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Stocks Close Volatile Day Narrowly Mixed

Lehman and WaMu once again dominated the headlines as rumors run rampant about more M&A activity in the financial sector.

Updated from 2:56 p.m. EDT

After a volatile day, stocks in the U.S. ended with ho-hum results as traders assessed a mixed bag of reports about the fate of harried brokerage

Lehman Brothers



The major indices closed narrowly mixed. The

Dow Jones Industrial Average

ended down 11.72 points at 11,421.99, while the

S&P 500

edged up 2.64 points, or 0.2%, at 1251.69. The


tacked on 3.05 points, or 0.1%, to 2261.27.

For the week, the Dow climbed 1.8%, the S&P added 0.8% and the Nasdaq dropped 2.1%.

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

Fannie Mae



Freddie Mac


last weekend. Throughout the week, investor jitters were evident in volatile price action in Lehman and

Washington Mutual

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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.


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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. Shares finished Friday down 2.1% at $2.77.

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


(BCS) - Get Barclays PLC Sponsored ADR Report

. Conflicting reports also emerged surrounding a potential WaMu acquisition by


(JPM) - Get JPMorgan Chase & Co. (JPM) Report

. Lehman shares lost 14% to $3.65.

Other financial stocks also fell victim to concerns over mortgage-related assets. Dow component stock


(AIG) - Get American International Group, Inc. Report

dropped 31% to $12.14. Fellow Dow member

General Electric

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took a 5% hit to $26.75 on concerns that it would not be able to sell its credit card business, according to a report by the

Associated Press

. Merrill Lynch dropped 13% to $17.05.

As rumors swirled about the future of financial-sector members, trading in interest rate futures showed an increased expectation that the Fed would cut rates by the end of the year. The market was pricing in a 14% chance of a 25-basis-point rate cut at next Tuesday's FOMC meeting, up from 0% a week ago.

In the realm of commodities, crude oil, which briefly traded below $100 a barrel earlier in the day, settled down 28 cents at $101.18 a barrel. Oil refiners were shutting down some production in anticipation of Hurricane Ike hitting the Texas Gulf Coast this weekedn. 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 22/32, yielding 3.72%. The 30-year lost 1-23/32 to yield 4.32%. The dollar getting crushed by the euro and pound, but rising vs. the yen.