Financials' Woes Drag U.S. Stocks to Losses

Updated from 4:08 p.m. EDT

After spending much of Tuesday with modest losses, stocks on Wall Street finished with a final downward plunge on concerns that the financial sector remains vulnerable to disquieted housing and credit markets.

The Dow Jones Industrial Average dropped 139.88 points, or 1.2%, to 11,642.47, and the S&P 500 lost 15.72 points, or 1.2%, to 1289.59. The Nasdaq edged down 9.34 points, or 0.4%, at 2430.61.

On the corporate front, a spate of negative headlines struck at several big financial names. Moody's downgraded Morgan Stanley's (MS) debt rating after the close Monday, to A1 from Aa3, saying that Morgan did a poor job of managing risk during the credit crisis. Morgan Stanley lost 6.1% to $42.61.

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Offering further credit-related headwinds, Standard & Poor's cut its ratings on holdings of mortgage firms Fannie Mae (FNM) and Freddie Mac (FRE), a move that could hurt the companies' efforts to raise additional capital. Fannie shares dropped 3.7% to $8.09, and Freddie stumbled 4.1% to $5.37.

Elsewhere in the financial space, Wachovia (WB) said it would cut 600 more jobs and revised its second-quarter loss to $9.11 billion from $8.86 billion. The bank said it was increasing its legal reserves as it discusses a possible settlement with the government over its dealings in auction-rate securities. Shares slumped 12% to $16.04.

Investment bank JPMorgan Chase (JPM) said in a filing with the Securities and Exchange Commission that it was writing down $1.5 billion in mortgage-related assets. The stock fell 9.3% to $37.99.

Traders were also focusing on Swiss bank UBS' (UBS) $331 million second-quarter loss. The company said it would split its investment-banking business from its wealth-management segment to quell customer concerns. UBS tumbled 6.2% to $20.35.

Michael Strauss, chief economist and strategist at Commonfund, said that the financial sector's negative headlines are a continuation of the same story. He said that the Federal Reserve's loan survey released Monday indicated that the financials continue to face challenges related to the weak housing market. "Call it a growth recession or whatever you want to call it," he said. "It's not just a challenge here, but it's a challenge internationally."

Strauss said that there are indications that half a dozen European countries are producing negative GDP, and that companies with exposure to those markets are also going to face difficulties.

Tuesday's move downward indicates the market is consolidating after several days of gains, said Fred Dickson, director of private client research and chief market strategist at D.A. Davidson. He said that the Dow's recent close above its 50-day moving average is probably a confirmation of a decent uptrend.

In technology, Advanced Micro Devices (AMD) announced after the market close Monday that it would release a new graphics card, which it said is the world's fastest. The stock climbed 2% to $5.21.

In retail, department-store operator TJX (TJX) announced a year-over-year increase in profits and raised its earnings expectations for the full year. Shares nonetheless slipped 2.3% to $36.15.

Elsewhere, biotechnology firm Gilead Sciences (GILD) won government approval to market its HIV drug Viread for chronic hepatitis B patients. The stock climbed 1.2% to $57.09.

Meanwhile, billionaire investor Carl Icahn increased his stake in Biogen Idec (BIIB) to 6% from 4.3%. Icahn has been seeking a sale of the biotech company. Biogen jumped 2.8% to $52.17.

As for analyst actions, UBS downgraded fast-food seller and member of the Dow Jones Industrial AverageMcDonald's (MCD) to neutral from buy. Goldman Sachs (GS), on the other hand, caught a Deutsche Bank downgrade to hold from buy. McDonald's fell 3.1% to $63.92, and Goldman shed 6.3% to $166.79.

The airline sector also caught a series of nods from JP Morgan, which slapped overweight stickers on American Airlines' parent AMR (AMR), Continental (CAL), US Air (LCC), Alaska Air (ALK) and Delta (DAL). Northwest (NWA) got a JPMorgan bump to neutral from underweight.

Moving over to commodities, crude oil lost $1.44 to finish at $113.01. Oil company BP (BP) announced it was shutting down two oil and gas pipelines that run through Georgia to forestall potential damage related to Georgia's conflict with Russia. Russia announced Tuesday that it was ceasing its operations against Georgia, but did not announce a withdrawal. Gold fell $13.70 to close at $814.60 an ounce.

Dickson of D.A. Davidson said that the market's failure to react to BP's pipeline shutdown indicates that the trend for crude oil is down.

"There is demand destruction and there is demand elasticity," said Strauss of Commonfund about the recent drop in oil prices. He said that declining demand is not merely a domestic story, but is also taking place internationally. "A lot of technicians are going to watch the 110 dollar area. ... Let the technicians worry about that if we get down there. We're seeing a change in the demand function for energy," he said, adding that headline inflation numbers will probably decrease for August and September.

"The worst-of-all-worlds scenario in terms of input costs has been tempered in the last 30 days," he said. Although dampened inflation won't have a huge impact on the financial services industry, it will provide a modest boost to the broader economy, he said.

U.S. Treasuries were edging upward in price. The 10-year note was adding 22/32, yielding 3.90%, and the 30-year was up 30/32 to yield 4.54%. The dollar was gaining against the euro and the pound, but moving down vs. the yen.

In economic data, the June trade deficit was revised down to $56.8 billion from $59.8 billion, a smaller deficit than the consensus estimate of $61.9 billion. A large increase in exports helped to counteract high petroleum imports. Strauss said that the trade report indicates that the U.S. is seeing better GDP growth at the expense of growth abroad, "but the market didn't focus on that," he said.

Foreign markets mainly lost ground. The FTSE in London, the DAX in Frankfurt, the Nikkei in Tokyo and the Hang Seng in Hong Kong each logged declines.

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