Stocks fall on rising oil, unease about financials

Thursday August 21, 12:53 pm ET By Tim Paradis, AP Business Writer
Stocks fall as oil prices rise amid Russia tensions; downgrades weigh on financial sector
NEW YORK (AP) -- Stocks resumed their pullback Thursday as a surge in oil prices fanned inflation concerns and as investors grew more anxious about the financial sector.
Oil jumped as investors questioned whether rising tensions with Russia could disrupt energy shipments from the world's second-largest oil producer. Wall Street is worried that oil's turn higher will hasten increases in inflation and put more pressure on already struggling consumers, whose spending is crucial to the well-being of the economy.
Light, sweet crude oil rose $6.03 to $121.59 a barrel on the New York Mercantile Exchange.
Investors also contended with fresh worries about the financials and the sector's troubles with faltering mortgage debt. A slew of analysts have been downgrading banks and brokerages over the past few weeks, and late Wednesday, Citigroup analyst Prashant Bhatia lowered his third-quarter estimates for the investment banks Lehman Brothers Holdings Inc., Goldman Sachs Group Inc. and Morgan Stanley. He predicted Lehman will write down its assets by $2.9 billion, that Goldman Sachs will write down $1.8 billion, and that Morgan Stanley will write down $1.7 billion.
"Oil is the driver and then it depends on a series of other factors that are kind of like magnifiers," said Doug Roberts, chief investment strategist at Channel Capital Research, pointing to Wall Street's latest worries about the financials.
In midday trading, the Dow Jones industrial average fell 37.78, or 0.33 percent, to 11,379.65. The Dow managed a moderate gain on Wednesday after heavy losses the first two days of the week.
Broader stock indicators also declined Thursday. The Standard & Poor's 500 index fell 2.33, or 0.18 percent, to 1,272.21, and the Nasdaq composite index fell 17.39, or 0.73 percent, to 2,371.69.
Bond prices fell. The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 3.83 percent from 3.80 percent late Wednesday.
Gold prices rose and the dollar was lower against other major currencies.
While oil prices remain well off their July 11 high of $147.27, the rebound in recent days is unnerving to investors after inflation readings the past two weeks showed prices were rising for consumers and businesses at a faster pace than expected.
With the focus on oil investors, appeared unimpressed by a better-than-expected snapshot of demand at some factories. The Philadelphia Fed said regional manufacturing activity is increasing in August by more than it did in July. Its index of activity improved to a negative 12.7 from a negative 16.3 in July.
The Conference Board's leading economic indicators report showed a 0.7 percent drop for July compared with a 0.1 percent decline in June. The index is aimed at predicting economic activity in the next three to six months.
A larger-than-expected drop last week in unemployment claims from newly laid-off workers failed to cheer Wall Street -- especially as the four-week moving average for claims hit a nearly seven-year high. The Labor Department said claims fell by 13,000 to 432,000, but that the four-week average rose to 445,750.
A shaky job market has been slamming consumers who also face a tighter credit climate, rising costs and falling home prices. That is troubling to investors as consumer spending accounts for more than two-thirds of U.S. economic activity.
"All three reports tend to indicate that we're bottoming out but that there is no real end in sight and that's what I think the market has to get used to," Channel Capital's Roberts said.
Investors again focused on the financials, which are getting hit as consumers fall behind on payments for mortgages and other debt. Citigroup's downcast note about the sector arrived after a volatile trading session Wednesday that saw worries about the possibility of a government bailout of Fannie Mae and Freddie Mac. Such a move could wipe out shareholder equity.
But Fannie and Freddie shares fluctuated after falling more than 20 percent Wednesday. Fannie rose 29 cents, or 6.6 percent, to $4.68, while Freddie rose 3 cents to $3.28.
Lehman Brothers is under particular scrutiny as well, after the Financial Times reported late Wednesday the investment bank failed to sell up to half of its shares to South Korean or Chinese investors earlier this month. Lehman fell 79 cents, or 5.8 percent, to $12.94.
Goldman Sachs fell $5.04, or 3.2 percent, to $153.21, while Morgan Stanley slipped 87 cents, or 2.3 percent, to $36.53.
The rise in oil weighed on sectors like airlines and lifted energy names. United Airlines parent UAL Corp. fell 78 cents, or 6.3 percent, to $11.62, while Continental Airlines Inc. fell 97 cents, or 6.4 percent, to $14.19.
Exxon Mobil Corp. and Chevron Corp. showed the strongest performance among the 30 stocks that make up the Dow industrials. Exxon rose $1.54, or 2 percent, to $80.35, while Chevron rose $1.84, or 2.1 percent, to $88.30.
Declining issues outnumbered advancers by about 3 to 2 on the New York Stock Exchange, where volume came to 423.8 million shares.
The Russell 2000 index of smaller companies fell 7.08, or 0.97 percent, to 724.52.
Overseas, Japan's Nikkei stock average fell 0.77 percent. Britain's FTSE 100 slipped 0.03 percent, Germany's DAX index fell 1.28 percent, and France's CAC-40 declined 1.40 percent.
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