Stocks Start Week in Reverse

The major averages retreat as traders mull Fed speakers and the government's subprime-help plan.
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Updated from 4:18 p.m. EST

Stocks in the U.S. ended modestly lower Monday, as traders weighed a government plan to help homeowners against jarring remarks from the

Federal Reserve

on the subprime mortgage mess.

The

Dow Jones Industrial Average

spent time on both sides of the flat line before falling 57.15 points, or 0.43%, to 13,314.57. The

S&P 500

briefly poked into positive territory but ultimately ended down 8.72 points, or 0.59%, to 1472.42. The

Nasdaq Composite

lost 23.83 points, or 0.9%, at 2637.13.

Stocks had earlier gained ground following comments from Treasury Secretary Henry Paulson, who confirmed that the federal government is working with mortgage lenders to create a plan that would essentially bail out consumers with subprime mortgages.

Paulson said that housing is still the biggest threat to the U.S. economy, and that "we will need an aggressive, systematic approach to fast-track able borrowers into a refinance or mortgage modification."

Those comments came after Boston Fed President Eric Rosengren expressed his concern over the subprime mortgage problem, saying before the opening bell that "the foreclosure crisis will get worse before it gets better, but our forecast is quite dependent on how far house prices fall."

He also said the "outlook for how much worse this problem could become depends critically on the outlook for the economy and the housing market. We are currently expecting the economy to grow well below potential for the next two quarters, before gradually improving over the course of next year."

Meanwhile, Janet Yellen, head of the San Francisco Fed, said that since the October central bank meeting, "financial conditions have deteriorated, and we have seen some unexpected softening in the economic data." She added, "On the inflation front, I continue to expect core consumer prices to rise at a pace that is broadly consistent with price stability, although there are some notable upside risks that bear careful watching and consideration."

Last week, remarks from several Fed officials, including chairman Ben Bernanke, bolstered hopes of a rate cut when the central bank next meets on Dec. 11, helping stocks notch their best week in months. The Dow added 3%, the S&P 500 gained 2.7%, and the Nasdaq finished higher by 2.4%.

Even though Rosengren's comments could be interpreted as friendly to those wanting to see another reduction, his blunt assessment of growth prospects was troubling.

On Friday, the next data point for the Fed will arrive when the government posts the November nonfarm payrolls data. It is expected that the U.S. economy added 70,000 workers last month, and any deviation will likely help determine the Fed's next step when the Federal Open Market Committee convenes on Dec. 11.

"Today showed that we're in a wait-and-see mode, at least until the jobs number," said Paul Nolte, director of investments with Hinsdale Associates. "Investors are starting to look at the employment number in terms of what the Fed does next. It's a hard number to handicap, and judging by what we're seeing in equities and bonds, investors fear the number may be weaker than expected."

Breadth and volume were poor to start the week. On the

New York Stock Exchange

3.28 billion shares changed hands, as decliners toppled advancers by a 9-to-7 margin. Volume on the Nasdaq reached 1.94 billion shares, with losers beating winners 3 to 2.

Art Hogan, chief market analyst with Jefferies, said that despite a weak close and low volume, there were still positives to take away from the session.

"There was very little input today, so it is good to see we didn't give up anything after last week's run-up," said Hogan. "As the week wears on, with more economic data to come, it is positive there wasn't a flood of people heading to the exits."

Among corporate news,

E*Trade Financial

(ETFC) - Get Report

weighed on sentiment as shares slid 10.7% to $4.11 after Bank of America downgraded the company to sell from hold and slashed its stock price target to $2 from $9.

The downgrade comes after Citadel Investment Group poured $2.55 billion into the embattled online brokerage last week. Shares of E*Trade have now dropped nearly 60% over the last month.

Financials were among the worst-performing sectors. The KBW Bank Index ended down 1%, the NYSE Financial Sector Index was off 0.8%, and the Amex Financial Sub Index dipped 0.1%. Retail, housing and transportation subsector indices also closed lower.

In other corporate news, automakers were releasing their monthly sales data.

Ford

(F) - Get Report

posted an unexpected 0.4% increase in November sales, and

General Motors

(GM) - Get Report

said U.S. sales fell 11% last month. GM lost $1.22, or 4.1%, to $28.61.

One of the notable winners was

Activision

(ATVI) - Get Report

, which soared 12.7% to $24.97 on word that

Vivendi

will acquire a controlling interest in the gamemaker for $9.8 billion. The companies will create a new firm, Activision Blizzard, which will trade under the Activision ticker. In total, the deal is being valued at $18.9 billion.

As for the economic front, the Institute for Supply Management said its factory index declined to a reading of 50.8 last month from October's 50.9.

"Manufacturing has slowed substantially, but is not so weak that recession is imminent," said Ian Shepherdson, chief economist with High Frequency Economics. "At this level, output will be weak and capital spending will be very subdued, but orders have not collapsed."

U.S. Treasury securities were rallying. The 10-year note was up 18/32 to yield 3.87%. The 30-year bond added 28/32 in price, yielding 4.33%. The dollar was weaker against the euro and the yen.

After falling nearly 10% last week, crude prices dropped as low as $87.20 before erasing the decline. Oil finished up 60 cents at $89.31 a barrel. Gold and silver futures also traded higher.

Overseas markets were mixed. In Asia, Hong Kong's Hang Seng rose 0.1% overnight, while Japan's Nikkei 225 slipped 0.3%. Among European bourses, London's FTSE 100 lost 0.7%, and Germany's Xetra Dax was off 0.4%.