* Oil sinks to five-month low as Gustav spares production
* Energy, materials, tech shares slide
* News of hedge fund closure seen contributing to fall
* Dow down 0.2 pct, Nasdaq down 0.8 pct, S&P down 0.4 pct
(Updates to include news of hedge fund closure)
By Kristina Cooke
NEW YORK, Sept 2 (Reuters) - U.S. stocks fell on Tuesday,
as a steep decline in the price of oil and other commodities
hammered energy and materials companies while tech shares fell
amid jitters a global economic slowdown would crimp technology
spending.
The market reversed sharp gains notched at the beginning of
the day, as commodity-related shares sold off. Analysts said
the drop in those shares was likely further fueled by the
closure of a hedge fund announced after the bell.
The market had initially soared more than 1 percent as oil
prices fell to a five-month low on relief that damage to energy
infrastructure from Hurricane Gustav appeared to be limited.
The lower oil prices also had buoyed hopes of a recovery in
consumer and business spending.
But as fears faded that Gustav would cause a prolonged
disruption to energy supplies, the focus shifted to one of the
reasons for oil's decline since its record peak in July: fears
of slowing world energy demand.
After the closing bell another potential reason for the
market's reversal emerged, when Ospraie Management told
investors it would close down a fund that lost 27 percent in
August amid a sell-off in energy, mining and resource equity
holdings.
"I definitely think that this helped turn the market
around," said Peter Holst, managing director at Delta Global
Advisors in Southern California.
"Someone was just selling stock, selling stock in those
names (that Ospraie had positions in) regardless of the market.
It had looked to us like there may have been a fund that was
about to be liquidated," said Holst.
Lehman Brothers Holdings Inc <LEH.N> took a 20 percent
stake in Ospraie in 2005. Lehman's shares were down more than 4
percent in after-hours trading.
The Dow Jones industrial average <> dropped 26.63
points, or 0.23 percent, to 11,516.92. The Standard & Poor's
500 Index <.SPX> dropped 5.26 points, or 0.41 percent, to
1,277.57. The Nasdaq Composite Index <> dropped 18.28
points, or 0.77 percent, to 2,349.24.
In addition, worries that tech companies will suffer as the
global economy slows, which sent markets tumbling on Friday
after computer maker Dell Inc <DELL.O> warned that companies
worldwide are cutting back on technology spending, continued on
Tuesday, analysts said. "This theme will continue to be very
front and center for a number of months ahead, because any
global slowdown is going to deliver a direct hit to technology
spending," said Peter Kenny, managing director at Knight Equity
Markets in Jersey City, New Jersey.
Even during the market's sharp gains earlier in the
session, technology shares did not gain as much.
Concerns a sharp slowdown in global economies could dent
demand also hurt commodity-related companies such as miner
Freeport McMoRan Copper & Gold Inc <FCX.N> and energy company
Exxon Mobil Corp <XOM.N>, which led the S&P 500 lower.
U.S. crude <CLc1> settled down $5.75 to $109.71 a barrel,
below the 200-day moving average of around $111.
"The market just couldn't hold its gains from the oil
drop," said Bobby Harrington, head of block trading at UBS in
Stamford, Connecticut. Apart from the selling in technology and
commodity-related shares, he said there are nagging "concerns
that credit problems at financial firms are still not
straightened out."
In a sign of more fallout from the credit crisis, Fitch
Ratings cut its ratings on the preferred stock of housing
finance companies Fannie Mae <FNM.N> and Freddie Mac <FRE.N> on
concern a lack of access to fresh capital could lead the
companies to suspend dividend payments.
On the economic front, U.S. factory activity unexpectedly
shrank slightly in August according a report by the Institute
for Supply Management. The report suggests the factory sector
is still struggling, along with the rest of the economy, to
overcome the effects of the worst U.S. housing slump since the
Great Depression of the 1930s.
Freeport-McMoRan shares fell 7 percent to $83.05, while
Exxon slid 3.4 percent to $72.32.
On the Nasdaq, Apple <AAPL.O> fell 2 percent to $166.19,
while Research In Motion <RIM.TO> <RIMM.O> dropped 2.7 percent
to $118.35. Dell's shares fell 4.1 percent to $20.83.
The lower price of oil did help airline and retail stocks.
The airline index <.XAL> rose 6.6 percent and the S&P retail
index <.RLX> gained 3 percent.
Trading was tepid on the New York Stock Exchange, with
about 1.1 billion shares changing hands, well below last year's
estimated daily average of roughly 1.9 billion, while on Nasdaq
about 2 billion shares traded, also below last year's daily
average of 2.17 billion.
Advancing stocks outnumbered declining ones on the NYSE by
17 to 14 while decliners just edged out advancers on the Nasdaq
by 14.2 to 13.8.
(Editing by Leslie Adler)
