident in volatile price action in

Lehman Brothers



Washington Mutual



Washington Mutual

said late Thursday it has $50 billion in liquidity and announced that its retail deposit base remained at levels reached at the end of 2007. The company also said it expects its third-quarter loan-loss provision to be about $4.5 billion, down from $5.9 billion in the second quarter.

Ratings agency Moody's

downgraded WaMu's credit rating

to below investment grade, citing "reduced financial flexibility." Goldman Sachs had a more positive take, upgrading shares of WaMu to neutral from sell. According to a


report, Goldman said the company might be able to avoid another capital raise.


also reported that the company may have to sell some of its deposits and branches as it struggles to raise capital. Thursday's late rally aside, shares of the Seattle bank have been pounded in recent days on fears about its sizable exposure to bad mortgage debt.

Goldman Sachs had a more positive take, upgrading shares of WaMu to neutral from sell. According to a


report, Goldman said the company might be able to avoid another capital raise.

Investors are on edge thanks to uncertainty about Lehman's fate, said Alan Gayle, senior investment strategist and director of asset allocation at RidgeWorth Capital Management. "In the absence of an announcement today, investors may want to go flat or minimize their exposure over the weekend," he said.

Gayle said a deal brokered without government funds would signal to the market that we're further along in stabilizing the credit markets and the banking system.

"Lehman will cease to be an independent entity," said Bill Fleckenstein, hedge fund manager at Fleckenstein Capital Management. He said that a shotgun marriage with another institution may be on the horizon, with or without backing by the Treasury or Federal Reserve. "They're gone," he said. "The only question is in what way are they gone and how much collateral damage is there from that goneness."

Troubles in the financial system extend beyond Lehman and permeates many other financial institutions, said Fleckenstein. "It's a very dangerous situation," he said.

Speculation about merger talks piled up as afternoon trading wore on. Reports indicated that potential Lehman buyers included BofA, JC Flowers, CIC and



. Conflicting reports also emerged surrounding a potential WaMu acquisition by




Reflecting broader trouble in credit markets, a sale of $228 million in

Clear Channel

bonds last week failed to attract as many buyers as underwriters had anticipated.

In the realm of commodities, crude oil, which briefly traded below $100 a barrel earlier in the day, was down 7 cents at $101.39 a barrel. Oil refiners were shutting down some production as Hurricane Ike menaced the Texas Gulf Coast. Gold closed down $9 at $764.50.

Gayle of RidgeWorth said the threat that Hurricane Ike will force reductions in pumping and refining capacity is spooking investors. "We'll find out how much damage gets done, but it looks like some damage will get done," he said. However, he said he believes oil is headed below $100 a barrel.

As for economic data, RealtyTrac said that August foreclosure filings were up 27% year over year to 303,000, or one out of every 416 U.S. homes.

The Bureau of Labor Statistics' August producer price index fell 0.9%, a broader decline than expected by economists and down from a 1.2% uptick in July. The core read on inflation rose 0.2%, a narrower increase than 0.7% in July. The Census Bureau's retail sales figures showed a decline of 0.3% for August, whereas analysts were looking for an increase of 0.3%. Excluding autos, retail sales fell 0.7%.

"The economy's sinking," said Fleckenstein. He said that last quarter's 3.3% GDP growth was dependent on the belief that inflation was at 1%, a notion he disputes. Further, the economy was propped up by the government's stimulus checks, which have now been spent, he said.

A consumer confidence survey from the University of Michigan showed that sentiment rose to an eight-month high in September, beating analyst estimates.

Longer-dated U.S. Treasury securities were lower in price. The 10-year note was down 11/32, yielding 3.68%. The 30-year lost 32/32 to yield 4.28%. The dollar getting crushed by the euro and pound, but rising vs. the yen.

Indices abroad were mainly higher. The FTSE in London, the Nikkei in Japan and the Dax in Frankfurt were rising, while the Hang Seng in Hong Kong took losses.