Stocks break even; more challenges ahead

By Charley Blaine and Elizabeth Strott

The good news for the stock market Friday was that it basically broke even after tumbling sharply on weak news on jobs and home foreclosures.

The bad news is that next week offers the potential for just as much volatility as investors saw this week.

The problems the market faces include:

• A Tuesday meeting of the Organization of Petroleum Exporting Countries. The question is whether OPEC members will vote to cut production to boost prices.

• Concern about where Hurricane Ike is heading. The storm may move into the Gulf of Mexico.

• How the markets react to a possible Treasury Department plan to shore up mortgage giants Fannie Mae (FNM, news, msgs) and Freddie Mac (FRE, news, msgs). The Wall Street Journal reported that plans are being finalized and may be announced as early as this weekend.

• Continued fears about the weakening economy and its effect on stocks. Friday's jobs report showed unemployment hitting 6.1%, the highest level in five years.

• Worries about the health of hedge funds, many of which had been investing heavily in commodities, especially crude oil.

The Dow Jones industrials closed Friday up 33 points to 11,221. The Standard & Poor's 500 Index moved up 5 points to 1,242. But the Nasdaq Composite Index slipped 3 points to 2,256.

The finish was even better than it looked. At 11:15 a.m. ET, the Dow was down 150 points.

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Markets could also be affected next week by a strike at Dow component Boeing (BA, news, msgs) collapsed. That could delay the delivery of the new 787 Dreamliner whose first flight was expected before the end of the year.

Machinists had voted to strike on Wednesday but agreed to delay the strike by 48 hours to allow more talks.

Boeing shares were down 0.2% to $62.89 in regular trading and down an additional 0.6% to $62.50 in after-hours trading. The stock is down 28% this year.

Does a stormy weak mean more trouble ahead? A stormy beginning to September

Despite Friday's positive finish, the week was, to be charitable, forgettable as the first week of September lived up to its reputation as a tough month.

The Dow lost 2.8%, its biggest weekly loss since the week of June 23 when it fell 4.2%. The S&P 500 fell 3.2%, its worst week since falling 3.5% the week of May 19. The Nasdaq's 4.7% loss for week was its worst since the week of Dec. 31 when it fell 6.4%.

Crude oil, meanwhile, closed down $1.66 a barrel to $106.23 in New York. Crude had fallen to as low as $105.13 during the session before rebounding somewhat. It was down 8% for the week and is down 24% this quarter. Crude's gain for the year has fallen to 10.7%. It had been up 54% in mid-July.

What set off Friday's early selling were the big economic reports:

• The Labor Department said employers shed as many as 84,000 jobs in August.

• The Mortgage Bankers Association said 2.75% of all mortgages it tracks were in a foreclosure process as of the end of the second quarter, and 6.4% of mortgages were delinquent. Increases in foreclosures in California and Florida overwhelmed improvements in states such as Texas, Massachusetts and Maryland, the trade group said.

Friday's recovery may not be a sign of a market bottom. "It's an oversold bounce/reaction rally after a sharp decline," MKM Partners Chief Market Technician Katie Stockton said. "Yesterday (and this morning's) selling was somewhat climactic, driving sentiment indicators and volume closer to contrarian levels. Support levels also are being tested by the major indices."

Art Cashin, who heads New York Stock Exchange floor operations for UBS Financial Services, thinks Monday and Tuesday could be especially volatile. The market looks like it may test lows seen in mid-July.

The markets for the week

	Close for week	Wk. ago close	% chg.	YTD. chg.
Dow Jones industrials	11,220.96	11,543.55	-2.79%	-15.41%
S&P 500	1,242.31	1,282.83	-3.16%	-15.39%
Nasdaq Composite	2,255.88	2,367.52	-4.72%	-14.95%
Russell 2000	718.85	739.50	-2.79%	-6.16%
Crude oil per barrel	$106.23	$115.46	-7.99%	10.68%
10-yr. Treasury yield	3.66%	3.81%	-4.01%	-9.29%
Gold per troy ounce	$802.80	$835.20	-3.88%	-4.20%

Big changes ahead for Fannie Mae and Freddie Mac

Shares of Fannie Mae and Freddie Mac were both sharply lower in after-hours trading after the Wall Street Journal said the Treasury Department was finishing up plans to try to shore up the largest providers of mortgage capital.

Fannie Mae was off 20.2% to $5.62 after finishing up nearly 10% in regular trading at $7.04. Freddie Mac was down 18.6% to $4.15. It had been up 3% to $5.10 in regular trading.

The stock price reaction is a clear signal that investors expect the plan to require wiping out common shareholders' stakes in both companies. The Journal said few details were available except:

• Taxpayer money would be used in the plan.

• There would be changes in senior management in both companies.

Earlier in the summer, Congress agreed to give the Treasury the ability to inject capital into the companies, which have suffered huge losses from the crash of the U.S. residential real estate market.

Lehman Bros. leads financials higher

Financial stocks led the market after reports surfaced that Blackstone Group (BX, news, msgs) and Kohlberg Kravis Roberts & Co are each looking to buy parts of Lehman Bros.' (LEH, news, msgs) real estate and asset management units, sources familiar with the situation said on Friday, sparking a broad rebound in financial stocks.

Lehman's real estate unit, which includes property and some asset-backed securities, could be worth about $5 billion, sources told Reuters.

Lehman shares jumped 6.8% to $16.20 and helped lift the Select Sector SPDR-Financial (XLF, news, msgs) exchange-traded fund up 3.6% to $21.74. The ETF tracks the financial sector of the S&P 500.

Bank of America (BAC, news, msgs) was the top performer among the 30 Dow stocks, up 5.3% to $32.23. American International Group (AIG, news, msgs) was second with a 5.28% gain to $22.34.

Materials and metals stocks, which had been crushed earlier in the week, were among those groups making comebacks. The Select Sector SPDR-Materials (XLB, news, msgs) ETF was up 0.1% to $37.22; it had been down as much as 2.7%. Freeport-McMoRan Copper & Gold (FCX, news, msgs), which had been down as much as 7.6% at 11 a.m. ET, closed down 1.4% to $73.91. Still, the stock fell more than 17% on the week.

While the overall indexes rebounded, decliners were ahead of gainers 1.1-to-1 on both the New York Stock Exchange and the Nasdaq system. Eighteen of the Dow stocks were lower, along with 280 of the S&P 500 stocks.

Energy prices -- New York close

	Fri.	Thur.	Chg.	Month chg.	YTD chg.
Crude oil (NYMEX) (per barrel)	$106.23	$107.89	-$1.66	-7.99%	10.68%
Heating oil (per gallon)	$2.9828	$3.0237	-$0.0409	-6.26%	12.58%
Natural gas (per million BTU)	$7.4490	$7.3220	$0.1270	-6.22%	-0.45%
Unleaded gasoline (per gallon)	$2.6861	$2.7404	-$0.0543	-10.76%	7.84%

Unemployment rate is highest since 2003

The 84,000 jobs lost in August exceeded the 75,000 decline economists had expected. The Labor Department also revised its estimate of July job losses to 58,000 from a previously reported 51,000.

The last time the economy lost jobs for eight straight months was from October 2001 to May 2002.

"Unemployment did rise, but that is partly due to the extended unemployment benefits that began in July," Mark Zandi, the chief economist for Moodys.com, told CNBC. People have more time to look for work, Zandi explained, so they aren't taking the first job that comes their way. "The reality is that I think unemployment is south of 6%. But the real risk is that job losses are across all industries now and not just in construction."

Average hourly earnings rose 0.4% and increased 3.6% over the past year. Since January, the economy has shed more than 600,000 jobs.

Those who are unemployed long-term -- out of work for 27 weeks or more -- rose by 163,000 in August to 1.8 million.

• Video: Jim Jubak looks at where stocks are headed

On Thursday, a report said weekly initial jobless claims rose by 15,000 last week to a seasonally adjusted 444,000 rate -- more than economists had predicted. Most economists believe that a jobless claims figure above 400,000 indicates weakness in the economy.

Despite the fact that the government has reported eight straight months of job losses, it's still not as bad as it could be, according to one observer. "Every recession dating back to 1953 produced considerably more severe job loss than we've just experienced," Saul Hymans, a professor emeritus of economics at the University of Michigan, told CNNMoney.

Another economist had a different perspective: "The new jobless rate reflects the weakest labor market in five years and adds weight to the case that the economy is in a recession," wrote Nomura Securities Chief Economist David Resler. "Jobs in the private sector fell by 101,000 in August, and the nine consecutive declines now total 772,000. That is comparable to the concurrent estimates of job losses in the early months of previous recessions but a bit smaller than the declines evident in the final revised data."

Oil continues to slide

Crude's fall was due in part to the rising dollar and weakening global demand.

Oil and the dollar typically move in opposite directions; crude prices are denominated in dollars, so a rising dollar makes oil more expensive for foreign buyers.

OPEC will meet next week in Vienna, Austria, to discuss production output. "If prices get to the double digits again, expect to see production cuts announced," Chip Hodge, a managing director at John Hancock Financial Services, told MarketWatch.

But another expert said OPEC could end up losing by cutting production, as more people could turn away from oil. "OPEC will be blamed for the economic woes worldwide, and in 10 years a sizable percentage of our vehicles will be using some other form of energy," James Williams, an economist at WTRG Economics, wrote in a recent note.

The price of oil could rise if one of three brewing storms makes its way to the Gulf of Mexico, where a significant number of oil and natural-gas rigs operate. Tropical Storm Hanna is heading to the Atlantic coast of the southeastern U.S. and will likely avoid causing any oil production damage, but forecasters are closely watching the paths of Hurricane Ike and Tropical Storm Josephine, which are building in the Atlantic.

Oil has lost more than $40 a barrel since hitting an intraday record of $147.27 on July 11.

Nokia cautions about market share

Companies that make cell phones and handheld devices were hit Friday after Nokia (NOK, news, msgs) cautioned that its market share would drop in the third quarter.

Shares of Nokia slumped 7.6% to $20.62 after the company said it will be hurt by "weaker spending in many regions." Nokia said its share in the mobile-phone market will fall because of its decision not to follow suit with competitors' price cuts.

"There is an undercutter in the market, and Nokia doesn't want to sacrifice its margins," Michael Schroder, an analyst at Glitnir Bank in Helsinki, Finland, told Bloomberg News.

Merrill gets a downgrade

Merrill Lynch (MER, news, msgs) shares were one of the day's heroes. The stock had been down as much as 5.6% early in the section after Goldman Sachs cut Merrill to "sell."

But the stock finished with a 2% gain to $26.73.

Goldman analyst William Tanona said the company would lose $5.75 per share in the third quarter and added Merrill to Goldman's "conviction sell" list.

Brokerages and banks have been struggling amid the credit crunch that has slammed the marketplace over the past year.

Dell to sell factories

In an effort to save money, personal computer maker Dell (DELL, news, msgs) plans to sell computer factories around the world, The Wall Street Journal reported. Dell will sell all of its factories over the next year and a half, the paper wrote, and will have contract manufacturers make its computers.

Dell has been struggling to boost its stock price and has been trying to gain back market share from rival Hewlett-Packard (HPQ, news, msgs), which surpassed Dell as the No. 1 personal computer maker in 2006.

"As the company moves away from its direct-sales business model, it needs to offer a wider range of products and respond more quickly to market demand," Wang Wanli, a technology analyst at HSBC Holdings, told Bloomberg. "Outsourcing production to third-party manufacturers will help them become more flexible."

Dell closed up 0.3% to $20.41.

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

	Fri.	Thur.	Chg.	Month chg.	YTD chg.
Treasurys
13-week Treasury bill	1.640%	1.650%	-0.010	-2.96%	-47.77%
5-year Treasury note yield	2.919%	2.876%	0.043	-5.50%	-15.51%
10-year Treasury note yield	3.660%	3.643%	0.017	-4.01%	-9.29%
30-year Treasury bond yield	4.276%	4.281%	-0.005	-3.08%	-4.10%
Currencies
U.S. Dollar Index	79.010	78.685	0.325	1.95%	3.02%
British pound in dollars	$1.7655	$1.7596	0.0059	-3.07%	-11.25%
Dollar in British pounds	£0.5664	£0.5683	-0.0019	3.17%	12.67%
Euro in dollars	$1.4271	$1.4245	0.0026	-2.74%	-2.35%
Dollar in euros	€ 0.7007	€ 0.7020	-0.0013	2.82%	2.41%
Dollar in yen	107.11	106.41	0.70	-1.53%	-4.24%
Canadian dollar in U.S. dollars	$0.939	$0.934	$0.0053	-0.16%	-5.44%
U.S. dollar in Canadian dollars	$1.066	$1.071	-$0.0051	0.18%	5.78%
Commodities
Gold	$802.80	$803.20	-$0.40	-3.88%	-4.20%
Copper	$3.0985	$3.2660	-$0.17	-8.52%	1.89%
Silver	$12.3250	$12.9400	-$0.62	-10.08%	-17.39%
Corn	$5.4850	$5.6450	-$0.16	-3.48%	20.42%
Crude oil (NYMEX) (per barrel)	$106.23	$107.89	-$1.66	-7.99%	10.68%