Stocks Slammed as Financials Suffer - TheStreet

Stocks Slammed as Financials Suffer

Oil prices fall, but that's not enough to overcome Wall Street's lingering worries about mortgage buyers Fannie Mae and Freddie Mac. Frank Curzio fills you in on The Real Story.
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Updated from 2:34 p.m. EDT

Stocks in the U.S. tumbled Monday as anxiety about the financial-services sector, particularly government-sponsored entities

Fannie Mae

(FNM)

and

Freddie Mac

(FRE)

, sent the major averages reeling.

The

Dow Jones Industrial Average

finished down 180.51 points, or 1.6%, to 11,479.39, and the

S&P 500

got hammered for 19.60 points, or 1.5%, at 1278.60. The

Nasdaq

dropped 35.54 points, or 1.5%, to 2416.98.

All of the Dow's 30 components ended the day in negative territory, led by

General Motors

(GM) - Get Report

, which shed 7.4% to $10.35. Financial components

American International Group

(AIG) - Get Report

,

Citigroup

(C) - Get Report

and

Bank of America

(BAC) - Get Report

were each down more than 4%.

Stoking investor angst was a

Barron's

article saying the government will probably have to help troubled mortgage companies Fannie and Freddie raise fresh capital at the expense of taxpayers and shareholders. Fannie lost 22% to $6.15, and Freddie gave back 25% at $4.31.

"For the first time, with oil flat to down, the financials have rolled," said Steven Kroll Sr., managing director at Monness Crespi & Hardt. He said the article detailing further risks for Fannie and Freddie indicates that the problems in the financials have not been fixed yet. "I expect the market, the financials, to correct here for several weeks."

The comeback in financial stocks has been remarkable, given the depth of Fannie and Freddie's recent troubles, wrote Jack Ablin, chief investment officer at Harris Private Bank, in an email. He said the sector was led higher mainly by substantial moves in bond insurer

MBIA

(MBI) - Get Report

, mortgage insurer

MGIC

(MTG) - Get Report

and

Wachovia Bank

(WB) - Get Report

. MBIA ended the day up 5.4% at $11.83, MGIC fell 4.6% to $8.18 and Wachovia slipped 3.9% to $14.96.

Despite the financials' recent bullish action, Ablin wrote, "The group would need to outpace the market by another 20% to stage a technical breakout." He said that narrowing credit spreads among A-rated financials offer some hope for the sector.

As for the dollar, Kroll said the recent rally is over, and he suspects that continued problems in the credit markets will spur the Federal Reserve to cut interest rates rather than raise them.

The Wall Street Journal

also reported that brokerage

Lehman Brothers

(LEH)

could stand to lose $1.8 billion in the third quarter, adding further pressure to CEO Richard Fuld and increasing the prospects that the company would need to raise more than the $6 billion in capital it amassed in June. Lehman ended the day down 7.1% at $15.03.

Meanwhile, Japanese bank

Mitsubishi UFG

has inked an agreement to buy regional bank

UnionBanCal

(UB)

. Mitsubishi already owns 65% of UnionBanCal shares and will pay $3.5 billion for the remainder. UnionBanCal is noted for having sidestepped the worst of the housing crisis. Shares of the California bank added 12% to $73.18.

In the technology sphere, telecom service provider

Qwest

(Q)

reached a potential accord with two of its labor unions, Communications Workers of America and the International Brotherhood of Electrical Workers. The stock stumbled 2.3% to $3.83.

Elsewhere, video games developer

Electronic Arts

(ERTS)

announced it would not extend the deadline on its $2 billion buyout offer for

Take-Two Interactive

(TTWO) - Get Report

. Electronic Arts agreed to meet with Take-Two's management, raising the possibility of a friendly acquisition. Take-Two shares edged down 4.4% to $23.75.

In the consumer goods area, candy maker

Hershey

(HSY) - Get Report

announced it would increase prices in an effort to preserve profit margins. Citigroup downgraded the stock to hold from buy, citing limited earnings visibility going forward. Hershey dropped 9.4% to $37.71.

As for earnings, mining company

BHP Billiton

(BHP) - Get Report

announced rising full-year profit and raised its dividend, sending shares up 0.4% to $65.48. Retailer

Lowe's

(LOW) - Get Report

announced a year-over-year slump in income but nonetheless bested Wall Street's estimates. It climbed 0.2% to $24.54.

In the commodities space, crude oil fell 90 cents to settle at $112.87. Gold was up $13.60 to close at $805.70. The dollar was beginning to soften after a week of solid gains against its major foreign counterparts. Treasury securities were gaining. The 10-year was up 8/32, yielding 3.80%, and the 30-year was adding 18/32 to yield 4.43%.