Jitters about the health of U.S. financial institutions put equity market players in a sell first, ask questions later frame of mind on Monday.
Major U.S. stock indexes closed sharply lower in thin trading Monday. The market was weighted down by losses in financial stocks, spurred by fresh worries surrounding troubled investment bank Lehman Brothers (LEH) and giant insurer American International Group (AIG). The failure over the weekend of a Kansas-based bank, Columbian Bank and Trust, and market rumors of a hedge fund in trouble, also gave investors pause, according to S&P MarketScope.
There was little immediate reaction to a report that U.S. existing home sales rose 3.1% in July.
Bonds were surging as stocks fell. Bonds soared as stocks plunged. The dollar index rose, sending gold lower. Oil rose in volatile trading.
On Monday, the Dow Jones industrial average finished lower by 241.81 points, or 2.08%, to 11,386.25. The broader S&P 500 index was off 25.36 points, or 1.96%, to end the session at 1,266.84. The tech-heavy Nasdaq composite index dropped 49.12 points, or 2.03%, to 2,365.59.
On the New York Stock Exchange, 24 stocks declined in price for every seven that gained. The ratio on the Nasdaq was 22-6 negative.
Lehman Brothers' shares were under pressure after concerns a top South Korean regulator may derail the Korea Development Bank's purchase of an interest in the bank.
AIG shares fell after the company, including its insurance and financial subsidiaries, was placed on "Rating Watch Negative" by ratings agency Fitch Ratings. Also, Credit Suisse cut AIG's target price and EPS estimates.
Investors continued to anticipate the possibility that U.S. Treasury Secretary Henry Paulson will produce a federal bailout plan for troubled mortgage-finance giants Fannie Mae (FNM) and Freddie Mac (FRE), according to S&P MarketScope. A government rescue of Fannie Mae and Freddie Mac - whose share prices have plunged in recent weeks as they struggle with billions of dollars in losses from bad mortgages - could be costly for scores of investment, banking, and insurance companies, says S&P MarketScope.
Shares of the two companies were higher after Freddie Mac's success in auctioning $2 billion worth of debt Monday. Also, Reuters reports two of the biggest U.S. bond investors said they would get involved in a capital raising by Fannie and Freddie as long as the U.S. Treasury participates in the new deals. But Bill Gross, chief investment officer at Pacific Investment Management Co., and Dan Fuss, vice chairman of Boston-based Loomis Sayles, disagree on what shape any deal with Treasury should take, according to separate interviews on Friday.
U.S. existing home sales rebounded 3.1% to a 5.0 million unit annual pace in July, offsetting the 2.8% drop to a 4.85 million rate in July. The reading was a little bit better than the 4.9 million expected. Sales are still down 13.2% over last year, decelerating from -15.5% previously. Single family sales rose 3.1% but are still down 12.4% from a year earlier. Condo and coop sales were up 3.4%, but are down 18.6% over last year.
The months' supply of homes on the market rose to 11.2, from 11.1, on a sharp increase in condo inventory. The median sales price dipped to $212,400 from $215,100, down 7.1% year-over-year.
"Though the slightly better than expected reading suggests that bargain hunters are starting to enter the market, we still expect sales to remain weak for another year," wrote S&P senior economist Beth Ann Bovino in a note Monday.
On Tuesday, traders will examine a report on July new home sales and the minutes from the Federal Reserve's July policy meeting.
October West Texas Intermediate crude oil futures, which plunged $6.29 Friday, rose 52 cents Monday to $115.11 per barrel in one of the most volatile days in a while. London markets were closed for a holiday, which contributed to slow trading and wild movements.
Among other stocks in the news Monday, Grey Wolf (GW) agreed to be acquired by Precision Drilling Trust (PDS) in a $2 billion deal for the Houston gas drilling firm. Precision, a Canadian firm, raised its bid after Grey Wolf rejected a buyout offer two weeks ago.
Werner Enterprises (WERN) was reportedly downgraded from outperform to market perform by Wachovia analysts, who downgraded the entire U.S. trucking sector from overweight to market weight.
Healthways (HWAY) affirmed previous guidance of 2008 earnings of $1.50 to $1.55 per share. The company expects solid earnings growth in the first quarter of 2009, but a decline in revenue.
LDK Solar Co. (LDK) says its wafer plant reached a milestone of 1.0 gigawatts of wafer production. The firm said it expects revenue of $2.8 billion to $3 billion as it ships 1.45 to 1.55 gigawatts of solar wafers.
Losses for major European stock indexes deepened in late trading Monday. In Paris, the CAC 40 index slipped 1.01% to 4,355.87. Germany's DAX index fell 0.72% to 6,296.95. The London stock market was closed for a holiday.
Major Asian indexes were higher. Japan's Nikkei 225 index added 1.68% to 12,878.66. In Hong Kong, the Hang Seng index rallied 3.5% to 21,104.79.
Treasury prices were surging Monday. The 10-year note was higher at 101-26/32 for a yield of 3.786%, while the 30-year bond climbed to 101-25 for a yield of 4.395%.