Stocks End Mixed amid Financial-Sector Tumult

Major U.S. stock indexes finished mostly higher on Friday, even as Wall Street quaked with fear at the possibility of further meltdowns within the financial industry. The talk that Lehman Brothers Holdings (LEH) was desperately shopping itself to prospective buyers set the tone for the gloom, but jitters about additional losses at American International Group (AIG) and the prospects for Washington Mutual (WM) finding a buyer also kept stocks under pressure during a volatile trading session.

Market rumors of a joint bid for Lehman involving Bank of America (BAC) and other parties were circulating, notes S&P MarketScope.

Other financial stocks were in the hot seat Friday. Shares of AIG plunged nearly 31% after Standard & Poor's Ratings Service put the insurance giant's credit ratings on negative watch. The market is worried AIG may have trouble rolling over $40 billion in debt and won't be able to raise additional capital in the current credit environment. Merrill Lynch (MER) and Washington Mutual (WM) ended down, though off their earlier lows.

Bonds were lower after reports Friday showed that producer prices, excluding food and energy, were up 0.2% in August, while the overall index fell 0.9%. Headline August retail sales fell 0.3%, and were down 0.9% excluding autos. July business inventories rose 1.1%, while the University of Michigan consumer sentiment index surged to to 73.1 from 63.0 in August.

The dollar index traded lower. Gold futures were higher. Crude oil and gasoline futures climbed as Hurricane Ike approached the Texas coast.

On Friday, the Dow Jones industrial average rebounded from a 150-point drop to close 11.72 points, or 0.10%, lower at 11,421.99. The broader S&P 500 index gained 2.65 points, or 0.21%, to finish at 1,251.70. And the tech-heavy Nasdaq composite index ended 3.05 points, or 0.14%, higher at 2,261.27. By the end of the week, the S&P had recouped 27 of the 43 points it lost on Sept. 9, while the Nasdaq had bounced 51 points after a 60-point drop on Sept. 9.

On the New York Stock Exchange, 18 stocks advanced in price for every 14 that declined. The ratio on the Nasdaq was 15-14 negative.

Shares of Lehman Brothers were in focus Friday as investors waited for news on the firm's fate. S&P says it would be in favor of a possible Bank of America (BAC)/Lehman combo, only with government backing. Ladenburg Thalmann believes that BofA will be a winning bidder for Lehman, adding that there is a "natural fit" between the two companies.

Some analysts are saying that Lehman Brothers isn't under as much pressure as Bear Stearns was six months ago to secure a deal because it still has access to the Fed's discount window if it needs capital. But Christopher Whalen, managing director at Institutional Risk Analytics, a Torrance, Calif.-based firm that builds customized risk management tools, thinks Lehman is headed for bankruptcy if it doesn't find a buyer very soon.

The problem is that nobody can buy it without having to write down a big chunk of its assets right away because of the debt-laden real estate business, Whalen says.

"The only possible savior is a foreign buyer. I can’t see Bank of America [buying] this because the board would sack Ken Lewis," he says. "Don't forget Countrywide," which didn't show up on BofA's books in the second quarter because the acquisition closed at the start of July.

When it shows up in BofA's third-quarter results, the bank will start to look "fairly gritty", he says.

Even a foreign buyer would understand that "the best way to buy Lehman is on the other wide of a bankruptcy because then it will be clean," says Whalen.

Beleaguered bank Washington Mutual was also in the spotlight Friday. WaMu expects its capital ratios at the end of the third quarter to remain significantly above the levels for well-capitalized institutions and it continues to be confident that it has sufficient liquidity and capital to support operations while it returns to profitability. According to a Wall Street Journal report, WaMu said late Thursday that it had about $50 billion in liquidity from "reliable funding sources" and reported that retail deposit balances at the end of August "were essentially unchanged" from the end of 2007.

WaMu shares spiked Friday afternoon on reports from American Banker and Reuters that the Seattle-based bank was in "advanced" talks with JPMorgan Chase & Co. about a possible deal, only to slide back after CNBC Business News reported there was no such deal.

According to a New York Times report, investors fear that American International Group will face billions in additional losses due to its ties to home loans whose values have plummeted. Meanwhile, Reuters reports that credit protection costs for financial firms rose in early trading on Friday, led by AIG, Lehman, and JPMorgan Chase (JPM), as investors awaited news on the fate of Lehman.

In economic news Friday, the U.S. producer price index fell 0.9% in August, lower than the 0.4% decline the market expected, while the core rate edged up 0.2%, which was in line with expectations. This comes after gains of 1.2% and 0.7%, respectively, in July. Headline prices decelerated to a 9.6% rise over last year from 9.8% previously. Core prices accelerated to 3.6% over last year from 3.5% previously. Energy plunged 4.6%, to explain the weakness in the headline index. Gasoline prices dropped 3.5%, while food prices were up 0.3%. Light truck prices dropped 1.9%, while computers fell 1.2%.

U.S. retail sales fell 0.3% in August; excluding autos, sales were down 0.7%. Those figures are weaker than the market had expected. On a year-over-year basis, sales were down 0.4% (vs. 4.5% previously), and ex-autos sales were running at a 4.2% clip (vs. 7.9% previously). July's headline 0.1% dip was revised lower to -0.5%. The 0.4% increase in July ex-autos was revised to 0.3%. June data were also revised down. Excluding autos, gas, and building materials, sale fell 0.2%.

The components of the report were mixed. Weakness was evident in gas stations (-2.5%), nonstore retailers (-2.3%), building materials (-2.2%), and electronics (-1.3%). Motor vehicle sales were up 1.9%; food sales rose 0.7%, and sporting goods were up 0.5%.

U.S. business inventories rose 1.1% in July, while sales rose 0.5%. June's 0.7% rise in inventories was revised higher to 0.8%. The 1.7% June surge in sales was not revised. The inventory-sale ratio edged up to 1.24, from 1.23 in June.

The University of Michigan's U.S. consumer sentiment index preliminary reading surged to 73.1 in September from 63.0 in August. The improvement is much better than the 64.0 expected, and largely from the drop in energy prices. The economic outlook index jumped to 70.9 from 57.9 in August, while current conditions rose to 76.5 from 71.0.

Next week, all eyes will be on the Federal Reserve, whose policy committee meets to decide whether to change its 2% interest rate on Sept. 16. "The Fed remains trapped between the problems in the financial markets, a weak economy, and inflation fears," an S&P research note said. "With core inflation accelerating and above target, it is hard to see them loosening, especially while gross domestic product (GDP) growth remains positive. On the other hand, the continuing weakness in the labor market and the turmoil in the mortgage and related financial markets make any tightening difficult.

Lower oil prices could provide some cover to loosen in coming months if the economy deteriorates." S&P said it expect the Fed to keep the funds rate at 2% until mid-2009, with the next move a hike.

In energy markets Friday morning, October reformulated gasoline futures were up 5.68 cents to 280.56 cents as Hurricane Ike moved closer to the Texas coast and the Houston area, home to 26 refineries that account for one-fourth of U.S. refining capacity. Hundreds of thousands of people fled coastal areas in the path of the as the storm gathered strength. Ike was a Category 2 storm with 105 mph (165 kph) winds and likely will come ashore late on Friday or early on Saturday. Refineries are built to withstand high winds, but flooding can disrupt operations and -- as happened in Louisiana after Hurricane Gustav -- power outages can shut down equipment for days or weeks. An extended shutdown could lead to higher gasoline prices.

October West Texas Intermediate crude oil futures settled up 24 cents at $101.18 per barrel on Friday.

Among other stocks in the news Friday, Chipotle Mexican Grill (CMG) said that based on third-quarter results to date, the impact of the weakened economy has been greater than anticipated, resulting in further sales deceleration leading to comparable-restaurant sales in the low-single digits for the quarter. The company says the combination of a weak economy as well as food costs rising faster than expected during the quarter will result in its EPS for the period being slightly below thos of a year ago.

Deutsche Bank AG (DB) reportedly agreed to buy nearly 30% of Postbank for $3.9 billion.

Potrash Corp. (POT) announced that its Board of Directors has approved, subject to regulatory approval, an increase to the share repurchase program authorized in January, 2008, raising the ceiling to approximately 10% of the public float or 31.5 million of the company's issued and outstanding common shares.

LDK Solar (LDK) says it has signed an 11-year processing service agreement to process upgraded metallurgical grade (UMG) solar-grade silicon provided by Germany-based Q-Cells AG into wafers. LDK will process a minimum of 20,000 metric tons of UMG solar-grade silicon in the years 2008-2018, with an option to process an additional 21,000 metric tons during the same period.

Cemex (CX) expects third-quarter EBITDA to be about $1.25 billion, a decrease of about 3% on a like-to-like basis for ongoing operations vs. the year-earlier quarter, while operating income is expected to be close to $800 million. The company sees third-quarter sales of about $5.9 billion, flat with a year ago. It also sees 2008 EBITDA of $4.6-$4.7 billion. About half of the drop in its EBITDA guidance is the result of the lower expected performance from U.S. operations. Cemex also expects lower EBITDA contributions from Spanish and UK operations.

European indexes were higher Friday. In London, the FTSE 100 index added 0.84% to 5,363.30. In Paris, the CAC 40 index rose 0.87% to 4,286.19. Germany's DAX index gained 0.25% to 6,194.42.

Major Asian indexes finished mixed Friday. Japan's Nikkei 225 index rose 0.93% to 12,214.76. In Hong Kong, the Hang Seng index fell 0.18% to 19,352.90.

Treasury market

Treasury prices ended lower after Friday's round of economic data. The 10-year note was down 20/32 at 102-09/32 for a yield of 3.72%, and the 30-year bond fell 1-19/32 to 103-02/32 for a yield of 4.31.