U.S. Stocks Pare Early Gains As Fed Bailout Considered

NEW YORK (MarketWatch) -- U.S. stocks on Monday mostly failed to hold early gains as uncertainty over the government's rescue plan for mortgage-finance giants Fannie Mae and Freddie Mac offset cheer from InBev NV's $52 billion deal for Anheuser-Busch Cos.

"Reality is setting in. The news over the weekend regarding Fannie Mae and Freddie Mac was good -- but also bad in it is confirming what the market feared all along," said Peter Cardillo, chief market at Avalon Partners.

Energy trading got largely overshadowed for a change. Crude oil gained on the New York Mercantile Exchange, with futures for August delivery up 52 cents at $145.60 a barrel.

After generating double-digit percentage increases early on, shares of Fannie Mae and Freddie Mac pared their gains, with the former ahead 7.9% and the latter up 5.9%. The market valuations of both companies have declined steeply in recent sessions as investors worried about the viability of the government-sponsored companies.

Up more than 100 points early on, the Dow Jones Industrial Average was more recently up 34.22 points at 11,133.76.

Of the Dow's 30 components, 21 were on the rise, with the gains led by the likes of Alcoa Inc. , up 1.5%, and Coca-Cola Co. , up 1.4%.

General Motors Corp. fronted blue-chip losses, with shares of the automaker down 3.4%.

The S&P 500 remained 3.71 points higher, at 1,243.2, while the Nasdaq Composite fell 0.60 points to 2,239.68.

Volume neared 340 million on the New York Stock Exchange, and decliners topped advancers 3 to 2. On the Nasdaq, 213 million shares traded, and declining issues outpaced those on the rise by more than 3 to 2.

After the opening bell, Freddie Mac completed a $3 billion auction with solid results: The agency sale reaped yields lower than comparable debt was trading earlier on.

The Fed on Sunday said it was prepared to lend to both Fannie and Freddie, and Treasury Secretary Paulson is requesting prompt congressional approval of a plan to widen the line of credit available to the two companies, which together back about half of all outstanding U.S. home mortgages.

Investors applauded the weekend moves in the early going, with the government's rescue of Fannie Mae and Freddie Mac in turn bolstering the dollar.

Underlining the financial sector's ongoing troubles, federal banking regulators on late Friday seized mortgage lender IndyMac Bancorp Inc. after anxious investors made a run on the bank, with the failure the third largest of a U.S. bank.

On the M&A front, Anheuser-Busch said it had accepted an improved bid from Belgium-based InBev in a deal that would create the globe's largest beer maker. .

Shares of Yahoo Inc. declined 3.4% in the wake of its weekend rejection of an offer from Microsoft Corp. and dissident investor Carl Icahn.

In overseas action, Asian stocks slid on inflation and interest-rate worries, with Tokyo's Nikkei 225 Average finishing 0.2% lower. .

In Europe, shares advanced, with the pan-European Dow Jones Stoxx 600 index recently up 1.2%. .

U.S. stocks fell on Friday, driven by worries about Fannie and Freddie along with another spike in the price of crude to above $147 a barrel.

By Kate Gibson