Dow off 280 as Lehman woes slam stocks

By Charley Blaine and Elizabeth Strott

Worries about the viability of investment bank Lehman Bros. (LEH, news, msgs) knocked its stock down by more than 45% and made investors wonder how long the battering of financial stocks can go on.

Lehman Bros. shares closed at $7.79, down $6.36 on the day, on news that a Korean bank backed away from talks to buy a stake in the New York bank. As Wall Street wondered how the investment bank was going to raise new capital, short-sellers drove the stock lower.

The Dow Jones industrials dropped 280 points, or 2.4%, to 11,231. The Standard & Poor's 500 Index fell 43 points, or 3.4%, to 1,225, and the Nasdaq Composite Index was off 60 points, or 2.6%, to 2,210.

With today's sell-off, the Dow gave up 97% of its gain on Monday and had its 25th loss of 200 or more points this year. The S&P 500 and Nasdaq saw their Monday gains disappear.

The lesson from today's selling: The huge rally that stocks enjoyed on Monday in the wake of the government's seizure of mortgage companies Fannie Mae (FNM, news, msgs) and Freddie Mac (FRE, news, msgs) and a big drop in mortgage rates was a one-day wonder.

The seizure of Fannie and Freddie pushed the rate on a 30-year fixed-rate loan down to 5.88% today, Bankrate.com said today, down from 6.26% a week ago.

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

The bigger issues plaguing U.S. stocks -- the health of financial companies, the continued depression in the housing market, high energy prices and increasing evidence of weakening economies around the world -- are still alive and well.

Today's losses were broad. Only five of the 30 Dow stocks had gains, led by McDonald's (MCD, news, msgs), up 1.2% to $63.19 thanks to a report of strong same-store sales in August. Just 39 S&P 500 stocks and 7 stocks in the Nasdaq-100 Index ($NDX.X) finished higher. The Nasdaq-100 closed down 41 points, or 2.4%, to 1,722. In addition, all 10 sectors of the S&P 500 were lower, with financial and energy shares the biggest losers.

Meanwhile, the lowest closing price for crude oil since April 1 pushed energy shares lower.

ExxonMobil (XOM, news, msgs) slumped 4.6% to $73.26. Apache (APA, news, msgs) fell 8.4% to $100.55, and Schlumberger (SLB, news, msgs) dropped 5.9% to $80.90.

Coal producer Massey Energy (MEE, news, msgs) was down 19.4% to $38.90 after an analyst downgraded the coal miner's shares, voicing concern about how a global economic slowdown would affect prices of coal used in steel production.

A report on pending home sales was worse than expected and tech stocks continued to weaken. Apple (AAPL, news, msgs) fell 4% to $151.68 after announcing new models of its iPod music player -- and lower prices as well.

Energy prices -- New York close

	Tues.	Wed.	Chg.	Month chg.	YTD chg.
Crude oil (NYMEX) (per barrel)	$103.26	$106.34	-$3.08	-10.57%	7.58%
Heating oil (per gallon)	$2.9247	$3.0134	-$0.0887	-8.08%	10.39%
Natural gas (per million BTU)	$7.5350	$7.5270	$0.0080	-5.14%	0.69%
Unleaded gasoline (per gallon)	$2.6526	$2.7503	-$0.0977	-11.87%	6.50%

Uncertainty slams Lehman, financials

Lehman's loss was the biggest for the S&P 500 stocks, followed by Washington Mutual (WM, news, msgs), down 19.9% to $3.30.

Lehman shares fell apart today on news reports that Korea Development Bank backed out of discussions with the U.S. bank.

• Reader talk: The Fannie-Freddie takeover is a disaster

South Korea's Financial Services Commission Chairman Jun Kwang-woo said that talks between Korea Development Bank and Lehman have ended, according to Dow Jones.

KDB had been interested in acquiring a stake in Lehman, as the company has turned to outside investors to boost capital. Speculation has also circulated that Lehman may sell its asset management business.

The Securities and Exchange Commission declined to comment on the decline in Lehman's stock price, Reuters reported. The Federal Reserve also declined to comment.

Lehman will announce strategic plans for its future at 7:30 a.m. Wednesday when it releases its third-quarter results. Analysts expect the report, originally scheduled for release on Sept. 18, to show a loss of $2.52 per share.

Lehman also shook up management Monday, which could mean that Lehman is having trouble finding investors, Ladenburg Thalmann analyst Dick Bove wrote in a note to clients today.

Among financial stocks, American International Group (AIG, news, msgs) was the worst Dow performer, down 19.3% to $18.37. Wachovia (WFC, news, msgs) was down 14.5% to $16.24.

Wells Fargo (WFC, news, msgs), which has weathered most of the credit crunch, was down 7.1% to $31.17 because it expects to take a big write-down of its investments in Fannie Mae and Freddie Mac preferred stock.

Housing slump to continue

The National Association of Realtors' pending-home-sales index fell 3.2% in July from June, indicating that the slump will continue for the next few months. The forward-looking index was down 6.8% from July 2007.

"Pending home sales are oscillating month to month, with the long-term trend essentially flat," said NAR chief economist Lawrence Yun. "Overly stringent lending criteria imposed by Fannie Mae and Freddie Mac in the past month no doubt held back contract signings."

The NAR forecasts existing-home sales to be 5.01 million this year, lower than the 5.65 million in 2007.

Sales fell 10.6% in the West and 7.5% in the Northeast, while sales rose 2.8% in the Midwest. The South was flat in July.

• Talk back: How much farther will home prices fall?

Oil heading to $100

Crude oil closed down $3.08 to $103.26 in New York, and many traders believe crude could fall below $100. Crude is now off 30% from its intraday high of $147.27 on July 11. Crude's drop has pushed retail gasoline prices lower. AAA's Daily Fuel Gauge Report said the national average retail price of gasoline $3.652 a gallon, down slightly from Monday and off 11.2% from its all-time high of $4.114 a gallon on July 17.

Crude's drop came as new projections suggest that Hurricane Ike would cross the Gulf of Mexico south of the critical system of platforms and pipelines that bring 20% or so of domestic oil and gas production ashore.

Meanwhile, the Organization of Petroleum Exporting Countries met today and was expected to keep production steady despite worries about the recent decline in oil prices.

"The market is fairly well balanced," Saudi Arabian Oil Minister Ali-Al-Naimi told reporters in Vienna this morning. "I think things are in balance, in a healthy position."

"OPEC fully realizes that recent extraordinary prices cut deeply into immediate demand but, more important, (have) spurred long-term conservation methods," Anthony Sabino, a law professor at St. John's University, told MarketWatch.com. U.S. consumption fell to 19.55 million barrels a day in June, down from 19.73 million barrels a day in May.

Hurricane Ike was downgraded to a Category 1 hurricane this morning as it headed toward the Gulf of Mexico. The downgrade eased some worries about the potential impact of the storm on any oil and natural gas rigs in the Gulf.

Ike is expected to hit the south coast of Texas on Saturday.

Carnage in commodity stocks

While most of the day's attention was focused on the damage that financial stocks absorbed, don't forget commodity stocks.

These were hit hard as commodity prices come down and global economic worries grow. Consider:

• Potash of Saskatchewan (POT, news, msgs) fell 8.5% and is off 41% since June 17.

• Monsanto (MON, news, msgs) fell 5.4% today and has slumped 30% since June 17.

• Freeport-McMoRan Copper & Gold (FCX, news, msgs) fell 9.6% to $65.16. It's down nearly 50% since peaking in mid-May.

Alcoa (AA, news, msgs) fell 2.6% to $26.82 and has dropped 38% since May 19.

• U.S. Steel (X, news, msgs) fell 12.9% to $93.69 and is down 61% since June 25.

Cooking up sales at McDonald's

McDonald's shares moved higher after the fast-food chain said that sales at stores open at least a year rose 8.5% in August.

Same-store sales rose 4.5% in the U.S., 11.6% in Europe and 10% in the Asia Pacific, Middle East and Africa regions.

Results were also helped by an Olympics advertising blitz.

"Clearly being an Olympic sponsor in China is a good thing," said RBC Capital Markets analyst Larry Miller. "For McDonald's, it was sort of a home run."

Miller, who had expected worldwide same-store sales to rise only as much as 5.5% in August, said the results were strong across the board.

The gain for its stock today pushed McDonald's 2008 gain to 7.3%, third-best among Dow stocks, behind Wal-Mart Stores (WMT, news, msgs), up 28.6% for the year, and Home Depot (HD, news, msgs), up 8.2%.

Only seven Dow stocks are showing gains for the year.

Wells Fargo to take charge on Fannie, Freddie

Fannie and Freddie have been beaten up badly by the mortgage mess. The two companies finance most of the home mortgages in the U.S. and have taken huge losses -- in total about $14 billion between them over the past year -- as rising mortgage interest rates and falling home prices have produced millions of mortgage defaults and foreclosures.

The Treasury Department announced a takeover of the two companies over the weekend.

While many stocks reacted positively to the government takeover Monday, the consequences will be both far-reaching and complex, producing a ton of information and analysis as the effects of the move shake out in coming weeks.

The government's plan protects investors in bonds issued by the two companies, but it does little to protect those who invested in common or preferred shares in the companies.

The shakeout began late Monday, when Wells Fargo announced that it will take a write-down in the third quarter because it holds preferred shares of Fannie Mae and Freddie Mac. In a press release, the company said it had invested some $480 million in the shares. Wells Fargo did not specify the amount of the write-down. Broadly speaking, the value of stock in Fannie and Freddie has lost 90% of its value over the past year.

• Analysis: Fannie-Freddie rally won't fix the market

Under the government's plan, the Treasury Department will take equity stakes in Fannie and Freddie by buying new senior preferred shares. The plan also eliminates dividends on the companies' existing preferred -- and common -- shares. That puts equity shareholders at the bottom of the barrel in terms of benefiting from any recovery by the companies.

Fannie and Freddie get the boot

One more injury for supporters of Fannie Mae and Freddie Mac.

Standard & Poor's is tossing both stocks out of the S&P 500 Index after Wednesday's close. Fannie Mae has been in the index since 1988; Freddie Mac's been a member since 1992.

Freddie Mac will be replaced by business software company Salesforce.com (CRM, news, msgs). Replacing Fannie Mae: industrial supplies maker Fastenal (FAST, news, msgs).

Homebuilders downgraded

Homebuilders had a stellar day Monday, thanks to the government's plan for Fannie and Freddie, but this morning, Credit Suisse downgraded the group.

• SuperModels: A desperate but necessary bailout

Credit Suisse cut Toll Bros. (TOL, news, msgs), Pulte Homes (PHM, news, msgs), DR Horton (DHI, news, msgs) and KB Home (KBH, news, msgs) to "neutral" from "outperform." The investment bank predicted that the takeover will lower mortgage rates between 0.3 and 0.4 percentage points and that the decrease will help make homes more affordable.

But it suggested that home prices need to fall an additional 9% and the availability of credit needs to improve before the housing market can turn around.

Shares of all of the companies were down 7% to 11% today.

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

	Tues.	Wed.	Chg.	Month chg.	YTD chg.
Treasurys
13-week Treasury bill	1.640%	1.670%	-0.030	-2.96%	-47.77%
5-year Treasury note yield	2.882%	2.960%	-0.078	-6.70%	-16.58%
10-year Treasury note yield	3.596%	3.665%	-0.069	-5.69%	-10.88%
30-year Treasury bond yield	4.192%	4.269%	-0.077	-4.99%	-5.99%
Currencies
U.S. Dollar Index	79.290	79.655	-0.365	2.31%	3.38%
British pound in dollars	$1.7612	$1.7587	0.0025	-3.31%	-11.47%
Dollar in British pounds	£0.5678	£0.5686	-0.0008	3.42%	12.95%
Euro in dollars	$1.4126	$1.4132	-0.0006	-3.73%	-3.35%
Dollar in euros	€ 0.7079	€ 0.7076	0.0003	3.87%	3.46%
Dollar in yen	106.75	108.13	-1.38	-1.86%	-4.56%
Canadian dollar in U.S. dollars	$0.934	$0.938	-$0.0045	-0.72%	-5.97%
U.S. dollar in Canadian dollars	$1.072	$1.066	$0.0059	0.73%	6.36%
Commodities
Gold	$792.00	$802.50	-$10.50	-5.17%	-5.49%
Copper	$3.0870	$3.0930	-$0.01	-8.86%	1.51%
Silver	$11.7150	$12.0650	-$0.35	-14.53%	-21.48%
Corn	$5.4450	$5.4900	-$0.04	-4.18%	19.54%
Crude oil (NYMEX) (per barrel)	$103.26	$106.34	-$3.08	-10.57%	7.58%