Dow falls 181 as financial stocks slump

By Charley Blaine and Elizabeth Strott

The stock market opened the week with a resounding thud as slumping financial stocks, especially mortgage capital suppliers Fannie Mae (FNM, news, msgs) and Freddie Mac (FRE, news, msgs), pulled the entire market lower.

The selling pressure offset any cheer that lower crude oil might have provided today. Crude closed at $112.87 a barrel in New York, down 0.8% from Friday, after investors concluded the odds that Tropical Storm Fay might affect oil and gas production facilities off Louisiana and Texas were slim.

Weak technology stocks, especially semiconductor stocks, also weighed on the market.

The Dow Jones industrials finished down 181 points, or 1.6%, to 11,479. The Standard & Poor's 500 Index tumbled 20 points, or 1.5%, to 1,279, and the Nasdaq Composite Index slumped 36 points, or 1.5% to 2,417.

The Dow's loss was its worst since Aug. 7, when the blue-chip index fell 225 points. It was the worst loss for the S&P 500 since Aug. 12, and the Nasdaq's decline was the ugliest since July 28.

All 30 Dow stocks were lower on the day, along with 444 S&P 500 stocks and 87 Nasdaq-100 ($NDX.X) stocks. The index was down 25 points, or 1.3% to 1,933.

The selling sent investors scurrying to safety. Interest rates were lower; the 10-year Treasury yield fell to 3.816% from 3.852% on Friday. Utility and gold stocks were the only strong areas of the market. The Dow Jones Utilities Average ($UTIL) was up 0.4% to 469.

Looking for some good news? Here it is: Volume was less than 850 million shares on the New York Stock Exchange (about 1.6 billion shares is average). That suggests there wasn't any panic selling.

August is typically one of the lightest months of the year in terms of volume. A year ago, however, the problem of huge numbers of defaults on subprime mortgages morphed into a full-blown global credit crisis, causing wild volatility -- and huge trading volumes in markets around the world.

The market's losses today, came despite better-than-expected second-quarter earnings from home-improvement retailer Lowe's (LOW, news, msgs), which offered cautious guidance about its third quarter. Shares were up slightly on the news.

• Get free, real-time stock quotes on MSN Money

Also affecting the market's mood were continued worries about geopolitical issues, including the Russian incursion into Georgia and the stability of Pakistan after President Pervez Musharraf resigned.

But the international realities were a small issue compared with the deep slump in the national housing market and its horrific effects on the national and global financial system.

Will Fannie and Freddie be nationalized?

Fannie Mae and Freddie Mac were down 22.2% to $6.15 and 25% to $4.39, respectively, by far the worst performers among S&P 500 stocks.

A Barron's article this weekend suggested that a federal government takeover of the nation's two largest suppliers of mortgage capital is inevitable. Government assistance would be allowed under recent legislation signed by President Bush.

Such a move, the article said, would wipe out existing shareholders; even holders of the companies' $19 billion in subordinated debt would suffer losses.

"Soaring mortgage delinquencies and foreclosures have led the companies to gush red ink for the past four quarters," the article noted. "And their managements concede the outlook is even grimmer well into next year."

The selling, however, accelerated after Treasury Department spokeswoman Jennifer Zuccarelli said, "We have no plans" to use the authorities granted under recent legislation to prop up Fannie Mae and Freddie Mac. That raised fears that the government would simply let the companies collapse, and there was a fair amount of criticism that the Treasury Department, which has been working on the problem with the Federal Reserve, would say anything at all.

Fannie Mae and Freddie Mac are shareholder-owned companies but are known as government-sponsored enterprises because they were set up by the federal government to provide support for the housing market.

• Top Stocks blog: A look at the week's earnings

In large because of Fannie Mae and Freddie Mac's problems, the Select Sector SPDR-Financial (XLF, news, msgs) exchange-traded fund, which tracks the financial sector of the S&P 500, finished the day down 3.8% to $20.54 this afternoon. It's down nearly 28% this year and down 45% since peaking on June 1, 2007.

• Video: Looking at the Fannie Mae-Freddie Mac crisis

Bank of America (BAC, news, msgs) was off 4.6% to $29.30. American Express (AXP, news, msgs) was off 2.8% to $37.99.

Housing, earnings from Target, Hewlett-Packard on tap

More evidence of the economic slowdown will come Tuesday when the government reports housing starts and building permits for July and offers another snapshot on inflation -- the Producer Price Index report for July.

The consensus estimate on building permits and housing starts is about 975,000 units each, down roughly 10% from May. They're also down 29% from a year ago and 53% from their peaks in 2005.

In addition, Dow components Home Depot (HD, news, msgs) and Hewlett-Packard (HPQ, news, msgs) will report quarterly profits on Tuesday, along with discount retailer Target (TGT, news, msgs).

Hewlett-Packard fell 2.2% to $44.60; Target was off 2.3% to $50.05.

Energy prices -- New York close

	Mon.	Fri.	Chg.	Month chg.	YTD chg.
Crude oil (NYMEX) (per barrel)	$112.87	$113.01	-$0.90	-9.03%	17.60%
Heating oil (per gallon)	$3.0848	$3.1191	-$0.0343	-10.29%	16.43%
Natural gas (per million BTU)	$7.8800	$8.0920	-$0.2120	-13.59%	5.31%
Unleaded gasoline (per gallon)	$2.8152	$2.8602	-$0.0450	-7.64%	13.02%

Goldman Sachs, JPMorgan may 'prove mortal'

In addition to the problems at Fannie Mae and Freddie Mac, Goldman Sachs (GS, news, msgs) and JPMorgan Chase (JPM, news, msgs) shares were down 1.9% to $160.04 and 3.5% to $36.74, respectively, this afternoon. The two companies, among the very strongest of big financial institutions, may "prove mortal" in the third quarter as loan losses increase and banking revenue drops, UBS analyst Glenn Schorr said in a research note today. In addition, analysts at Fox-Pitt cut their third-quarter earnings estimate for Goldman Sachs from $3.26 to $1.95.

Schorr said Goldman Sachs is "not immune" to declining profits even after the biggest U.S. securities firm "escaped many of the pitfalls that have snagged rivals."

JPMorgan faces more asset write-downs and deteriorating consumer credit, he said.

Until recently, the two companies have outperformed the S&P Financial Index. The results for the past two quarters topped analysts' estimates, Bloomberg noted, and write-downs and credit losses totaled less than those at peers Morgan Stanley (MS, news, msgs), Bank of America and Citigroup (C, news, msgs). Goldman Sachs has dropped more than 36% since peaking on Oct. 31. JPMorgan has lost nearly 31% since peaking in May 2007.

Schorr also cut earnings estimates for Citigroup and Morgan Stanley. Citigroup was down 5% to $17.62. Morgan Stanley was off 3.2% to $39.59.

Crude declines as Fay heads toward Florida

Crude's drop to $112.87 a barrel appears to confirm the downtrend that's been in place since mid-July.

Still, crude has dropped more than 22% from its $147.22-a-barrel peak on July 11.

Crude had risen early in the day on concern earlier that Tropical Storm Fay might head into the central Gulf of Mexico, which provides some 25% of domestic oil and gas supplies. But the most recent tracks show the storm moving up the west coast of Florida.

Consumers have seen relief at the pump from oil drop. The national retail price of gasoline was $3.741 a gallon today, AAA's Fuel Gauge Report said, down slightly from Sunday and off 9.1% from its peak of $4.114 on July 17.

Gold, meanwhile, closed up $13.60 to $805.70 an ounce in New York. The gain was partly due to the dollar falling against the British pound, euro and the Japanese yen. The U.S. Dollar Index, which measures the greenback against a basket of currencies, was down 0.3% to 77.12.

Energy shares were lower with crude's decline. ExxonMobil (XOM, news, msgs) fell 0.7% to $76.53. Schlumberger (SLB, news, msgs) dropped 2.3% to $89.37.

GM offers big discounts to sell vehicles

General Motors (GM, news, msgs) was the worst-performer among the 30 Dow stocks, down 7.3% to $10.36, after rolling out a major promotion for U.S. dealers that includes employee-level discounts on almost all the Chevrolet cars and trucks in its showrooms.

The discount program starts Wednesday. GM had abandoned promotions like this in the last two years to make its pricing more transparent and to wean American consumers from fire-sale blowout deals.

But GM's sales through July were down almost 18% from last year, and the automaker has faced pressure to cut costs amid signs that industrywide sales would remain slack in August despite lower gasoline prices.

"Desperate times call for desperate measures, and that's what we're seeing from GM," Edmunds.com analyst Jesse Toprak said.

Rival Ford (F, news, msgs) fell 4.3% to $4.89.

Higher prices taste bitter to Hershey

While commodity prices have eased of late, chocolate giant Hershey (HSY, news, msgs) said late Friday it expects price increases to curb sales and profit growth in 2009.

Hershey is boosting U.S. prices by an average of 10% to help counter rising cocoa, packaging, energy and shipping expenses.

Commodity costs will probably climb twice as fast in 2009 as in 2008, and hedging and marketing expenses will also advance.

The stock was down 9.4% to $37.71, fourth-worst among S&P 500 companies.

Higher prices will probably curb demand for Hershey's chocolates and other candies, the maker of Kisses and Reese's Peanut Butter Cups said. Sales growth may slow to 2% to 3% next year from a previous forecast of 3% to 5%.

Earnings per share will gain less than the company's long-range goal of 6% to 8%, Hershey said.

Lowe's says rebate checks boost profit

Lowe's reported a higher-than-expected quarterly profit on Monday, helped by U.S. consumers spending tax rebate checks, and raised its full-year forecast, sending shares up 0.2% to $24.54.

Lowe's, the second-largest home-improvement chain behind Home Depot, also forecast earnings for the third quarter below current Wall Street estimates.

Home Depot, which reports second-quarter earnings on Tuesday, fell 2.1% to $26.96.

Home-improvement retailers have been posting weak results as a slumping U.S. housing market, tightening credit and rising gas and food costs pressure consumers. The second quarter marked the fourth-straight quarterly profit decline for Lowe's.

But Lowe's profit still topped Wall Street forecasts as consumers used their tax rebates for spring projects, and its sales performance for stores open at least a year was also better than some analysts had expected.

The company's earnings for the quarter ended Aug. 1 fell to $938 million, or 64 cents a share, from $1.02 billion, or 67 cents a share, a year earlier. Reuters said the average analyst estimate was for earnings of 56 cents a share.

Total sales rose 2.4% to $14.5 billion, higher than the $14.1 billion analyst estimate.

Sales at stores open at least a year, an important retail measure, fell 5.3%, hurt by weakness in big-ticket projects such as kitchen renovations. But some analysts had predicted a drop of as much as 7%.

UnionBanCal will sell out to Mitsubishi

Despite the headwinds facing the banking industry, there was one bank deal making news today: Mitsubishi UFJ Financial Group and UnionBanCal (UB, news, msgs) agreed on a tender offer at a raised price of $73.50 a share in a deal worth $3.5 billion.

UnionBanCal shares jumped 11.7% to $73.18 on the day.

Japan's biggest bank has been trying to take over the 35% of UnionBanCal that it doesn't already own, to make it a wholly owned subsidiary. But UnionBanCal rejected a lower buyout offer last week, saying the $3 billion price, which equaled $63 per share in cash, was too low.

Mitsubishi UFJ, also known as MUFG, already owns a 65.4% stake in UnionBanCal, which is headquartered in San Francisco, and had wanted to buy the remaining interest through a tender offer beginning Aug. 18.

Short hits from the markets -- 4 p.m.

	Mon.	Fri.	Chg.	Month chg.	YTD chg.
Treasurys
13-week Treasury bill	1.740%	1.800%	-0.060	6.42%	-44.59%
5-year Treasury note yield	3.066%	3.109%	-0.043	-6.12%	-11.26%
10-year Treasury note yield	3.816%	3.852%	-0.036	-4.10%	-5.43%
30-year Treasury bond yield	4.441%	4.473%	-0.032	-3.52%	-0.40%
Currencies
U.S. Dollar Index	77.270	77.350	-0.080	5.24%	0.75%
British pound in dollars	$1.8653	$1.8653	0.0000	-5.93%	-6.23%
Dollar in British pounds	£0.5361	£0.5361	0.0000	6.31%	6.64%
Euro in dollars	$1.4702	$1.4691	0.0011	-5.76%	0.59%
Dollar in euros	€ 0.6802	€ 0.6807	-0.0005	6.12%	-0.58%
Dollar in yen	110.11	110.44	-0.33	2.07%	-1.56%
Canadian dollar in U.S. dollars	$0.940	$0.944	-$0.0043	-3.85%	-5.36%
U.S. dollar in Canadian dollars	$1.065	$1.059	$0.0055	4.08%	5.66%
Commodities
Gold	$805.70	$792.10	$13.60	-12.68%	-3.85%
Copper	$3.3090	$3.3145	-$0.01	-9.63%	8.81%
Silver	$13.2170	$12.9300	$0.29	-25.71%	-11.41%
Corn	$5.5300	$5.5300	$0.23	-5.87%	21.41%
Crude oil (NYMEX) (per barrel)	$112.87	$113.77	-$0.90	-9.03%	17.60%