The markets lost ground again Friday as the growing AIG ( AIG) bonus controversy weighed on the financials.

The Dow Jones Industrial Average fell 122.42, or 1.65%, to 7,278.38, while the S&P 500 dropped 15.50, or 1.98%, to 768.54. The Nasdaq lost 26.21, or 1.77%, to 1,457.27.

Joe Terranova said on CNBC's "Fast Money" TV show that the uncertainty generated in the last 48 hours from the political fallout from the AIG bonus controversy has destabilized the financials.

Jeff Macke said the constant changing of the rules by Congress and the federal government makes it difficult to value stocks and leaves investors to trade on a technical bsis.

Pete Najarian said the best example of that uncertainty could be seen in the explosion of the VIX today to 46. Tim Seymour said equity investors feel as they are out of a limb with credit spreads worsening.

Terranova said there is very little incentive for private equity companies to help troubled banks if they don't know what they are stepping into.

Melissa Lee, the moderator of the show, asked the panel to comment on the plunge in the dollar and subsequent emergence of the reflation trade. She pointed out that oil has hit a 3-month high while copper has surged to a 41/2-mnth high.

Terranova said gold is much too volatile for a trade. His preference is oil, which he says investors should get into after a pullback.

Seymour sees aluminum getting into the picture after Aloca ( AA) raised $1.3 billion. Najarian said Freeport McMoRan shot up dramatically with the rise of copper prices.

Lee said the healthcare sector was the only sector that was up today, with Johnson & Johnson ( JNJ) up 3% after the FDA recommended approval of a drug it's been working on.

Najarian liked the approach Johnson & Johnson has taken in building up its business incrementally. Instead of taking the route of a mega merger, it has made a number of acquisitions and is one of the names mentioned in connection with a spinoff of a private company from Blackstone ( BX).

Is the worst over the financials? That was the question Lee put to Paul Miller of FBR Capital Markets. Miller said the overhang from the AIG bonus controversy is having on the financials. "Why would anyone go into the deal with the government if politicians will reneg on it later on?"

Miller said the move to tax bonuses taxes could take away the political goodwill needed to pass other banking bailout packages down the road.

He said the road ahead doesn't look for the financials as they face accelerating losses throughout the year with the problem of toxic assets still on the table.

He said the removal of bonuses for Freddie Mac ( FNM) and Fannie Mae ( FNM) will drain a lot of talent that the agencies need at this critical time.

Will the merger and acquisition activity in recent weeks keep the market going? Howard Lanser, director of M&A for Robert Baird, said he was encouraged by the M&A activity in pharma and tech, but he told the panel that should be viewed against the backdrop of extremely weak M&A activity in November, December and January.

He said IBM ( IBM)'s reported deal to buy Sun Microsystems ( JAVA) will reverberate in board rooms across the country.

He said there could be an uptick in M&A activity in financial services, where the key will be financing. On that point, he was encouraged to see 30 banks had lined up to finance the Pfizer ( PFE)- Wyeth ( WYE) deal.

He also sees so-called merger of equals deals in the industrial space, particularly among basic materials companies.

In the "last stock" standing segment, Seymour focused on the auto industry. He said he would go long on auto companies in the emerging markets where auto demand is up in such countries like India and China.

In the U.S., Ford ( F) and General Motors ( GM) should benefit from a new $5000 credit for used cars, he said.

In the final trade, Macke said he was going long on the S&P at 740. Terranova said to buy JPMorgan Chase ( JPM) at $20 on a pullback. Seymour liked Teck Cominco ( TCK), and Najarian liked Teva ( TEVA) as a play on generic drugs.

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