Stocks Continue to Cool as Commodities Heat Up

All three major indices continue to slide amid a manufacturing pullback and fresh turmoil in the financial sector.
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Updated from 11:59 a.m. EDT

Wall Street was taking a dive Monday as U.S. investors dealt with a further contraction in the manufacturing sector, a high-profile ouster in the financial-sector, and renewed strength in oil futures.

The

Dow Jones Industrial Average

was sliding 207 points, or 1.6%, to 12,432, and the

S&P 500

dropped 22 points, or 1.6%, at 1378. The

Nasdaq Composite

was off 48 points, or 1.9%, to 2475.

Wall Street tracked lower out of the gate, but the mood worsened after crude oil reversed course to spike $1.37 at $128.72 a barrel. Gold futures were up $8.50 to $895.80 an ounce. The U.S. dollar firmed by 0.2% against the euro and added 0.6% to the British pound, while yielding 1.3% to the yen.

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%.

Among stocks,

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 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.

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'

(BSC)

James Cayne.

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

Elsewhere in the financial space,

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 retreated 1.3%.

Standard & Poor's made several outlook revisions in the financial sector, citing a belief that loss rates in the U.S. residential mortgage and construction loan sectors are poised to exceed historical levels. Its outlooks on the large financial institutions are now predominantly negative.

S&P lowered its ratings on

Lehman Brothers

(LEH)

,

Morgan Stanley

(MS) - Get Report

and Merrill Lynch, and revised its outlooks on

Bank of America

(BAC) - Get Report

and

JPMorgan Chase

(JPM) - Get Report

to negative.

It also affirmed its ratings on Citigroup, removing the ratings from CreditWatch negative and assigning a negative outlook. And finally, S&P placed its ratings on Wachovia on CreditWatch negative.

As stocks pulled back, the yield on the 10-year Treasury note ducked back under the 4% level, recently jumping 28/32 in price at 3.95%. The 30-year bond was up 30/32 in price, bringing the yield down to 4.66%.

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.

Recently, the FTSE 100 lost 0.8%, the Germany's Xetra Dax sank 1.2%. 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).

Back in U.S. companies,

TheStreet.com

has learned that

Google

(GOOG) - Get Report

may

delay the release of its Gphone

to 2009, according to a source familiar with the situation. Shares of Google surrendered 1.8%.

Shares of

Marriott International

(MAR) - Get Report

gave up 3.3% 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 ticked down 2 cents at $49.14.

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 $102.26 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 0.6% as Sovereign added 4 cents at $9.18. Weyerhaeuser shares lost 1.4%.

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 between 4.1% and 7.2%.