DJ US Stocks Down As Financial Worries, Spike In Oil Weigh

NEW YORK (Dow Jones)--Another sell-off in the financial sector pushed U.S. stocks down Thursday as oil prices gained on a weakened dollar and tensions between the U.S. and Russia.
With more wild swings for shares of mortgage buyers Fannie and Freddie Thursday morning, investors are grappling with what the markets and economy may look like after a potential wipeout of their stock-market value.
Shares of Freddie recently gained 4% to $3.38, rebounding after hitting $2.26, their lowest mark of the crisis, earlier. Fannie Mae rose 7% to $4.72, up from its low of $3.53. The Wall Street Journal said the fate of the two, which own or guarantee about half of all U.S. home loans, hinges on whether they can repay bonds due at the end of September.
"The stock market appears to be discounting a doomsday scenario" for Freddie and Fannie, said Kevin Kruszenski, director of equity trading for KeyBanc Capital Markets. "I would say in terms of cost of credit in general, if you have a failure of this magnitude it's going to cause everyone to reprice risk."
Adding fuel to the fire, Citigroup lowered its fiscal third-quarter earnings estimates for Goldman Sachs, Lehman Brothers and Morgan Stanley due to asset write-downs, weaker client flows and a seasonal slowdown.
Despite the flurry of bad news, investors do not seem to be reacting like they have in the past, when indexes saw steep drops and the issues in the financial sector weighed more heavily across the broader market.
The Dow Jones Industrial Average fell 38 points, or 0.3%, to 11378. The broad Standard & Poor's 500 index declined 2.9 points to 1271, and the technology-oriented Nasdaq Composite dropped 17 points to 2371.
"The Fannie, Freddie news would have been a market disaster 60, 90 days ago, but now the market is taking it in stride and we're not free-falling. Volume has remained summer-like anemic," said Jim Paulsen, chief investment strategists at Well Capital Management. "I think the market would be making a much bigger move upwards if we didn't have the spike in oil."
On the New York Mercantile Exchange, crude oil futures shot $6.01, or 5.2%, higher to $121.57 a barrel, hitting a 17-day high, as the dollar weakened and relations between the U.S. and Russia deteriorated following Russia's conflict with Georgia.
The news weighed on consumer stocks as rising oil prices are seen to weigh on cash-strapped consumers' ability to spend.
Also at issue was data from the Labor Department indicating initial claims for jobless benefits fell 13,000 to a seasonally adjusted 432,000 in the week ended Aug. 16.
The four-week average of new claims, a figure used to smooth the effects of weekly volatility in the data, rose 7,250 to 445,750 from the previous week's revised average of 438,500. The new figure is the highest since December 2001 and above the 400,000 mark typically seen as recession territory.
A new unemployment insurance program may have given claims an upward bias for the last four weeks, said Zach Pandl, an economist at Lehman Brothers Holdings.
"The question remains if fundamental deterioration is happening underneath this bias, and we're just going to have to wait for the August payrolls report," Pandl said.
Whether the U.S. is in recession is an "academic question" at this point, the economist added, saying any recovery is likely "to be a drawn-out process."
Separately, The Wall Street Journal reported that the Federal Reserve investigated a rumor that Credit Suisse Group pulled a Lehman credit line. The newspaper said the Fed was told by the Swiss bank that the rumor was false. The Financial Times reported that a recent effort by Lehman to sell about half of the firm to overseas investors failed. Shares of Lehman, the smallest of the four major Wall Street brokers, fell 5.4% to $12.99. The Financial Select Sector SPDR, a basket of financial stocks, fell 1.7% to $20.
Markets overseas generally lost ground Thursday, with the Nikkei 225 falling 0.8% in Tokyo.