Stocks Finish Lower

Indexes fell amid weakness in financial shares, a drop in oil prices, and an inflation warning by San Francisco Fed President Yellen

Major U.S. stock indexes closed lower in Monday’s session after concerns about the ailing financial sector, including Freddie Mac (FRE) and Fannie Mae (FNM), halted a rally attempt that had been stoked by a pullback in crude oil prices.

The volatility in equities comes on the eve of the second-quarter earnings season and follows comments made earlier today from San Francisco Fed President Janet Yellen, who reportedly said problems in the housing market and banking system could get even worse before the economy recovers.

Bonds were higher. The dollar index finished flat. Gold futures fell.

On Monday, the Dow Jones Industrial Average finished 56.58 points, or 0.5%, lower at 11,231.96. The broader S&P 500 shed 10.59 points, or 0.84%, to close at 1,252.31. The tech-heavy Nasdaq composite index fell 2.06 points, or 0.09%, to end the session at 2,243.32.

Yellen said the risks to inflation, while "not symmetric," have definitely increased, adding that the Fed can't let a wage-price spiral develop, though inflation expectations have been reasonably well anchored. She expects the economy to grow modestly for the balance of 2008 and improve into 2009, while inflation will remain elevated over the next few quarters and core inflation likely to rise as businesses pass on higher costs.

The market remains uncertain what the Federal Reserve plans to do about interest rates in the coming months as last Thursday’s release of the June employment report indicated the U.S. economy remains soft, but oil and food prices remain stubbornly high, fueling inflation worries.

Financial stocks were once again pulling the major indexes down, ignited by concerns over a need to raise funds at Merrill Lynch & Co. (MER). Shares of Freddie Mac (FRE) and Fannie Mae (FNM) swooned on resurgent fears over the government-sponsored enterprises' need for abundant cash to fortify their balance. Lehman Brothers (LEH) analysts estimate that both Freddie Mac and Fannie Mae together may need to raise some $75 billion in capital as well, following an accounting rule change, according to a Bloomberg report.

Action Economics cited another Bloomberg report of a potential sell-off of GSE (agency) debt by Bank of America (BAC) following the merger with Countrywide is being cited as a catalyst for the sudden surge in risk premiums, plunge in stocks and jump in Treasuries.

Yahoo (YHOO) shares were up on reports of activist investor Carl Icahn's latest open letter to Yahoo shareholders, and Yahoo saying it "continues to stand ready to enter into negotiations with Microsoft Corp. (MSFT) for an acquisition of Yahoo." Yahoo also noted that Microsoft CEO Steve Ballmer and Carl Icahn have "teamed up in an apparent effort to force" Yahoo into selling its Search business to Microsoft at a price to be determined in a future negotiation between Mr. Icahn's directors and Microsoft's management. Yahoo strongly believes this would not lead to an outcome that would be in the best interests of its stockholders. Standard & Poor's reiterated it buy rating on Yahoo.

Looking ahead to later in the week, Fed Chairman Ben Bernanke will give the keynote address at the FDIC Forum on mortgage lending in Arlington, Va., Tuesday night. Bernanke and Treasury Secretary Henry Paulson will testify Thursday before the House Financial Services Committee on financial market regulatory restructuring.

There are few noteworthy economic reports this week. The ones that will get the most attention -- the international trade figures for May, June import prices and the preliminary July consumer sentiment numbers -- come out Friday.

The trade deficit widened by almost $4.5 billion in April, entirely due to higher prices, especially for oil. With imported oil prices up another 7.8% in May, the May trade gap may have widened to $62.0 billion from $60.9 billion in April, with low non-auto retail inventory levels possibly also driving higher imports to meet a short-term rise in demand for goods resulting from the tax rebates, economist John Ryding at RDQ Economics said in an email report.

August WTI crude oil futures dropped $4.06 to $141.23 per barrel in late trading Monday as the dollar rose in a rebound from recent losses and the euro slumped on indications of an economic slowdown in the Eurozone. Many observers argue oil prices will fall if a global economic slowdown materializes.

Also weighing on oil prices were subsiding tensions between the U.S. and Iran over the latter's nuclear intentions after comments from Iran's foreign minister expressing confidence in talks with western governments on the country's nuclear program. Foreign Minister Manouchehr Mottaki said in an interview with CNN on Sunday that “new approaches” are possible in Iran's relations with the U.S.

August gold futures were off $3.80 to $929.80 per ounce Monday.

Topping the agenda for the Group of Eight nations' annual summit, starting Monday in Japan, is aid for Africa and whether the world's major economic powers are providing enough of it.

Among Monday’s stocks in the news, Marshall & Ilsley (MI) expects to take second-quarter loan and lease loss provisions of up to $900 million (or $2.22 per share), due to continuing deterioration in housing market. The bank holding company now sees a second-quarter net loss of $1.50-$1.60 per share. M&I expects to return to profitability in the third quarter, but also sees elevated charge-offs and loan loss provisions for the rest of 2008 in comparison to those incurred by M&I prior to the current housing downturn.

UBS AG (UBS) said second-quarter results are likely to be at or slightly below break-even, reflecting positive contributions from its Global Wealth Management & Business Banking and Global Asset Management units, offset by a loss in its Investment Bank. In connection with the losses to date, UBS’s second-quarter results include tax credit of about 3 billion Swiss francs.

According to a Wall Street Journal report, Merrill Lynch is moving closer to selling stakes in financial firm BlackRock Inc. (BLK) and information provider Bloomberg LP, as the Wall Street firm scrambles to raise cash to make up for $6 billion in coming write-downs, say people familiar with the matter.

General Motors (GM), bruised by a deep sales slump and a half-century-low in its stock price, is preparing to cut thousands more white-collar jobs and is considering whether it should sell or shutter more of its brands, according to sources cited in a Wall Street Journal story.

APP Pharmaceuticals (APPX) agreed to be acquired by Fresenius. Terms: $23.00 cash per APP share, plus a contingent value right (CVR) that could deliver up to an additional $970 million, or $6.00 per share, in cash, if the financial results of APP meet certain targets (payable in the second quarter of 2011).

Teva Pharmaceutical Industries (TEVA) said that top-line results from a Phase III study designed to assess the efficacy, safety and tolerability of glatiramer acetate 40mg as compared to approved Copaxone 20mg in treatment of relapsing-remitting multiple sclerosis did not demonstrate increased efficacy in reducing the relapse rate; however, the higher dose maintained the favorable safety and tolerability profile of Copaxone 20mg.

Canadian Solar (CSIQ) shares jumped after it announced it signed five new sales agreements in Italy and the Czech Republic in the past three weeks.

Major European indexes were trading higher Monday. In London, the FTSE 100 index was up 1.85% at 5,512.70. In Paris, the CAC 40 advanced 1.80% to 4,342.59, while Germany's DAX index jumped 1.97% to 6,395.75.

In Asia, Japan's Nikkei 225 closed 0.92% higher at 13,360.04, and Hong Kong's Hang Seng index rose 2.28% to finish at 21,913.06.

Treasury market

Treasuries rallied Monday afternoon on the back of a flight to safety, moving inversely to a drop in the stock market due to ongoing concerns of losses in the financial sector. The 10-year note rose 16/32 to 99-21/32 for a yield of 3.92%. The 30-year bond climbed 20/32 to 98-02/32 for a yield of 4.49%.

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