Stocks Close in a Pool of Red

Wachovia shakeup and manufacturing woes rattle investors, though an easing in oil prices helped toward the end of the trading day.
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Updated from 2:57 p.m. EDT

Wall Street took a dive Monday as U.S. investors dealt with a high-profile ouster in the financial space and a further contraction in the manufacturing sector, but equity measures finished well off their worst levels after oil futures went lower.

The

Dow Jones Industrial Average

, which plunged as many as 210 points earlier, ended the day down 134 points, or 1.1%, to 12,504. The

S&P 500

dropped 15 points, or 1.1%, at 1386, and the

Nasdaq Composite

was worse by 31 points, or 1.2%, to 2492.

Stocks found a bit of relief after crude oil retreated from its sizable earlier gains, finishing up just 41 cents at $127.76 a barrel. Gold futures finished up $5.50 to $897 an ounce. The U.S. dollar firmed by 0.1% against the euro and added 0.8% against the British pound, while yielding 1% to the yen.

Hank Smith, chief investment officer with Haverford Investments, believes that the market's weakness makes it extraordinarily attractive right now, but said that "the wild card, in some respects, is oil. Because clearly $3.75- and $4-a-gallon gas seems to be the breaking point for consumers." The national average for gas at the pump is $3.975 -- another record high -- according to AAA.

"I can remember, it wasn't too long ago, that commentators were saying, as gas got to $2 a gallon, that it would kill the consumer, and nobody even bothered noticing," Smith said. "Then it got to $3 and the consumer still didn't bother complaining. But now as it's at $4, just about, that seems to be the point."

Smith added that it's worrisome "when you start to see commodity costs spill over into broader areas and start being used as excuses for price increases in other sectors." He pointed to

Dow Chemical's

(DOW) - Get Report

announcement last week that it would be

hiking prices across the board

in order to offset the pain of surging commodities costs.

Financials were hit particularly hard after

Wachovia

(WB) - Get Report

said that CEO Ken Thompson has been

forced out

by the board a few weeks after the bank disclosed that its first-quarter loss was 80% higher than it had originally reported. Thomson had been stripped of his chairman title in the wake of those losses. Shares were down 1.4%.

"There are a number of things weighing on this market, not the least of which is that Wachovia just joined the parade of banks making changes in the executive suite," said Art Hogan, chief market analyst with Jefferies.

The

NYSE

Financial Sector Index was recently sinking 1.7%.

Other chiefs pushed out in recent months, also amid massive writedowns, have been

Citigroup's

(C) - Get Report

Chuck Prince,

Merrill Lynch's

(MER)

Stan O'Neal, and

Bear Stearns'

James Cayne.

"Unfortunately, when we get these kinds of reminders of how bad things in the financial sector can be, even with the recent pullback in valuation, I think it's difficult to mount any significant rally here," Hogan said.

At the same time,

Washington Mutual

(WM) - Get Report

announced that it will be

splitting its chief executive and chairman roles

. Stephen Frank will assume the chairman spot, while Kerry Killinger remains CEO. The stock dipped fractionally to $9.

Furthermore, Standard & Poor's slashed its ratings on Merrill Lynch,

Morgan Stanley

(MS) - Get Report

, and

Lehman Brothers

(LEH)

, and revised its outlooks on

Bank of America

(BAC) - Get Report

and

JPMorgan Chase

(JPM) - Get Report

to negative. Shares lost between 1.3% and 8%.

S&P also put Wachovia on CreditWatch with negative implications while removing Citigroup from the same, but also assigned Citi a negative outlook. All told, S&P now has mostly negative rankings on large financial institutions. Citi shares were off 1.9% lately.

As stocks pulled back, the yield on the 10-year Treasury note ducked back under the 4% level. Recently, the note was jumping 27/32 in price to yield 3.96%. The 30-year bond was up 26/32 in price, bringing the yield down to 4.67%.

The slide in U.S. shares also came amid suffering European exchanges as Britain's largest lender to landlords,

Bradford & Bingley

, sliced the price of its rights offering and stoked fears that credit-related losses are continuing to spread.

The FTSE 100 lost 0.8%, the Germany's Xetra Dax sank 1.2%, and the Paris Cac plunged 1.6%. Asia markets fared better, however. Tokyo's Nikkei 225 climbed 0.7% overnight, and Hong Kong's Hang Seng Index jumped 1.2%.

Also on Monday, mobile operator

China Unicom

(CHU) - Get Report

announced it will

take out

fixed-line provider

China Netcom

(CN) - Get Report

in a stock swap worth $23.8 billion (185 billion Hong Kong dollars).

Shares of

Marriott International

(MAR) - Get Report

gave up 2.2% after the hotel operator said it now expects revenue per available room to grow just 2% in the second quarter,

down from its prior forecast

of 3% to 5%.

Meanwhile, fertilizer concern

Intrepid Potash

(IPI) - Get Report

said its fiscal first-quarter earnings quintupled from last year to $33.1 million on sales that ramped up 75% at $84.4 million. Still, the stock spent the morning in negative territory and recently lost 2%.

Elsewhere, the

Financial Times

reported that Japan-based carmaker

Toyota

(TM) - Get Report

is considering shaving down its U.S. revenue guidance amid dwindling sales of its larger vehicles. Toyota shares were up slightly at $102.37 on the NYSE.

In notable analyst actions, insurance firm

Progressive

(PGR) - Get Report

had its rating raised to outperform at Friedman Billings, and Keefe Bruyette upgraded

Sovereign Banc

(SOV)

. Logging company

Weyerhaeuser

(WY) - Get Report

was cut to hold from buy at Deutsche Bank.

Progressive shares bumped up 1.4% as Sovereign rose 0.7%. Weyerhaeuser shares lost 1.6%.

Friedman Billings also boosted the price targets of several coal producers, among them

Peabody Energy

(BTU) - Get Report

,

Patriot Coal

(PCX)

and

Arch Coal

(ACI) - Get Report

. Shares were up at least 4.1% apiece.

Earlier, the Institute for Supply Management put its national factory-activity index at 49.6 in May -- a full point higher than the prior month and better than the consensus estimate. Still, that was a bit below the break-even level of 50. Another potentially worrisome aspect of the report was a bulging list of commodities, the prices of which are rising. The ISM said that only two of the commodities it tracks -- methanol and zinc -- have cooled down from the prior month.

Ian Shepherdson, chief U.S. economist with High Frequency Economics, wrote that a healthy pickup in export orders is helping to boost overall orders, but that the gains aren't strong enough to halt losses of manufacturing jobs. The export strength, he said, "is dead in line with the performance implied by the weakening of the dollar over the past year and will likely persist for a few more months yet."

"Overall, soft but not catastrophic," said Shepherdson, "but remember this is a deeply atypical, consumer-led downturn."

Meanwhile, the Commerce Department said construction spending was down just 0.4% in April, a little ahead of the 0.6% consensus. Data from March was revised to minus 0.6% from the originally released negative 1.1%.