Stocks fall on higher oil, banking concerns

By Steven C. Johnson

NEW YORK (Reuters) - U.S. stocks fell on Tuesday as oil prices rose on hurricane fears in the U.S. Gulf, while a list showing more troubled U.S. banks added to concerns about the health of the financial sector and broader economy.

Adding to the negative tone were minutes from the Federal Reserve's last policy meeting that showed officials remain worried about growth risks even as some said interest rates may have to rise to fend off inflation.

Oil prices rose, at one point breaking above $117 a barrel, on fears that Hurricane Gustav could disrupt output in the U.S. Gulf. <

While energy stocks gained, the news was negative for the broader market, especially energy-intensive sectors. The S&P energy index <.GSPE> was up 1.4 percent, but an index of airlines <.XAL> tumbled 5 percent.

"In the short term, the hurricane bearing down on the Gulf of Mexico has oil firming here, and if you follow that line it could impair production. That's hurting stocks," said Joseph Battipaglia, market strategist at Stifel Nicolaus in Yardley, Pennsylvania.

In addition, a report from the U.S. Federal Deposit Insurance Corporation that 117 banks were on its troubled banks list at the end of the second quarter, up from 90 after the first three months of the year, hurt financial shares.

"We have had some failures already, so this watch list has garnered a lot of attention," said Peter Kenny, managing director at Knight Equity Markets in Jersey City, New Jersey.

The Dow Jones industrial average was down 31.60 points, or 0.28 percent, at 11,354.65. The Standard & Poor's 500 Index was down 1.98 points, or 0.16 percent, at 1,264.86. The Nasdaq Composite Index was down 15.64 points, or 0.66 percent, at 2,349.95.

Financial shares fell, with Merrill Lynch down 1.7 percent at $23.76 and Washington Mutual down 1.1 percent at $3.56. The S&P Financials Index fell 0.7 percent.

Energy shares, meanwhile, rose on the higher oil prices, with Exxon Mobil among the biggest boosts for the S&P, rising 1.1 percent to $79.60.

Anadarko Petroleum rose 6 percent after the company announced a share repurchase program of up to $5 billion.

On the Nasdaq, Marvell Technology Group shares fell 7.2 percent after Jefferies & Co. downgraded the microchip design company's stock on concerns about its hard disk drive inventory and weak cellular positioning.

Housing data on Tuesday was mixed. The Standard &Poor's/Case-Shiller showed prices of single-family homes fell at a record pace in June from a year earlier.

But nine of the 20 cities the index tracks showed price increases, up from seven in May, while a separate report showed a drop in inventories of new unsold homes.

The data failed to convince some investors that the housing slump is nearing an end.

"We think we will see prices falling until the fourth quarter of 2010," said Gary Shilling, president of A. Gary Shilling & Co in Springfield, New Jersey. "There will be more write-downs at financial institutions and a lot more problems for consumers."

The Dow Jones Home Construction index was down 3.14 percent.

Embattled mortgage finance giants Fannie Mae and Freddie Mac rallied on hopes that a possible government rescue would not necessarily wipe out shareholder value.

"I think there's a lot of speculation that maybe the shareholders will get bailed out. So shareholders think, 'If I buy this at $3 to $5 a share and the shareholders get bailed out, I'm going to do great.' They are certainly not doing it on the basis of fundamentals," said Mark Coffelt, chief investment officer at Texas Capital Value Funds in Austin, Texas,

Fannie's shares rose 12.5 percent to $5.84 and Freddie's shares jumped 21.9 percent to $4.01.

(Additional reporting by Richard Leong and Kristina Cooke; Editing by Leslie Adler)

(c) Reuters 2008. All rights reserved. Republication or redistribution of Reuters content, including by caching, framing or similar means, is expressly prohibited without the prior written consent of Reuters. Reuters and the Reuters sphere logo are registered trademarks and trademarks of the Reuters group of companies around the world.

More US (Business) News click here