Stocks whipsawed by Fannie and Freddie
Wall Street closes down, but off the day's lows, as fears of a government takeover of mortgage backers eases.
NEW YORK (CNNMoney.com) -- Stocks fell Friday, but closed off their lows, as fears that mortgage backers Fannie Mae and Freddie Mac would collapse eased after comments from a leading senator and talk that the Federal Reserve would open up its discount window.
The Dow Jones industrial average (INDU) lost about 128 points, or 1.1%, after briefly falling below 11,000 for the first time in nearly two years. The Standard & Poor's 500 (SPX) index lost 1.1%, briefly touching a more than 2 1/2-year low. The tech-heavy Nasdaq composite (COMP) lost 0.8% and remained above its March lows.
Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) both fell by close to 50% in early trading amid fears about their ability to stay afloat and speculation of a government buyout. (Full story).
But shares trimmed losses as the day wore on, recovering after Treasury Secretary Henry Paulson and Sen. Christopher Dodd, D-Conn., made comments that sought to assuage some fears.
Freddie Mac briefly turned positive, lifting the broader market, on reports that Fed Chairman Ben Bernanke told Freddie's chief that the two companies can take advantage of the emergency discount window to borrow directly from the Fed.
However, the Fed did not immediately confirm those reports, and stocks moved lower again. After the close, the Fed said that it was monitoring the overall situation closely, but that no such talks had taken place. Freddie ended 3% lower and Fannie ended 22% lower.
"The market got what it wanted to hear from Bernanke and we lifted off the lows, but the underlying issues for the financial markets remain," said Ryan Detrick, senior technical strategist at Schaeffer's Investment Research.
For the financial sector and for the stock market, there's more pain to come before a bottom is reached, said Domenic DiPiero, president at Newport Capital Group.
"Consumers can't borrow, the job market is tough, the value of the home is falling, and the stock market is down," he said. "We're getting hit from all sides."
All three major gauges are down more than 20% off the cyclical highs from October - the definition of a bear market.
All three major gauges ended lower this week, with the Dow off 1.6%, the S&P 500 off 1.8% and the Nasdaq composite off 0.4%.
Fannie and Freddie fallout. Shares of the companies have been battered this week, and have dragged on the broader stock market. Combined, the two firms hold or guarantee nearly $5 trillion worth of mortgages, or about half of the nation's home-loan debt.
The failure of Fannie and Freddie would cause further strain on an already hard-hit financial system, causing more losses to companies that have large holdings of mortgage-backed securities. (Full story).
The scare sparked a broad selloff in a variety of financial services stocks.
"These are the poisoned sectors right now and nobody want to touch poison," said Kim Caughey, senior equity analyst at Fort Pitt Capital Partners.
"If they need to recapitalize, the money has to come from somewhere, and nobody knows how much they are going to need or where it's going to come from," Caughey said.
Treasury Secretary Paulson said Friday the government is focused on assuring the health of the two companies in their current form, dampening bets that a government takeover of one or both firms is imminent.
Dodd, the chairman of the Senate Banking Committee, said that there was no need to consider a failure or a bailout, and that discussions with Paulson, Bernanke, the regulators who oversee the firms, and the companies' CEOs convinced him that they have sufficient capital. Both Freddie Mac and Fannie Mae issued statements late Friday that they have the capital necessary to function and meet regulators' targets.
Fuel prices. U.S. light crude oil for August delivery gained $3.43 to settle at $145.08 a barrel on the New York Mercantile Exchange, after hitting a trading record of $147.27 earlier. Prices were jumping on supply fears amid tensions in Iran and other oil-producing nations. (Full story).
The national average price for a gallon of regular unleaded gas fell Friday to $4.096 from $4.104 Thursday, according to AAA. (Full story).
Other movers. Elsewhere in the financial sector, Lehman Brothers (LEH, Fortune 500) lost another 16.6%, amid continued uncertainty about the brokerage's solvency since it reported a nearly $3 billion second-quarter loss last month. (Full story).
Dow component Citigroup (C, Fortune 500) managed to close with just modest losses, after the company said it is selling its German retail banking unit to France's Credit Mutuel for $7.7 billion.
General Electric (GE, Fortune 500) reported weaker earnings that met forecasts on higher sales that beat estimates. The company reiterated that it would earn $2.20 to $2.30 per share for the full year versus analysts' estimates of $2.22 per share.
GE also said it will sell its Japanese consumer finance business for $5.4 billion. On Thursday, GE said it wants to spin off its lighting and appliance businesses. GE shares ended nearly unchanged, after rising a bit in the morning.
Of the 30 Dow components, 21 fell, led by AIG (AIG, Fortune 500), Boeing (BA, Fortune 500), Bank of America (BAC, Fortune 500), Chevron (CVX, Fortune 500) and JPMorgan Chase (JPM, Fortune 500).
In other news, Anheuser-Busch (BUD, Fortune 500) is likely to accept Dutch brewer InBev's sweetened bid of $70 a share, according to media reports. Anheuser-Busch stock gained more than 8%.
Market breadth was negative. On the New York Stock Exchange, losers topped winners 2 to 1 on volume of 1.73 billion shares. On the Nasdaq, decliners beat advancers by a narrow margin on 2.3 billion shares.
Other markets. In currency trading, the dollar fell versus the euro and the yen.
In the bond market, Treasury prices tumbled, raising the yield on the benchmark 10-year note to 3.95% from 3.80% late Thursday. Bond prices and yields move in opposite directions.
COMEX gold for September delivery rose $18.70 to settle at $963.20 an ounce.
Economic news. The U.S. trade deficit narrowed in May by more than expected, as the record demand for exports - due to the weak dollar - overshadowed the record demand for imports, including crude oil.
The University of Michigan's July consumer sentiment index inched up to 56.6 from 56.4, versus forecasts for a drop to 55.5. However, the index's expectation component, which relates to consumer spending, fell to a 28-year low. 
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