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Financial stocks weighed on the broader markets after Barron's reported that government officials anticipate that mortgage giants Fannie Mae (FNM | Quote | Chart | News | PowerRating) and Freddie Mac (FRE | Quote | Chart | News | PowerRating) will fail to raise enough needed capital. According to the report by Barron's, the U.S. Treasury Department may need to bail out Fannie and Freddie in the upcoming months using taxpayer dollars.
The article noted that such an action could wipe out existing holders of the companies' common stock, with preferred shareholder and possibly holders of the two firms' $19 billion of subordinated debt also taking losses.
Adding to the financial sector's woes, the Wall Street Journal reported over the weekend that Lehman Brothers (LEH | Quote | Chart | News | PowerRating) might have to pre-announce its third quarter earnings on speculation that it will have to record another large loss.
With traders keeping a close eye on Tropical Storm Fay, the price of oil saw some volatility over the course of the trading day. The price of oil eventually ended the session firmly in negative territory, adding to the loss posted last week.
After rising as high as $115.35 a barrel, crude for September delivery closed down $0.90 at $112.87 a barrel, a three month closing low.
On the earnings front, home improvement retailer Lowe's (LOW | Quote | Chart | News | PowerRating) reported a 7.9 percent decline in its second-quarter profit Monday morning, reflecting the ongoing challenging sales environment, but its earnings per share still beat analysts' estimates. Nonetheless, the company also forecast third quarter earnings in a range of $0.27 to $0.31 per share, lower than the consensus of $0.33 per share.
In other news, Take-Two Interactive Software Inc. (TTWO | Quote | Chart | News | PowerRating) confirmed that it expects to sign a confidentiality agreement with Electronic Arts (ERTS | Quote | Chart | News | PowerRating) allowing EA to enter into Take-Two's formal process to evaluate strategic alternatives. Take-Two also affirmed that it is continuing its discussions as part of this process to maximize value for stockholders.
Additionally, Quest Communications (Q | Quote | Chart | News | PowerRating) said it reached separate three-year tentative agreements with the Communications Workers of America and the International Brotherhood of Electrical Workers.
In one bright spot for the markets, UnionBanCal (UB | Quote | Chart | News | PowerRating) saw notable strength after Japanese banking major Mitsubishi UFJ Financial Group (MTU | Quote | Chart | News | PowerRating) said it reached a definitive merger agreement with the company, pursuant to which MUFG will offer a higher price of about $3.5 billion in cash to acquire all the publicly held shares of the San Francisco-based bank. Shares of UnionBanCal closed up 11.7 percent.
The major averages ended the day sharply lower although they moved off of their worst levels of the session. The Dow closed down 180.51 points or 1.6 percent at 11,479.39, the Nasdaq closed down 35.54 points or 1.5 percent at 2,416.98 and the S&P 500 closed down 19.60 points or 1.5 percent at 1,278.60.
Sector News
Housing stocks turned in some of the worst performances after a report from the National Association of Home Builders showed that home builder sentiment remained at a record low in August. The Philadelphia Housing Index ended the day down 4.7 percent, pulling back from a two-month closing high set in the previous session.
Within the housing sector, Meritage Homes (MTH | Quote | Chart | News | PowerRating) and Hovnanian Enterprises (HOV | Quote | Chart | News | PowerRating) were among the worst decliners. Shares of Meritage Homes closed down 9.9 percent, coming off of a four-month closing high on Friday. Hovnanian Enterprises fell 9.5 percent, remaining in a month-long trading range.
Financial stocks also saw substantial declines, hurt by the downbeat report on Freddie Mac and Fannie Mae. The Amex Bank Index fell 4.3 percent, compared to a 3 percent decline by the Amex Securities Broker/Dealer Index.
Freddie Mac and Fannie Mae were among the worst performers within the financial sector. Freddie Mac plunged 25 percent, while Fannie Mae closed down 22.3 percent, at its worst closing level in well over ten years.
Other stocks that posted notable losses include disk drive, health insurance and real estate stocks. The Amex Disk Drive Index closed down 3.4 percent, the Morgan Stanley Healthcare Payor Index closed down 2.3 percent and the Morgan Stanley REIT Index closed down 2.1 percent.
On the other hand, gold stocks ended the session with notable gains, benefiting from a $13.60 an ounce increase in the price of the precious metal. The Amex Gold Bugs Index closed up 1.9 percent.
Dow Components
The Dow components ended Monday's session with notable losses, sending the blue chip index sharply lower. Of the 30 stocks that make up the Dow, none ended the day higher.
General Motors (GM | Quote | Chart | News | PowerRating) saw one of the biggest declines within the Dow, falling 7.3 percent. Earlier in the day, General Motors said it would offer employee prices on nearly 90 percent of its Chevrolet inventory as part of a new nationwide promotion. On Sunday, the Wall Street Journal reported that the automaker was pulling out of its sponsorship of the Academy Awards.
Taking its cue from the financial sector, AIG (AIG | Quote | Chart | News | PowerRating) also saw significant selling pressure. Shares of the insurer ended the day down 6.1 percent, extending a recent downward move. With the decline, the stock set a monthly closing low.
Citigroup (C), Bank of America (BAC | Quote | Chart | News | PowerRating) and JP Morgan Chase (JPM | Quote | Chart | News | PowerRating) were also pressured by the weakness in the financial sector. Citigroup closed down 5 percent, compared to a 4.6 percent loss by Bank of America. JP Morgan Chase ended the session 3.5 percent lower.
Hurt by fears that the global economy is slowing, Hewlett Packard (HPQ | Quote | Chart | News | PowerRating) posted a substantial loss as well. Shares of the computer maker ended the day down 2.2 percent. American Express (AXP | Quote | Chart | News | PowerRating), Home Depot (HD | Quote | Chart | News | PowerRating) and Alcoa (AA | Quote | Chart | News | PowerRating) also showed considerable weakness.
Other Markets
The major Asian markets ended Monday's session mostly lower, with the exception of the Australian and the Japanese markets. Japan's Nikkei 225 finished off the highs of the session, up 1.1 percent.
The major European averages also ended the day mostly lower. While the French CAC 40 Index and the German DAX Index closed down 0.1 percent and 0.2 percent, respectively, the U.K.'s FTSE 100 Index saw a decline of about 0.1 percent.
Meanwhile, treasuries ended Monday's session with notable gains. The benchmark ten-year note moved higher throughout the day, although it pared some of its gain in the final 30 minutes of the session. Subsequently, the yield on the ten-year note closed down 3.6 basis points at 3.816 percent, a monthly closing low.
Looking Ahead
Looking ahead to Tuesday, the Department of Commerce will release its data on housing starts, which measures the number of residential units that have started construction each month. In June, housing starts unexpectedly jumped to an annualized pace of 1.066 million units, although the strength was based on a one time change in regulations. Analysts expect housing starts to fall to an annualized pace of 0.950 million units in July.
At the same time, the Department of Labor will release its producer price index, which measures prices of goods at the wholesale level. Analysts expect the producer price index to climb 0.5 percent and the core producer price index to climb 0.2 percent.
Meanwhile, Dallas Federal Reserve Bank President Richard Fisher, who is a FOMC voting member, will be speaking about innovation in Aspen, Colorado.
On the earnings front, Target (TGT | Quote | Chart | News | PowerRating) will release its second quarter results before the opening bell on Tuesday. Analysts expect the discount retailer to post a profit of $0.76 per share, down from the $0.80 per share it earned last year.
Medtronic (MDT | Quote | Chart | News | PowerRating) and Home Depot (HD | Quote | Chart | News | PowerRating) are also scheduled to report their quarterly results on Tuesday.
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