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Finance sector fears hit Wall St.

Speculation of a federal takeover of Fannie and Freddie sparks a sell-off. Dow tumbles 180 points.

August 19, 2008|Walter Hamilton | Times Staff Writer

NEW YORK — Stocks fell sharply Monday as investors once again questioned when the financial sector would be able to turn itself around. The Dow Jones industrial average lost 180 points.

A blistering sell-off in shares of mortgage-finance giants Fannie Mae and Freddie Mac radiated across bank, brokerage and housing stocks after an article in Barron's, a financial weekly, postulated that the government was likely to assume control of Fannie and Freddie, wiping out their existing shareholders.

Fannie Mae skidded $1.76, or 22%, to $6.15, a 19-year low, while Freddie Mac plummeted $1.46, or 25%, to $4.39, its lowest price in 17 years.

"It's not just about Fannie and Freddie," said Gail Dudack, chief strategist of Dudack Research Group in New York. "It's about how troubles at Fannie and Freddie would spill over to the broad financial sector. That's the big concern."

And because Fannie and Freddie own or guarantee nearly half of the country's $12 trillion in outstanding mortgage debt, their woes can be bad news for the housing market.

Consequently, a widely watched index of bank stocks slid 3.9%, while an index of big home-builder stocks fell 6%.

Concerns about Fannie and Freddie aren't new, but they caught investors' attention on a day with relatively little favorable news, analysts said.

"We had a day where no good news hit the tape and where there was a rekindling of these smoldering financial flames," said Fred Dixon, chief market strategist at D.A. Davidson. "That was all it took."

The Dow, which was off more than 200 points in the afternoon, ended the day down 180.51 points, or 1.6%, at 11.479.39.

Broader indexes also lost ground. The Nasdaq composite index declined 35.54 points, or 1.4%, to 2,416.98, while the Standard & Poor's 500 index slid 19.60 points, or 1.5%, to 1,278.60.

Stocks of smaller companies, which had recently outperformed their larger brethren, did no better than the large-company averages. The Russell 2,000 small-cap index fell 1.5%.

Trading volume was light as many Wall Street investors were away on summer vacations.

The market got little relief from commodity prices, whose decline in recent weeks had helped push up stocks.

Oil prices fell back again, dropping 90 cents to $112.87 a barrel, but a closely tracked commodity index rose 0.5% as grain prices rallied. Crude futures earlier shot above $115 a barrel as Tropical Storm Fay approached Florida, but the storm later appeared unlikely to disrupt petroleum facilities in the Gulf of Mexico.

The dollar, meanwhile, pulled back slightly after rallying solidly last week on signs of slowing outside the U.S. The euro rose slightly to $1.47 from $1.468 on Friday.

"We had a pretty good run there with the dollar going up pretty much every day" recently, said Justin Walters, co-founder of Bespoke Investment Group in Harrison, N.Y.

Walters predicted that the dollar would resume rallying because increasing worries about economic growth in Europe were likely to send investors scurrying to dollar-denominated investments.

A stronger dollar makes imported goods less expensive, thus easing inflationary pressures and giving the Federal Reserve breathing room to attempt to resuscitate the economy. But it also threatens to weaken a recent boom in U.S. exports.

In other market highlights:

* Yields on government bonds declined along with stocks. The benchmark 10-year Treasury note fell to 3.81% from 3.84% late Friday.

* General Motors dropped 82 cents, or 7.3%, to $10.36. Chief Executive Rick Wagoner said that despite the recent decline in oil prices, he wasn't yet seeing signs of a recovery in either the U.S. economy or vehicle sales.

* Shares of Hershey tumbled $3.91, or 9.4%, to $37.71 after the chocolate manufacturer raised wholesale prices to offset rising ingredient prices and lowered its forecast for its 2008 and 2009 earnings.

--

walter.hamilton@latimes.com

Times wire services were used in compiling this report.

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