Stocks hit hard on bank woes
Wall Street retreats, with the Dow losing 242 points, on credit market problems and higher oil prices. Investors discount better-than-expected existing home sales report.
NEW YORK (CNNMoney.com) -- Credit market woes hit Wall Street again Monday, with the Dow dropping around 242 points in a thinly-traded session also influenced by fluctuating oil prices and a weaker U.S. dollar.
The Dow Jones industrial average (INDU) lost nearly 242 points, or 2.1%. The broader Standard & Poor's 500 (SPX) index fell almost 2% and the Nasdaq composite (COMP) lost 2%.
"It's been looking ugly today," said Lee Schultheis, chief investment strategist at AIP Funds. "Lately people are realizing that there may be a whole other leg of this credit market fallout that they haven't anticipated yet."
Stocks rallied from mid-July through mid-April, as oil prices backed off records above $147 a barrel. But revived concerns about the financial sector over the last week have stopped investors from continuing any advance. Additionally, oil prices have been very volatile.
"You're seeing a rolling problem that started two years ago in the mortgage business, and we haven't touched the bottom of the swimming pool in terms of the housing market," said Mark Travis, CEO at Intrepid Capital Funds.
Add to these factors the fluctuations in the oil market and the uncertainty about the political landscape as the Democratic Convention gets underway, he said.
"Between all these factors, I don't think you can make the argument that the broad market is at a compelling place to get in," Travis said.
Stocks gained Friday at the end of a tough week, thanks to lower oil prices, a stronger dollar, and comments from Fed Chairman Ben Bernanke that soothed some inflationary worries. The broader market also benefited from bets that troubled investment bank Lehman Brothers could be a buyout candidate.
But the credit market worries resurfaced Monday, at the start of a busy week for economic news. Tuesday brings reports on July new home sales, August consumer confidence and the minutes from the last Federal Reserve policy meeting.
Investors seemed to take in stride a report showing that existing home sales rose to a five-month high in July, topping forecasts, while home prices fell.
Market breadth was pretty light with many Wall Street professionals taking the last week of August off. On the New York Stock Exchange, losers topped winners over 3 to 1 on volume of 865 million shares. On the Nasdaq, decliners topped advancers by more than 3 to 1 on volume of 1.44 billion shares.
Corporate news. Lehman Brothers (LEH, Fortune 500) retreated Monday after speculation cooled that state-run Korea Development Bank is likely to buy the firm, following comments from a top regulator that discouraged such a move. (Full story)
AIG (AIG, Fortune 500) slipped after Fitch ratings said late Friday that it might cut its ratings on the insurer. Additionally, Credit Suisse cut its 12-month price target on the company and forecast it would post a bigger third-quarter loss.
Other big financial decliners included Washington Mutual (WM, Fortune 500), Wells Fargo (WFC, Fortune 500), Bank of America (BAC, Fortune 500) and JP Morgan Chase (JPM, Fortune 500).
JP Morgan said the market value of its investments in Fannie Mae and Freddie Mac preferred stock has likely fallen by half to $600 million, according to reports. The brokerage said that this could impact its quarterly earnings. Fannie and Freddie shares have been tumbling lately on worries that they can't raise capital and that a government takeover is imminent.
Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) shares managed to bounce back Monday after Freddie's debt offering saw strong demand.
Canadian oil driller Precision Drilling Trust (PCP, Fortune 500) also said it will buy Houston-based driller Grey Wolf (GW) for $2.02 billion in cash and stock.
Fuel prices: Oil prices seesawed after tumbling $6.59 a barrel Friday to settle at $114.59 on a stronger dollar and bets that global demand is slowing.
U.S. light crude oil for October delivery rose 52 cents to settle at $115.11 per barrel on the New York Mercantile Exchange.
Retail gas prices continued to drop overnight, extending their downward trend, according to a survey of gas station credit-card activity. Gas prices are down 10% from all-time highs hit in mid-July. (Full story.)
Other markets: In the bond market, Treasury prices rallied, lowering the yield on the benchmark 10-year note to 3.78% from 3.86% late Friday. Prices and yields move in opposite directions.
The dollar gained versus the euro and slipped against the yen.
COMEX gold for October delivery fell $6.70 to $822.80 an ounce. 
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