Dow off 134 as financial stocks take a beating

By Charley Blaine and Elizabeth Strott

The stock market opened June with a thud as slumping financial stocks pulled the entire market lower.

The selling pushed the Dow Jones industrials down 134 points, or 1%, to 12,504. The Standard & Poor's 500 Index was off 15 points, or 1.1%, to 1,386, and the Nasdaq Composite Index was off 31 points, or 1.1%, to 2,492.

But the market's close was a big improvement from its lows on the day. The Dow had been down as much as 210 points; the Nasdaq's low was a loss of 51 points.

The selling started when Wachovia (WB, news, msgs), the big North Carolina banking company, said its board had ousted CEO Ken Thompson. And it was exacerbated when Standard & Poor's downgraded several banks.

In addition, the market was unnerved by an abrupt rebound in the price of crude oil to a high of $129.35 a barrel following an Israeli newspaper report that the Bush administration was planning to attack Iranian military bases. The report was strongly denied, and crude fell back, finishing up 41 cents from Friday at $127.76 a barrel.

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At the same time, a Marriott International (MAR, news, msgs) warning that it sees profit growth getting squeezed by the softening economy and rising airline fares started a sell-off in hotel stocks. Marriott was down 2.2% to $32.19; Starwood Hotels (HOT, news, msgs) fell 4.2% to $46.36.

The unease may extend into tomorrow when automakers report sales for May and beyond to Friday when the Labor Department reports on nonfarm payrolls and unemployment.

Only four of the 30 Dow stocks had gains today led by General Motors (GM, news, msgs), up 2% to $17.44 after Barron's said over the weekend that the stock could triple by 2010. Only 71 S&P 500 stocks showed gains today, along with just 17 Nasdaq-100 ($NDX.X) stocks.

Mortgage crisis claims Wachovia CEO

Wachovia's ouster of CEO Thompson was just the start of a bad day for financial stocks. The stock, down as much as 4.5% in the morning, fell 1.7% on the day to $23.40.

The Select Sector SPDR-Financial (XLF, news, msgs) exchange-traded fund, which mirrors stocks in the financial sector of the S&P 500, fell 1.5% to $24.39 on the day. That was the worst close for the ETF since March 17, the day after JPMorgan Chase (JPM, news, msgs) agreed to take over investment bank Bear Stearns.

The Standard & Poor's Banking Index ($BIX.X) hit a low of 219.62, just above its March 17 low, before moving up to 222.50, down 1.4% on the day.

Financial stocks have been weak after a strong April. Stocks in the financial sector of the S&P 500 fell 6.4% in May, the only sector of the 10 in the index to fall during the month. And the overall market capitalization of the group fell behind that of the technology sector for the first time since 2000.

Wachovia's board asked Thompson, a 32-year veteran, to step down after months of crisis. The stock has fallen 61% since April 2006. Lanty Smith, Wachovia's board chairman, was named interim CEO, and Ben Jenkins, the bank's vice chairman and president, was named interim chief operating officer.

Wachovia posted bigger-than-expected losses in April, battered by sinking credit quality and the ill-timed acquisition in 2006 of Golden West Financial, the Oakland, Calif., mortgage lender. Wachovia angered shareholders in April when it cut its dividend by 41%.

• Talk back: What do you think of the ouster of Wachovia's Thompson?

"Most people have been requesting that Mr. Thompson be removed from his position" because of the bank's acquisition of mortgage broker Golden West at the peak of the mortgage cycle in May 2006, analyst Dick Bove of Ladenburg Thalmann, told CNBC this morning. "These decisions to make acquisitions continually penalize" companies like Wachovia.

Bove also said that "Wachovia is going to have a horrible second quarter." The bank will release its next earnings report on July 22.

As Wachovia pushed Thompson out, Washington Mutual (WM, news, msgs) said that Kerry Killinger is stepping aside as chairman of the nation's largest savings bank. He will remain CEO and a board member. The new board chairman, starting July 1, will be Stephen Frank, the retired CEO of Southern California Edison.

The move came after 51.5% of shareholders approved a resolution calling for WaMu to have a non-employee board chairman. WaMu has also been badly damaged by the subprime mortgage crisis. The stock has fallen 80% in the past year, and the company reported $3 billion of losses in the past two quarters. WaMu shares fell 2 cents to $9 today.

Former CEOs Stan O'Neal and Chuck Prince, of Merrill Lynch (MER, news, msgs) and Citigroup (C, news, msgs), respectively, also resigned in recent months because of losses stemming from the mortgage mess.

S&P ratings cut hits financial stocks

Ratings company Standard & Poor's cut its ratings on several banks and brokerages, including Merrill Lynch (MER, news, msgs), Lehman Bros. (LEH, news, msgs) and Morgan Stanley (MS, news, msgs). S&P also revised the outlooks for Bank of America (BAC, news, msgs) and JPMorgan Chase (JPM, news, msgs) to negative.

Lehman Bros. (LEH, news, msgs) was the big loser from the downgrade, falling 7.9% to $33.90. Merrill Lynch was down 3% to $42.62, Morgan Stanley was off 2.6% $43.10.

Bank of America fell 1.3% to 33.58, and JPMorgan Chase slid 2% to $42.15.

Credit card company American Express (AXP, news, msgs) was the Dow loser, falling 2.4% to $45.25.

GM gets a boost

General Motors was the Dow leader today with a 2% gain to $17.44 on the day.

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A report in Barron's over the weekend said that GM's share price could jump to $30 or even $45 by 2010, and that changes in GM's contract with the United Auto Workers will provide the company with $4 billion to $5 billion in savings.

The article said, however, the weak economy will likely weigh on GM for the near future. In fact, concerns about GM and rival Ford Motor (F, news, msgs) have pushed shares of both companies to levels not seen in more than 26 years.

The great oil debate

While the Israeli news report pushed crude oil higher, a question today was whether the price break last week was the start of something bigger.

There is "no quick fix" for the record-high prices, Treasury Secretary Hank Paulson told reporters on Sunday in the Gulf nation of Qatar. Despite an increase in worldwide demand, he added, "production capacity has not seen new development."

For a time, consumers seemed able to absorb higher oil prices because the economy was performing well, Michael Sheldon, chief market strategist at RDM Financial Group, told The Associated Press. "In the current environment, those tail winds are missing -- as a result, oil prices are a bigger and growing worry for consumers and the economy."

Still, one analyst thinks oil may be on its way down. "The seesaw we've seen in the last few days is an indication that the oil market may have peaked," Victor Shum, an energy analyst with Purvin & Gertz in Singapore, told the AP.

But Shum cautioned that the current hurricane season, which began on Sunday, could push oil prices higher.

"It's unlikely we're going to see any change in the currency regimes anytime soon," Simon Williams, chief Middle East economist at HSBC Holdings in Dubai, told Bloomberg News. "Paulson is trying to defuse concerns that the U.S. is forcing the Gulf to stick to the dollar peg."

The United Arab Emirates, Qatar, Oman and Bahrain also peg their currencies to the dollar; Kuwait dropped its currency's peg to the dollar in May 2007.

Manufacturing still slowing

The Institute of Supply Management's manufacturing index showed that the sector contracted in May, but the picture was better than expected

It was the fourth consecutive month of contraction, but the ISM came in at 49.6 -- better than economists' expectations of a reading of 48.7. The ISM index was at 48.6 in April.

Readings above 50 indicate expansion and readings below 50 indicate contraction. The manufacturing sector usually drops much more deeply in a recession. In a note to clients today, Michael Darda, chief economist of MKM Partners, said that, during the 1990-91 recession, the ISM index averaged 42.4; it averaged 42.5 during the 2001 recession. His conclusion: The United States may be in a slowdown but not a true recession.

A report on construction spending showed a 0.4% decline in April, slightly better than the 0.6% drop in March.

A recession is defined as at least two consecutive quarters of negative growth in gross domestic product. Last week, a revised report of the first-quarter GDP showed a 0.9% gain, better than the initial reading of a 0.6% increase.

Chip sales rise

Meanwhile, there's more evidence that the tech sector is holding up, despite a slowdown in consumer and business spending.

The Semiconductor Industry Association said this morning that chip sales rose 5.9% in April to $21.2 billion, helped by strong international demand. In Japan, chip sales rose 11%, and the Asia-Pacific region saw 4.5% growth.

Sales in the U.S. increased 6%, and European sales rose 3.8%.

The news did little for chip stocks, however. The Philadelphia Semiconductor Index ($SOX.X) was down 1.4% to 409. Intel (INTC, news, msgs) closed up 2 cents to $23.20, fourth best among Dow stocks.

Looking to Friday's jobs report

On Friday, investors can turn to the May jobs report for another gauge of how the economy is faring. Economists expect a decline of 50,000 jobs last month, on the heels of a 20,000 decline in April. The unemployment rate is expected to rise to 5.1% from 5%.

"The pace of monthly job losses will intensify through the course of the summer and could crest (at) the 100,000 mark," wrote Merrill Lynch North American Economist David Rosenberg.