Stocks Hit the Wall, Slide Down - TheStreet

Stocks Hit the Wall, Slide Down

Early gains are pared as IndyMac's takeover weighs on sentiment. Financials are under pressure despite government-promised relief for Fannie Mae and Freddie Mac.
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Updated from 11:55 a.m. EDT

The U.S. market began Monday with a spring in its step after the U.S. Treasury and the

Federal Reserve

promised relief for battered mortgage buyers

Fannie Mae

(FNM)

and

Freddie Mac

(FRE)

, but the gains were quickly pared as the major indices headed into negative territory.

In the early afternoon, the

Dow Jones Industrial Average

was down 47 points at 11,054 after having been up more than 100. The

S&P 500

was down 9 points at 1231, and the

Nasdaq

slipped 23 points to 2216.

On Sunday, Treasury Secretary Henry Paulson said his

agency would extend additional credit

to Fannie and Freddie, as well as buy stock in the companies, if needed, to help the government-sponsored entities retain adequate capital levels.

Meanwhile, the Fed said it will play a more active role in setting capital requirements for the two mortgage backers and granted its New York branch the power to lend to the companies if necessary.

Last week, shares of Fannie and Freddie were repeatedly hammered on concerns about their solvency and speculation that the government would stage a bailout, destroying the value of their stocks.

The Treasury and Fed's decision to step in on behalf of the government-sponsored entities is good news, because things might have been worse if the government hadn't intervened, said Bill Stone, senior vice president and chief investment strategist at PNC Wealth Management.

"Some of these people that worry about a systematic failure of the financial system are kind of overstating the case," said Stone. Still, investors have reason to be worried. "The fact remains that even though the systematic risk might not be there, big picture anyway, I'm not sure that things have necessarily gotten any better for shareholders in financials."

Stone pointed out that a decision by the Treasury to buy additional shares of the mortgage insurers would probably be dilutive to the stock, hurting shareholders. "They could survive, but shareholders could still come away with little to nothing."

In a less encouraging development for the financial space, the Office for Thrift Supervision took over

IndyMac

(IMB)

late Friday after a bank run diminished its capital. Shares of IndyMac have lost nearly all their value, ending last week at 28 cents.

Stone said that the IndyMac takeover weighed on sentiment. With IndyMac stock trading under $1 a share since late June, said Stone, "The thing was in bad shape. Their specialty was alt-A loans, more than 50% in California. You couldn't get much closer to the eye of the storm." He said the failure may weigh on sentiment because of worry that there may be more bad news to come, and traders are probably concerned about holding shares in financials stocks ahead of their upcoming earnings statements.

Reflecting jitters about the financial sector,

National City

(NCC)

shares plunged 27% this morning and recently stopped trading just before noon. The bank issued a statement to quell rumors that it was facing unusual depositor or creditor activity. Shares of fellow financial firm

Washington Mutual

(WM) - Get Report

were also falling substantially, down 26%.

Also disquieting to investors were earnings from regional firm

M&T Bank

(MTB) - Get Report

. The company said second-quarter profits declined 25% year over year to $160.3 million, or $1.44 a share, shy of analysts' forecast of $1.50 a share.

On Sunday,

Anheuser-Busch

(BUD) - Get Report

accepted a $70-a-share takeout bid by Belgian brewer InBev. The deal, worth $52 billion, represents an increase from InBev's earlier offer of $65 a share.

Elsewhere on the M&A front,

Yahoo!

(YHOO)

said over the weekend that it had rejected a proposal by

Microsoft

(MSFT) - Get Report

and billionaire Carl Icahn to restructure the Internet company and sell its search business to Microsoft.

This morning, disposal company

Waste Management

(WM) - Get Report

also began courtship of

Republic Services

(RSG) - Get Report

, offering $34 a share. Waste Management said its offer is better for Republic shareholders than a June 23 agreement by Republic to acquire

Allied Waste

(AW)

in a stock deal.

In technology,

Apple

(AAPL) - Get Report

announced that it sold 1 million iPhones over the weekend, trouncing analyst sales expectations for the sought-after smartphone.

Looking at commodities, crude oil was down 39 cents to $144.69 a barrel, and gold was adding $8.70 at $969.30.

As for Treasuries, the 10-year note was adding 26/32 in price, yielding 3.86%, and the 30-year was up 1 14/32 to yield 4.45%. The dollar was retreating against the euro the yen and pound.

Outside the U.S., European markets were rising, while the Asian exchanges showed some weakness. The FTSE in London and the DAX in Frankfurt were both up, though the Nikkei in Japan and Hong Kong's Hang Seng declined.