The blue chips slid by more than 100 points for the second day in a row as financial stocks were slammed yet again and new reports reminded Wall Street about rising inflation and the ugly housing market. 

Today's Market

The Dow Jones Industrial Average fell 130.84 points, or 1.14% to 11348.55, the Standard & Poor’s 500 index dropped 11.91 points, or 0.93%, to 1266.69 and the Nasdaq Composite lost 32.62 points, or 1.35%, to 2384.36. The FOX 50 fell 9.22 points, or 1.01%, to 907.96.

In addition to the aforementioned bearish headlines hitting Wall Street, the stock market wasn't helped by a bounce back for crude oil prices, which closed above $114 a barrel. Still, it was the financial sector that had Wall Street most worried, highlighted by a 13% dive for investment bank Lehman Brothers (LEH) and more losses from mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE). 

“I think the real culprits right now are the financials. I just don’t think we can get around the magnitude of negative news on the financial front," said Art Hogan, chief market strategist at Jeffries & Co. 

It's worth noting that for the second day in a row volume was very low as barely 1 billion shares exchanged hands on the NYSE, compared to the typical volume of more than 1.3 billion. The relatively quiet trading action often reflects a lack of conviction in the overall market's movement. 

Insurer AIG (AIG) led the way down among the Dow components, diving as much as 9% after Goldman Sachs lowered its price target on the company. Home Depot (HD) slid more than 3% even after its better-than-expected quarterly results and Bank of America (BAC) fell sharply again. Energy companies ExxonMobil (XOM) and Chevron (CVX) were two of the only blue-chip stocks posting significant gains on the day, boosted by the rise in oil. 

The Nasdaq Composite lost more than 1.5% of its value on the day. Amylin Pharmaceuticals (AMLN) and Staples (SPLS) posted some of the worst losses on the Nadaq 100.

Financial-sector stocks took the brunt of the damage for the second day in a row. Wall Street appeared to be spooked by former IMF chief economist Kenneth Rogoff, who told a conference on Tuesday that the worst of the financial crisis is yet to come, including the failure of a major U.S. bank. "We're not just going to see mid-sized banks go under in the next few months, we're going to see a whopper, we're going to see a big one, one of the big investment banks or big banks," said Rogoff

Lehman Brothers (LEH) plunged 13% after a JPMorgan analyst widened his 2008 loss-per-share forecast for Lehman to $6.77 and predicted writedowns of $4 billion in the third quarter.  

Separately, The Wall Street Journal reported that Lehman is willing to sell a stake in its investment-management business, including asset management unit Neuberger Berman. Potential suitors include private-equity firms Carlyle Group, Hellman & Friedman, General Atlantic and Blackstone Group (BX), the newspaper reported. Lehman has been mulling a sale of assets to offset more expected losses in its core business.  

Also, Fannie Mae (FNM) and Freddie Mac (FRE), which sparked a broad selloff on Wall Street a day ago, failed to rebound as fears of a government bailout persist. Freddie sold $3 billion worth of five-year notes at a premium to Treasuries on Tuesday. 

The day's economic data wasn't pretty. Pressured by soaring food and energy costs, the Labor Department's producer price index jumped by 1.2% in July, twice as high as economists had forecasted. On an annual basis, producer prices surged 9.8% from a year ago, the fastest rate since June 1981. The producer price "core" index, which removes food and energy prices, rose by a larger-than-expected 0.7% last month and 3.5% from a year ago. 

The increases in producer prices are disconcerting for Wall Street because those costs must either be passed on to consumers with higher prices (consumer prices have jumped by the fastest annual rate in 17 years) or absorbed by eating into companies' profits. It's also a negative development because the Federal Reserve has been handcuffed by the slow economy, which makes the central bank reluctant to fight inflation by hiking interest rates because that could hurt growth further. 

Also, the Commerce Department reported that housing construction plunged in July to the slowest pace in more than 17 years. New housing starts fell to a seasonally-adjusted rate of 965,000, better than the 940,000-unit annual rate that economists had forecasted. It's also a reversal from June's 10.4% jump in housing starts, an irregularity based on a permit change in New York City. 

Crude oil prices did little to lighten the mood on Wall Street, closing above $114 a barrel as the dollar weakened against rival currencies. Prior to the afternoon rally, oil prices had been pushed lower as worries about oil production halts in the Gulf of Mexico due to Tropical Storm Fay have largely faded. Crude closed up $1.66 to $114.53 a barrel. 

Corporate Movers

AIG (AIG) suffered the worst losses among the blue chips on Tuesday after a Goldman Sachs analyst urged investors to "stay on the sidelines with AIG," citing a potential capital raise and ratings downgrades. Goldman analyst Thomas Cholnoky also lowered his price target on AIG to $23 from $30. The insurance giant has been slammed by losses associated with mortgages, pushing its stock down more than 60% on the year. 

Home Depot (HD) closed sharply lower after reporting a 24% slide in quarterly profit to $1.2 billion, or 71 cents per share. However, those results managed to beat the Street. Home Depot, which is one of the few remaining Dow components to report earnings this season, reiterated its gloomy outlook. 

Target (TGT) posted an 8% drop in second-quarter profit but topped analyst expectations. The nation's second-largest discount chain earned 82 cents per share, exceeding estimates provided by Thomson Reuters by six cents. Target has now posted a decline in quarterly profit in each of the past four quarters. 

Hewlett-Packard (HPQ) is scheduled to report quarterly results after the closing bell. Analysts interviewed by Thomson Reuters expect HP to post a profit of 83 cents a share.

Saks (SKS) showed that even the rich are feeling the economic slowdown as the upscale retailer reported a worse-than-expected quarterly loss and cautioned of more trouble ahead. Saks posted an adjusted-loss of 22 cents per share, compared to consensus estimates for 19 cents. Quarterly sales at Saks declined to a lower-than-expected $669.2 million. The retailer downgraded its same-store sales forecast for the second half of the year, helping to push its shares nearly 10% in the red. 

Staples (SPLS) fell sharply as the office supply company warned of weaker-than-expected results in the second quarter. According to the newly released preliminary results, the company's earnings per share declined by 15% while its revenue rose 3%. Staples said its $2.7 billion buyout of Corporate Express will boost earnings slightly in 2008.