U.S. Stocks Shed Gains As Fed-bailout Rally Fades

NEW YORK (MarketWatch) -- U.S. stocks on Monday lost ground as uncertainty over the government rescue of mortgage-finance giants Fannie Mae and Freddie Mac took hold, offsetting 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.

After generating double-digit percentage increases, shares of Fannie Mae and Freddie Mac pared their gains, with the former ahead 1.5% and the latter off 1.5%. 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 off 8.30 points at 11,092.24.

Of the Dow's 30 components, 16 were down. General Motors Corp. fronted blue-chip losses, with shares of the automaker off 4.3%.

Dow gains were led by Alcoa Inc. , up 0.7%, and Coca-Cola Co. , up 1.5%.

The S&P 500 fell 2.54 points to 1,236.95, with the ailing financial sector leading the declines, off 3%, following by utilities, recently 0.8% lower, and information technology, down 0.7%.

Energy and consumer staples were the only gainers among the S&P's 10 industry group, with energy up 0.7% and consumer staples ahead 0.3%.

On the New York Mercantile Exchange, crude-oil futures were recently down $1.03 at $144.05 a barrel.

The Nasdaq Composite fell 12.89 points to 2,226.19, with the tech sector pressured after Yahoo Inc. on Saturday rejected a new offer from Microsoft Corp. and dissident investor Carl Icahn.

Shares of Yahoo fell 4.8%.

Volume hit 520 million on the New York Stock Exchange, and decliners topped advancers 2 to 1. On the Nasdaq, more than 324 million shares traded, and declining issues outpaced those on the rise more than 2 to 1.

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.

Fear factor

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 credit line to the two companies, which together back about half of all outstanding U.S. home mortgages.

Investors applauded the weekend moves earlier, 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.

"The failure of IndyMac only "added to the fear factor" dogging the market, Cardillo said.

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. .

The deal is a sign of confidence in that Anheuser-Busch was a "company growing very slowly in terms of sales, and now you have a European investor that says 'I trust this market will grow, so here I am.' On the other hand, it's sad to see this brand go away. There is a big 'For Sale' sign in America from the real estate sector to the banks, and now it's spreading to the consumer sector," said Marino Marin, managing director at investment bank Gruppo, Levey and Co.

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 inthe price of crude to above $147 a barrel.

By Kate Gibson