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US STOCKS-Wall St slips; credit jitters offset deal news

Published on Reuters

BONDS NEWS JULY 10, 2008 / 10:42 AM

By Ellis Mnyandu

NEW YORK, July 10 (Reuters) – U.S. stocks fell in choppy trading on Thursday as worry over whether Freddie Mac FRE.N and Fannie Mae FNM.N can obtain the capital they need overshadowed news of a planned $18.8 billion acquisition in the chemicals sector.

Federal Reserve Chairman Ben Bernanke appeared set to reassure investors. A source familiar with his testimony before a congressional committee said the Fed chief would say the government is focused on helping the financial system regain stability.

Even so, investors were cautious as capital-raising by the two government-chartered housing finance companies will dilute the value of current share-holdings. Freddie Mac fell more than 25 percent to $7.59 on the New York Stock Exchange, while shares of Fannie Mae tumbled 14.8 percent to $13.06.

“These dilutive type deals these companies are putting together are just increasing that downward spiral within the financials, not even to mention the confidence in the whole system,” said Alan Lancz, president of Alan B. Lancz & Associates Inc in Toledo, Ohio.

The Dow Jones industrial average .DJI fell 20.19 points, or 0.18 percent, to 11,127.25. The Standard & Poor’s 500 Index .SPX declined 4.65 points, or 0.37 percent, at 1,240.04. The Nasdaq Composite Index .IXIC shed 0.37 point, or 0.02 percent, to 2,234.52.

In M&A news, Dow Chemical (DOW.N) said it would acquire Rohm and Haas ROH.N for $18.8 billion, a deal that investors took as signaling value in the stock market and evidence that the credit crisis has not totally derailed deal-making. [ID:nN10461510]

But investors’ attention focused on the outlook for Fannie Mae and Freddie Mac, publicly traded companies that serve as an important pillar of the U.S. housing market.

Former St. Louis Federal Reserve Bank President William Poole said in an interview with Bloomberg that Fannie Mae and Freddie Mac are insolvent and may need a government bailout. For details, see [ID:nBNG63700]

The slide in their shares contributed to the broader market sliding into its first bear market since 2002 on Wednesday when the S&P 500 ended 20 percent below its October record close. (Editing by Kenneth Barry)