U.S. Stocks Gain, Led by Energy; Exxon, ConocoPhillips Advance

U.S. stocks rose, led by energy shares, after a gain in natural gas prices boosted the earnings outlook for the stock market's best-performing industry of 2007.

Exxon Mobil Corp., the world's biggest energy company, advanced for the seventh time in eight days. ConocoPhillips, the largest U.S. natural gas producer, rose to three-month high. Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co., the biggest U.S. banks, erased early gains and led financial shares to the steepest decline in the Standard & Poor's 500 Index after a report showed new-home sales fell to a 12-year low.

The S&P 500 advanced 2.12, or 0.1 percent, to 1,478.49, extending its fifth straight annual advance. The Dow Jones Industrial Average added 6.26, or 0.1 percent, to 13,365.87. The Nasdaq Composite Index decreased 2.33, or 0.1 percent, to 2,674.46. About the same number of stocks rose as fell on the New York Stock Exchange.

We don't think the prices on the energy stocks are overdone at all, said Ted Baszler, who helps manage $3 billion at Heartland Advisors Inc. in Milwaukee. They definitely have more room to run here. The long-term story for oil remains very bullish.

The S&P 500 lost 0.4 percent for the week, while the Dow slipped 0.6 percent and the Nasdaq dropped 0.7 percent.

Energy and mining companies have led the S&P 500 to a 4.2 percent advance this year as speculation the global economy will keep growing overshadowed a worsening U.S. housing slump. Oil drillers, refiners and drilling services companies have rallied 34 percent in 2007, helping the S&P 500 Energy Index more than triple in five years.

Yearly Gains

The Dow average has risen 7.2 percent in 2007, while the Nasdaq Composite has gained 11 percent.

Natural gas for February delivery rose 2.6 percent to $7.386 per million British thermal units, the highest since Dec. 12. Crude oil for February delivery touched $97.92 a barrel, rising within $1 of its record close of $98.18 on Nov. 23, before falling 51 cents to $96.11.

ConocoPhillips added 48 cents to $89.13. Exxon, also a producer of natural gas, increased $1.33 to $95. The rise in energy shares helped erase earlier losses spurred by concern falling home sales will cause a recession.

Energy is not the best leader to have because it's typically based on higher energy prices, said Richard Sichel, chief investment officer at Philadelphia Trust Co., which manages $1.5 billion in Philadelphia. You would rather see consumer and financial stocks leading the way. That would be a healthier environment.

Financial Shares

Financial shares lost 0.5 percent for their third consecutive retreat. Citigroup fell 27 cents to a five-year low of $29.29. Bank of America slid 36 cents to a three-year low of $41.10. JPMorgan Chase declined 38 cents to $43.26. Fannie Mae dropped $1.27 to $38.34.

Banks and brokerages retreated even as traders increased bets the Federal Reserve will lower interest rates at its next two meetings. The odds of a quarter-point cut to 4 percent at the Jan. 30 meeting increased to 90 percent from 76 percent, and the chances of a reduction to 3.75 percent on March 18 rose to 58 percent from 44 percent, future contracts indicate.

Purchases of new homes slid 9 percent to an annual pace of 647,000 in November and October sales were revised down to a 711,000 rate, the Commerce Department said. Last month's sales were weaker than the lowest forecast in a Bloomberg survey.

The market has been slow to grasp just how bad things were going to be for housing, said Doug Peta, market strategist at J.&W. Seligman & Co. in New York, which manages $20 billion.

Source - Bloomberg

Merrill Lynch seen cutting 1,600 jobs after Q4 write-downs

Merrill Lynch & Co is set to lay off 1,600 of its staff after disclosing fourth-quarter write-downs, a CNBC report said.

The layoffs are likely to be in trading positions and related areas, and will not likely include the investment banking or private client groups, the CNBC report said.

Merrill Lynch had about 64,000 employees as of the end of September, so 1,600 layoffs would represent less than 3 per cent of its work force.

Despite some appropriate actions recently taken by several firms in terms of raising capital and taking write-downs, the credit crisis still needs a couple of quarters before it is fully digested by the market, according to Goldman Sachs analysts.

U.S. Economy: Sales of New Homes Tumble 9% to 12-Year Low

By Bob Sales of new homes in the U.S. fell to a 12-year low in November, pointing to bigger declines in construction that will hinder economic growth in 2008.

Purchases dropped 9 percent to an annual pace of 647,000 and October sales were revised lower, the Commerce Department said today in Washington. Last month's sales were weaker than the lowest forecast in a Bloomberg News survey of economists.

Treasury notes extended their rally and traders added to bets that the Federal Reserve will cut interest rates again in January to prevent a recession. New-home sales are down 25.4 percent so far this year, heading for the biggest annual decline since at least 1963.

This gives a dire picture of the U.S. housing market, said Dana Saporta, an economist at Dresdner Kleinwort in New York. The weakness of the housing industry does raise the risk of recession.

A separate report showed the National Association of Purchasing Management-Chicago's index of American business activity rose this month as new orders increased. The group's index climbed to 56.6, from 52.9 the previous month.

The deepest housing recession in 16 years will worsen as discounts fail to lure buyers and mounting foreclosures swell the glut of unsold properties, economists said. Falling property values may cause consumer spending to cool, increasing the odds the expansion will falter in 2008.

The most important implication of this is it's going to drive down construction outlays and that's a direct effect on GDP, said Neal Soss, chief economist at Credit Suisse Group in New York.

Yields Retreat

The yield on the benchmark 10-year note fell 9 basis points to 4.11 percent at 10:21 a.m. in New York. The dollar weakened against the euro and stocks pared their advance. The Standard & Poor's Supercomposite Homebuilding Index, which includes KB Home, Pulte Homes Inc. and D.R. Horton Inc., declined 2.8 percent to 306.44.

A Bloomberg survey of 68 economists forecast sales would fall to an annual pace of 717,000 from a previously reported 728,000 rate in October, according to the median estimate. Economists' forecasts ranged from a low of 685,000 to a high of 750,000. Government records only go back to 1963.

Sales of new homes were down 34 percent from the same time last year, the biggest 12-month drop since January 1991. The median price fell 0.4 percent from November 2006 to $239,100.

The number of homes for sale at the end of November decreased 1.8 percent to 505,000, the fewest in two years. Still, because sales dropped even more, the inventory of unsold homes at the current sales pace jumped to 9.3 months from 8.8 months in October.

Regional Picture

Purchases fell in three of four regions, led by a 28 percent plunge in the Midwest. Sales dropped 19 percent in the Northeast and 6.4 percent in the South. They rose 4 percent in the West.

The housing recession has deepened since the August turmoil in subprime mortgages led to a worldwide credit shortage. Stricter borrowing standards and a freeze on lending to borrowers with poor credit put mortgages out of reach for more potential buyers. That's driving home prices lower, weakening sales as people hold out for even bigger reductions.

Sales of new houses will probably tumble 8.9 percent in 2008 after a 25 percent drop this year, according to a Dec. 13 forecast from Fannie Mae, the largest mortgage buyer. Sales of new homes in November were 53 percent down from their July 2005 peak.

Prices Decline

Home prices in 20 metropolitan areas fell 6.1 percent in the 12 months to October, the most in at least six years, according to a report this week by S&P/Case-Shiller. The decline raises the risk that more Americans will walk away from properties that are worth less than they owe, economists said.

Lehman Brothers Holdings Inc. is forecasting prices will fall at least 15 percent from peak to trough. By that measure, the S&P/Case-Shiller index is down 6.6 percent so far.

With sales and prices falling, foreclosures rose 68 percent in November from a year earlier. They may continue surging in 2008 as mortgages for some subprime borrowers with adjustable rates reset.

As foreclosures throw more homes onto the market, homebuilders such as Hovnanian Enterprises Inc., New Jersey's largest, are scaling back.

Hovnanian plans to pare down our inventories in virtually all our markets, Chief Executive Officer Ara Hovnanian said on a conference call Dec. 19. It will be a difficult year.

Construction

Housing starts are near a 14-year low and have fallen 48 percent since their January 2006 peak. Declining home construction has subtracted from economic growth for the last seven quarters, and economists are expecting the drag to continue in 2008.

The weaker housing market is also forecast to undermine consumer spending, which makes up two thirds of the economy, as falling property values leave owners feeling less wealthy and with less equity to tap for extra cash.

The odds of recession have increased since the credit markets froze as a result of the subprime crisis. The economy will expand at a 1 percent annual pace in the fourth quarter after growing at a 4.9 percent rate from July through September, according to the median forecast of economists surveyed this month by Bloomberg News.

`The probability of recession is 50 percent for next year at some point, Martin Feldstein, head of the National Bureau of Economic Research, which determines when contractions start and end, said in a Dec. 14 interview. We could see a downturn starting sometime in the spring or the second quarter of next year.

Source - Bloomberg

Crude Oil Rises to a One-Month High After U.S. Inventory Drop

Crude oil rose to a one-month high after an Energy Department report showed that U.S. inventories fell more than expected.

Stockpiles declined 3.3 million barrels to 293.6 million, the lowest since January 2005, the report showed. Supplies were expected to drop 1.5 million barrels, according to the median of responses by 12 analysts in a Bloomberg News survey. Prices rose earlier because of the assassination of Benazir Bhutto, Pakistan's former prime minister.

These numbers were bullish across the board, said James Ritterbusch, president of Ritterbusch & Associates in Galena, Illinois. You have to add some geopolitical premium because of the news from Pakistan. It's clear we are off to the races and will probably test the record tomorrow.

Crude oil for February delivery rose $1.36, or 1.4 percent, to $97.33 a barrel at 11:09 a.m. on the New York Mercantile Exchange. Oil reached $97.50 today, the highest since Nov. 26. Futures touched a record $99.29 on Nov. 21. Prices are up 61 percent from a year ago.

Brent crude for February settlement rose $1.37, or 1.5 percent, to $95.31 a barrel on London's ICE Futures Europe exchange. Prices reached $95.35, the highest since Nov. 26.

The department released its weekly report on inventories at 10:30 a.m. in Washington, a day later than usual because of Christmas.

The combination of bullish inventory numbers and thin volume is sending prices higher, said Christopher Edmonds, the managing principal of FIG Partners Energy Research & Capital Group in Atlanta. There are a lot of people who would love to see prices reach the magical triple digit level before the end of the year. The bias has to be higher until the year ends.

Lower Volume

Trading volumes have been lower than usual because of end- of-year holidays. Nymex oil traders exchanged an estimated 241,452 contracts yesterday, down 31 percent from a week earlier, according to data compiled by Bloomberg.

Total implied fuel demand in the U.S. averaged 21.1 million barrels a day in the four weeks ended Dec. 21, up 1.6 percent from a year earlier, according to the department. Consumption of distillate fuel, a category that includes heating oil and diesel, averaged 4.5 million barrels a day over the period, up 5.7 percent from a year earlier.

The department measures shipments from refineries, pipelines and terminals to calculate demand.

Terrorism

The oil market has been sensitive to suspected Islamic terror assaults since the Sept. 11, 2001, attacks on the U.S. Pakistan borders Iran, which holds the world's second-biggest oil reserves, and is located along the Arabian Sea, where tankers travel before entering the Persian Gulf.

The U.S. backed a partnership between Bhutto and President Pervez Musharraf. President George W. Bush banked on the relationship to return stability to a nuclear-armed country that, according to U.S. intelligence reports and officials, is failing to combat a growing Islamist threat.

Bhutto received a letter from friends of al-Qaeda on Oct. 23, threatening more suicide attacks, possibly using women bombers, her lawyer, Farooq Naik, said.

Oil Rises Above $96 on Expected Supply Drop, Turkish Air Strike

Crude oil rose above $96 a barrel in New York for the first time this month as a government report tomorrow may show a U.S. inventory decline and as Turkish planes bombed suspected Kurdish sites in northern Iraq.

Supplies probably dropped 1.75 million barrels in the week ended Dec. 21, according to the median of nine responses in a Bloomberg News survey of analysts. The Turkish strikes were the latest in a series of cross-border attacks on the outlawed Kurdistan Workers Party, or PKK.

The Turkish attacks are factored in but this isn't a new problem and it has had no impact on the oil flow, said Addison Armstrong, director of market research at Tradition Energy in Stamford, Connecticut. In oil inventories, we're looking for the sixth straight weekly withdrawal. Crude stocks fell below the five-year average last week and are clearly tightening.

Crude oil for February delivery rose $1.63, or 1.7 percent, to $95.76 a barrel at 11:31 a.m. on the New York Mercantile Exchange. Oil reached $96.54 today, the highest since Nov. 27. Futures touched a record $99.29 on Nov. 21 and are up 57 percent from a year ago.

Trading has been lighter than usual because of the end-of- year holidays. Nymex oil traders exchanged 81,634 contracts on Dec. 24, down 82 percent from a week earlier, according to data compiled by Bloomberg.

The main thing today is that this is a thin, volatile market, Armstrong said. If someone wants to push this market, they clearly can.

The Energy Department is scheduled to release its weekly report on inventories tomorrow at 10:30 a.m. in Washington, a day later than usual because of Christmas.

Bombing Raid

Today's bombing raid was at least the third air operation in Iraq this month. Troops were briefly sent across the border on Dec. 17, according to the army. Turkey says it is using intelligence from the U.S. to target the PKK.

Iraq has the world's third-largest crude-oil reserves. The country's northern region is controlled by a semi-autonomous Kurdish administration. Kirkuk, at the center of the region's biggest oil field, is about 100 miles (161 kilometers) from the Turkish border.

Exports from northern Iraqi fields, which run by pipeline to Turkey's Ceyhan export terminal on the Mediterranean Sea, averaged 400,000 barrels a day last month.

The ongoing Turkish air attacks are an excuse to push prices to the upside, said Tim Evans, an energy analyst at Citigroup Global Markets Inc. in New York. It's debatable whether this will have any effect on Iraqi shipments.

Falling Dollar

Crude-oil prices also rose because the U.S. dollar fell against the euro, which bolstered the appeal of commodities as a hedge against inflation. Weak Christmas retail sales in the U.S. indicate consumers are starting to feel pressured by the slowdown in the housing market. The U.S. uses about 25 percent of the world's oil.

Brent crude for February settlement rose $1.45, or 1.6 percent, to $94.15 a barrel on London's ICE Futures Europe exchange.

U.S. Stocks Drop on Retail, Home Price Concern; Target Falls

U.S. stocks dropped for the first time in four days on concern slower sales at Target Corp. and the biggest drop in home prices in at least six years signal consumer spending may weaken more than expected.

Macy's Inc., Circuit City Stores Inc. and Dillard's Inc. led declines by 30 of 31 retailers in the Standard & Poor's 500 Index. Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co., the biggest U.S. banks, retreated after billionaire investor Warren Buffett said he declined to invest in financial firms that approached him recently about buying stakes.

The S&P 500 decreased 5.32, or 0.4 percent, to 1,491.13 at 12:20 p.m. in New York. The Dow Jones Industrial Average lost 36.9, or 0.3 percent, to 13,512.43. The Nasdaq Composite Index slipped 8.03, or 0.3 percent, to 2,705.47. More than two stocks fell for every one that rose on the New York Stock Exchange. Asian benchmarks climbed and most European markets were closed.

The consumer is feeling some pain, said Frederic Dickson, chief market strategist at D.A. Davidson & Co., which manages $23 billion in Lake Oswego, Oregon. Investors are going to be looking for a spillover effect.

Target's forecast that December sales at stores open at least a year may drop 1 percent added to evidence that chain stores will post the weakest holiday sales growth in five years. Retailers in the S&P 500 have tumbled 18 percent as a group this year as home values decline and energy prices climb. The S&P/Case-Shiller index today showed property values slid 6.1 percent in October.

The S&P 500 is headed for its first quarterly decline since the three months ended June 2006. Today's drop limited the benchmark's advance to 5.1 percent in 2007, while the Dow average has gained 8.4 percent this year and the Nasdaq is up 12 percent.

Target Tumbles

Target fell $1.36 to $51.11. Target had earlier predicted a gain of as much as 5 percent for stores open at least a year. It issued its lowered forecast, which ranged from a possible gain of 1 percent to a drop of 1 percent, after financial markets closed on Dec. 24.

Macy's, the owner of the namesake department store chain and Bloomingdale's, lost $1.48, or 5.5 percent, to a three-year low of $25.53.

Circuit City, the second-largest consumer electronics chain, tumbled 24 cents to a four-year low of $4.71. Dillard's, the retailer that operates mostly in the South, slid $1.15 to $19.15.

Wal-Mart Stores Inc., the world's biggest retailer, slumped 55 cents to $48.19. The National Retail Federation has forecast a 4 percent increase in total sales for the holidays, the smallest gain since 2002.

`Consumer-Led Recession'

We're definitely heading into a consumer-led recession, said Howard Davidowitz, chairman of Davidowitz & Associates Inc., a New York-based consulting and investment banking firm for retailers. Retail stocks have been killed this year and rightfully so, but the worst is yet to come.

Property values fell 6.1 percent in October from the previous year, more than economists had forecast, according to the S&P/Case-Shiller home-price index. The decline was the biggest since the group started keeping year-over-year records in 2001. The index has fallen every month this year.

Citigroup slid 47 cents to $30.51. Bank of America lost 33 cents to $41.95. JPMorgan slumped 21 cents to $44.62. Financial firms in the S&P 500, down almost 20 percent this year, fell 1 percent today.

Buffett Not `Salivating'

We've seen some deals as you can imagine in this period, Buffett said today in an interview on CNBC. So far, we have not seen a deal that causes me to start salivating. He didn't say which firms approached him.

The biggest U.S. residential real-estate slump in 16 years has rendered mortgages unaffordable for many homeowners, leading to an increase in foreclosures. The world's biggest banks and brokerage firms have written down the value of their assets, including mortgage-backed bonds, by at least $96 billion.

Berkshire Hathaway Inc., Buffett's holding company, added $1,920 to $139,900 after saying it will pay $4.5 billion to take control of closely held Marmon Holdings Inc.

Hess Corp. led energy companies higher as crude oil climbed for a third straight day to a one-month high of $95.92 a barrel in New York. The fifth-largest U.S. oil company rose $1.98 to a record $104.36. Exxon Mobil Corp., the biggest U.S. oil company, rose 96 cents to $94.96.

U.S. stocks rose Dec. 24, sending benchmark indexes to the highest levels in two weeks, as falling interest rates and a $33.3 billion agreement to restructure Canadian commercial debt improved the outlook for credit markets.

Source - Bloomberg

U.S. Economy: Home Prices Declined at Faster Pace

Home prices in 20 U.S. metropolitan areas fell in October by the most in at least six years, raising the risk that more Americans will walk away from properties that are worth less than they owe.

Values fell a greater-than-forecast 6.1 percent from October 2006, the S&P/Case-Shiller home-price index showed today. The decrease was the biggest since the group started keeping year-over-year records in 2001.

Prices will continue falling as record foreclosures put even more homes on the market while stricter lending rules make financing tougher to get. Declining values also pose a risk to consumer spending by making it harder for owners to tap home equity for extra cash.

You are likely to see more people giving up on their loans as they end up with little or no equity in their homes, said Abiel Reinhart, an economist at JPMorgan Chase & Co. in New York. It's one more factor that weighs on the path of consumption.

Compared with a month earlier, home prices dropped 1.4 percent, the biggest one-month decline since records began. The figures aren't seasonally adjusted, so economists prefer to focus on the year-over-year change.

The median forecast of 12 economists surveyed by Bloomberg News projected a 5.7 percent decline after the index dropped 4.9 percent in the 12 months ended in September.

Manufacturing Slumps

A report from the Federal Reserve Bank of Richmond today also showed manufacturing in its region contracted for the second time in three months in December. Combined with earlier reports this month that showed factory activity slowed in New York and also shrank in the Philadelphia region, the reports suggest the housing slump is filtering through the economy.

Seventeen of the 20 cities in the S&P/Case-Shiller index showed a year-over-year decline in prices, led by 12 percent slumps in Miami and Tampa, Florida. Three cities, Charlotte, North Carolina, Seattle and Portland, Oregon, showed an increase from a year earlier.

All 20 areas covered showed a drop in prices compared with September.

The current state of the single-family housing market remains grim, Robert Shiller, chief economist at MacroMarkets LLC and a professor at Yale University, said in a statement.

Shiller and Karl Case, an economics professor at Wellesley College, created the home-price index based on research from the 1980s.

Prices to Worsen

The housing market may continue to weaken as an increase in foreclosures adds to a glut of unsold homes on the market, spurring sellers to cut prices, economists said.

With supply overhang enormous and mortgage financing tougher to obtain, home prices are going to decline considerably further in the quarters ahead, said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc., a New York forecasting firm.

Lower home prices may also threaten spending. This holiday shopping season is forecast to be the weakest in five years, according to the National Retail Federation. A jump in November sales and a rush of last-minute purchases the weekend before Christmas probably weren't enough to change that outlook, according to analysts.

Stocks dropped for the first time in four days on concern over the outlook for consumer spending, which accounts for more than two thirds of the economy. The S&P 500 index was down 4 points, or 0.3 percent at 12:47 p.m. in New York. The S&P supercomposite homebuilder index was down 0.9 percent.

Fewer Sales

Figures later this week from the Commerce Department may show new homes sold at an annual rate of 718,000 in November, down from October's 728,000 rate, based on the median estimate of economists surveyed by Bloomberg News.

Sales of new houses probably will fall 8.9 percent in 2008 after a 25 percent drop this year, according to a Dec. 13 forecast from Fannie Mae, the largest mortgage buyer.

The market is too challenging to make predictions for fiscal 2008, Ara Hovnanian, chief executive officer of Hovnanian Enterprises Inc., said on a conference call on Dec. 19. It will be a difficult year. The Red Bank, New Jersey- based company reported a net loss of $467 million for the three months ended Oct. 31.

Residential investment has subtracted from economic growth for the past seven quarters. Home building dropped at a 20.5 percent annual pace in the third quarter, the most since 1991.

The S&P/Case-Shiller index and another by the Office of Federal Housing Enterprise Oversight track the same home over time and more accurately reflect price trends, economists said.

Price gauges from the Commerce Department and the Realtors group can be influenced by changes in the types of homes sold. Higher sales of cheaper homes relative to more-expensive properties will bias the figures down.

Source - Bloomberg

U.S. Leading Economic Indicator Index Fell 0.4%

The index of leading economic indicators fell for the third time in four months in November, signaling an increasing risk of a U.S. recession.

The Conference Board's gauge, which points to the direction of the economy over the next three to six months, fell a greater-than-forecast 0.4 percent after declining 0.5 percent in October, the New York-based research group said today. The report followed revised figures from the Commerce Department that confirmed growth accelerated in the third quarter.

The deepest housing slump in 16 years is likely to worsen as foreclosures mount and banks restrict lending, economists said. Declining property values and rising energy costs may also hurt consumer spending, which accounts for more than two-thirds of the economy.

It's certainly pointing to a slowdown, said Roger Kubarych, chief U.S. economist at Unicredit Global Research in New York and a former Federal Reserve researcher. The fourth quarter is going to be much weaker.

Economists forecast the Conference Board's index would decline 0.3 percent, according to the median of 60 estimates in a Bloomberg News survey. Projections ranged from a decline of 0.6 percent to a gain of 0.2 percent.

Fewer Shipments

FedEx Corp., the second-largest U.S. package-delivery company, today said quarterly profit fell as fuel costs rose and demand for freight shipments slowed. The Memphis, Tennessee- based company said its third-quarter earnings would be lower than a year earlier and cut its fiscal 2008 capital-spending forecast.

We see challenging near-term economic trends, Chief Executive Officer Fred Smith said in the statement.

The National Retail Federation in Washington has forecast holiday sales this year will show the smallest gain since 2002.

Stocks erased gains and Treasury securities rose after the reports. The yield on the benchmark 10-year note was 4.02 percent at 10:18 a.m. in New York, compared with 4.03 percent late yesterday.

The leading index is down at an annual pace of 2.3 percent over the last six months, short of the approximate 4 percent to 4.5 percent drop that Conference Board economists say signals recession.

Former Treasury Secretary Lawrence Summers said yesterday it's quite likely a contraction will develop next year, while former Federal Reserve Chairman Allan Greenspan has given it about even odds.

Growth Forecasts

The economy is projected to grow at a 1 percent annual rate this quarter and at a 1.5 percent pace in the first three months of 2008, according to a Bloomberg News survey taken earlier this month. The last recession was in 2001, when the economy grew 0.8 percent.

The slowdown is all the more pronounced because of the surge in growth last quarter. The world's largest economy grew at a 4.9 percent annual pace from July through September, the most in four years, the Commerce Department's final estimate showed today.

Declines in stock prices, the money supply, consumer sentiment and an increase in firings pushed the leading index down, the Conference Board said. Gains in the factory workweek, orders for capital equipment and slower supplier deliveries limited the drop.

The Standard and Poor's 500 Index fell 5 percent on average in November to 1463.39 from the prior month, as mounting defaults on subprime mortgages forced banks to write off losses, leading to spreading declines in financial markets.

More Claims

An average 336,400 workers a week filed first-time claims for jobless benefits in November, up from 327,500 a month earlier. A report today from the Labor Department showed initial claims rose more than forecast to 346,000 last week.

The softening job market combined with declining home values and rising fuel costs may contribute to a slackening in spending during the holidays.

It looks as though consumer spending is going to slow considerably from the third quarter, said Paul Kasriel, chief economist at the Northern Trust Company in Chicago. I really do think the odds are better than 50 percent that we will have a recession.

Seven of the 10 components of the leading economic indicators index are known before the report: initial jobless claims, consumer expectations, building permits, supplier deliveries, the yield curve, stock prices and factory hours.

The Conference Board estimates money supply adjusted for inflation, new orders for consumer goods and orders for non- defense capital goods.

The Conference Board's index of coincident indicators, a gauge of current economic activity, rose 0.2 percent in November after falling 0.1 percent in October. The index tracks payrolls, incomes, sales and production. Combined with gross domestic product, these are the figures tracked by the National Bureau of Economic Research to determine when recessions start and end.

The gauge of lagging indicators also increased 0.2 percent after rising 0.3 percent in October. The index measures business lending, length of unemployment, service prices and ratios of labor costs, inventories and consumer credit.

China Raises Rates to Nine-Year High on Inflation

China raised interest rates for the sixth time this year to cool the world's fastest-growing major economy after inflation accelerated at the quickest pace in 11 years.

The benchmark one-year lending rate will increase by 0.18 percentage point to a nine-year high of 7.47 percent, starting tomorrow, the People's Bank of China said today on its Web site. The one-year deposit rate will rise by 0.27 percentage point to 4.14 percent.

Consumer prices rose 6.9 percent in November, property prices climbed at the fastest pace in two years and the main stock index has more than doubled in 2007. Higher borrowing costs and 10 increases in banks' reserve requirements have failed to stem the gains, underscoring government concern the economy may overheat.

Inflation expectations are rising and the central bank really needs aggressive action to cool them, said Stephen Green, senior economist at Standard Chartered Bank Plc in Shanghai. They will get even more aggressive from now on.

It's the third time this year that China has raised deposit rates by more than lending rates to curb asset-price gains by encouraging people to keep their money in the bank.

The central bank said higher rates were needed to curb overheating.

House prices in 70 major cities jumped 10.5 percent in November from a year earlier. The benchmark CSI 300 Index of stocks has climbed 147 percent this year.

Inflation Surges

Inflation jumped in November on fuel and food costs. Chinese households' concern about rising consumer prices is at the highest level since a survey began in 1999, the central bank said earlier today.

China should let its currency appreciate, given mounting inflation, growing asset bubbles and possible overheating, U.S. Treasury Secretary Henry Paulson said this month.

The yuan has gained more than 12 percent against the U.S. dollar since the end of a peg in July 2005. Before the rate announcement, the yuan closed at 7.3694 versus the dollar and the CSI 300 Index climbed 1.8 percent.

A stronger Chinese currency would help cool inflation by lowering import costs and slowing money inflows from a trade surplus that surged 52 percent in the first 11 months to $238.1 billion.

Bank Reserve Requirements

In addition to interest rates, the People's Bank of China has sold bills to absorb cash and raised the proportion of deposits lenders must hold as reserves to 14.5 percent from 9 percent at the start of this year.

Raising the reserve requirement has become more symbolic than substantial, said Kevin Lai, senior economist at Daiwa Institute of Research in Hong Kong. At the end of the day, the root cause is the trade surplus. China needs a one-off currency revaluation to reduce inflation and liquidity inflows.

China's economy, the world's fourth largest, expanded 11.5 percent in the third quarter from a year earlier.

Growth is likely to slow to 10.5 percent in 2008 from 11.4 percent this year on tightening measures, the Asian Development Bank said this month. The Organization for Economic Co-operation and Development forecasts a decline to a 10.7 percent pace on reduced demand for exports.

Morgan: New $5.7B writedown

Wall Street firm suffers loss in the quarter, takes another big hit from mortgage problems; CEO John Mack accepts blame.

Morgan Stanley reported a worse-than-expected quarterly loss Wednesday and said it would take an additional $5.7 billion mortgage-related writedown in the fourth quarter.

The Wall Street firm said its net loss was $3.59 billion, or $3.61 a share, for the period ending Nov. 30. A year ago the firm posted a profit of $2.21 billion or $2.08 a share.

Analysts polled by Thomson Financial were anticipating a loss of 39 cents a share.

The company also said it would take an additional $5.7 billion in writedowns during the quarter, on top of $3.7 billion already announced.

John Mack, Morgan's chairman and chief executive, called the quarter "deeply disappointing" and took full responsibility for the results, adding that he would not accept a bonus for 2007.

"The writedown Morgan Stanley took this quarter is deeply disappointing - to me, to our colleagues, to our Board and to our shareholders," said Mack.

"Ultimately, accountability for our results rests with me, and I believe in pay for performance, so I've told our compensation committee that I will not accept a bonus for 2007."

Japan Slashes Growth Forecast to 1.3% on Housing Woes

Japan's government slashed its economic growth forecast after stricter rules for obtaining building permits caused housing starts to plummet to a four- decade low.

The world's second-biggest economy will probably grow 1.3 percent in the year ending March 31, slower than a previous forecast of 2.1 percent, the Cabinet Office said in Tokyo today. The government predicts a 2 percent expansion the following year.

Slower growth may cause tax revenue to decline, making it more difficult for the government to eliminate the deficit and curb the world's largest public debt. The Finance Ministry will release its budget proposal for next fiscal year overnight.

The more the economy loses steam, the more difficulty the government will have in stoking economic growth through policy measures, said Takahira Ogawa, director of sovereign ratings at Standard and Poor's in Singapore.

Revenue from taxes could start falling, Economic and Fiscal Policy Minister Hiroko Ota said in Tokyo after the forecasts were published. Finance Minister Fukushiro Nukaga told reporters the government still wants to balance the budget by the year ending March 2012.

Government spending is likely to increase to 83.2 trillion yen ($734 billion) in the year starting April 1, the Nikkei newspaper reported on Dec. 16, as an aging population swells social welfare costs.

Sales Tax

Japan's debt will remain at 1.8 times the size of the economy as discussions on raising the nation's sales tax are likely to be delayed, Fitch Ratings said last week. The ruling Liberal Democratic Party and New Komeito last week released a proposal that excluded any mention of when, or how much, the country's 5 percent sales tax might increase.

The proposal of the coalition parties clearly mentioned it will drastically reform the tax system, Nukaga said today. In that environment, we need to stick with our efforts to achieve a primary balance.

The building slowdown will erase 0.6 percentage point from growth, the Cabinet Office said. That's the equivalent of about 3 trillion yen ($26 billion) of GDP, or the same size as Sri Lanka's economy, Bloomberg data show.

Housing starts plunged 35 percent in October and 44 percent in September because the regulations, introduced after an architect fabricated earthquake-resistance data in 2005 to cut costs, caused a logjam in building applications.

Prime Minister Yasuo Fukuda said he regrets the results of the changes to the building code, Chief Cabinet Secretary Nobutaka Machimura told reporters today.

`Bad Preparation'

The instruction manual describing the permit process was issued six weeks after the rules were introduced on June 20. Ota this week called the lapse a case of bad preparation.

Pent-up demand will help housing investment rebound next fiscal year, adding 0.4 percentage point to growth, the Cabinet Office said. The government yesterday said housing construction has almost stopped decreasing.

Spending by households is likely to remain sluggish next fiscal year because companies aren't increasing wages, Ota said.

Japan's gradual recovery hasn't been enough to push up wages and we can't expect a large improvement in consumer spending, she said. Stalled wage growth is a major reason why Japan hasn't been able to shake off deflation.

The GDP deflator, a broad measure of price changes, will rise for the first time in 11 years in the period starting April 1, the government said in today's report. The Cabinet Office predicted, incorrectly, in each of the past two years that the GDP deflator would rise.

Source - Bloomberg

Tata hits image problems in the U.S

After a string of successes, India’s industrial giant, Tata, has hit a rough patch in the United States. Advances made by Indian Hotels, which runs the Taj brand, to Orient-Express (OEH), the U.S. owner of luxury hotels, trains and cruises, have been firmly rebuffed. And American dealers selling Jaguar cars have objected to Ford selling the British luxury brand to Tata Motors (TTM).

The setbacks are a blow to Ratan Tata, chairman of Tata Sons, the group holding company, and one of the world’s 25 most powerful people in business. Early this year, he scored his biggest triumph when Tata Steel bought Corus, the British steel company, for $12.1 billion, defeating a strong rival bidder, CSN of Brazil, in a dramatic knock-out contest. Now Tata is bidding along with Mahindra & Mahindra (M&M), another leading Indian autos-based company, to buy the Jaguar and Land-Rover brands from Ford (F).

Some analysts question whether Tata Motors can handle Jaguar and Land-Rover, especially their difficult trade unions. Critics also point out that Tata is more focused on smaller cheaper cars – including a low-end model now in development that it plans to sell for around $3,000. That feeds U.S. dealers’ worries that Jaguar would lose its upscale image if it were Indian-owned - whether it’s bought by Tata or M&M.

Ken Gorin, chairman of the Jaguar Business Operations Council, which represents Jaguar car dealers in the U.S., has said that Ford should sell the two brands to another bidder, One Equity Partners, a private equity arm of J.P.Morgan Chase (JPM). He’s reportedly concerned that the American public won’t accept a luxury-car brand such as Jaguar “out of India.”

Gorin, of course, doesn’t get to decide who buys the brands, and the deal is still open - with Tata being tipped to win in some reports. But he has a point: Indian manufacturing is only starting to gain acceptance internationally. Foreign car companies are increasingly looking to India for supplies of components and even complete cars – Suzuki Motor announced last week that a factory near Delhi will supply its planned A-Star car to Europe and elsewhere. But A-Star is not a luxury model.

Perceptions about the low quality of Indian products are also behind Orient-Express’s rebuttal of Tata’s moves for a closer relationship. Indian Hotels increased its stake in Orient-Express to 11.5 percent recently, prompting Paul White, the CEO of Orient-Express, to say a combination was not in his company’s interests. “Any association of our luxury brands and properties with your brands and properties would result in a reduction in the value of our brands,” he told Indian Hotels, which is expected to respond to the rebuff shortly.

White’s remarks shocked officials at Tata’s Taj hotels, who deem their hotels to be one of Asia’s, and maybe the world’s, best. Taj hotel guests, however, do not always rate them so high: There are frequent complaints about the quality of service and inferior finishes. The group’s award-winning Taj hotel on the waterfront in Mumbai is one of Asia’s most splendid buildings, but service there does not always match the elegance.

So it is perhaps not surprising that White has serious reservations. What is more curious is that Tata has pursued the company despite the cool reception. Ratan Tata recently said in a television interview that he does not like hostile takeovers. “We walk in the face of opposition on an acquisition bid,” he said. What’s more, he denied that Indian Hotels is seeking to acquire the Orient-Express. Tata approached Orient-Express management “basically to seek an alliance and were misunderstood,” he said.

Meanwhile, Indian jingoism is on the rise in the media and among the country’s politicians. “Racism can’t halt Indian takeovers,” declared the Economic Times, a leading business daily, slamming “quasi-racist slurs.” Kamal Nath, India’s outspoken commerce minister, said “there cannot be any discrimination against outward investment from India.”

The bluster is unfortunate. A more effective tack for Indian officials would be to accept that their country is just beginning to lose its decades-long reputation for dreadful quality – and to vow to show the world that it can do even better.

Source - CNN Money

Stocks knocked back

Wall Street wilts as investors worry about higher inflation, lower economic growth.

Stocks tanked Monday, building on the previous week's declines, as investors continued to worry about the economic outlook amid rising inflationary pressures and slower growth prospects.

The Dow Jones industrial average lost 1.3 percent. The broader S&P 500 index lost around 1.5 percent. The tech-fueled Nasdaq composite lost 2.3 percent.

Treasury prices rose, lowering the corresponding yields as investors sought safety in government debt. The dollar was mixed versus other major currencies. Oil prices slipped and gold prices rose.

Stocks tumbled Friday at the end of a tough week, after a report showing higher consumer inflation raised bets that the Federal Reserve won't be able to keep cutting interest rates, even as the economy continues to struggle.

Those worries remained in place Monday, as investors sorted through the day's economic news and mulled the Fed's first credit auction.

"We're just in that rut right now, where people are worrying about credit and buyers are waiting for a bottom," said Ron Kiddoo, chief investment officer at Cozad Asset Management.

He said that stocks are likely to remain in a funk through the Christmas holidays.

On the upside, "sentiment has grown so negative that the market will likely react well to any good news that comes out over the next few weeks," said James Shelton, chief investment officer at Kanaly Trust Company.

Tuesday brings the November reports on housing starts and building permits, both expected to show declines.
Be prepared for a lot of bumps

The Federal Reserve offered $20 billion in 28-day credit through an auction Monday. The goal is for commercial banks to borrow from the Fed and then boost their lending to businesses and consumers. Results will be released Wednesday.

The series of auctions are part of the central bank's ongoing efforts to loosen up tight credit markets. Last week, the central bank also cut interest rates for the third time in a row since September as a means of adding liquidity to the banking system and tempering the risks to an economic recession.

But investors are worried that the Fed may have to put the brakes on its rate-cutting campaign, particularly if inflationary pressures keep rising. Former Fed Chairman Alan Greenspan said Sunday that the economy was at growing risk for stagflation - an environment in which the economy must contend with rising inflation and slower growth.

Meanwhile, Monday's economic news was mixed.

The New York Empire State index fell to 10.3 in December from 27.4 in November, a steeper-than-expected decline in the regional manufacturing read.

A separate report showed that the third-quarter current-account deficit narrowed more than expected.

And an afternoon report showed that homebuilder sentiment in December remained at a record low for the third straight month.
101 dumbest moments in business

The day also brought a number of corporate mergers, although the news failed to move the broader market higher.

Ingersoll-Rand (IR) said it will buy Trane (TT) for $10.1 billion, in a deal that will create one of the largest air conditioner manufacturers in the world. Ingersoll-Rand shares fell 11 percent, while Trane shares jumped nearly 22 percent.

Aon said it will sell two insurance units for $2.75 billion in separate all-cash deals. Aon shares gained 1 percent.

Loews said its board has approved a spinoff of cigarette marker Lorillard Inc. Loews shares gained over 2 percent.

National Oilwell Varco said it will buy oil drilling gear maker Grant Prideco (GRP) for $7.37 billion in cash and stock. National Oilwell shares fell 8.6 percent and Grant Prideco shares rose 13.6 percent.

Stock declines were broad-based, with 27 out of 30 Dow issues falling, led by Alcoa, Hewlett-Packard, Home Depot, Intel and Verizon.

Market breadth was negative. On the New York Stock Exchange, losers beat winners by more than four to one on volume of 1.44 billion shares. On the Nasdaq, decliners topped advancers by more than four to one on volume of 1.50 billion shares.

Treasury prices rose as investors sought safety in government debt, lowering the yield on the 10-year note to 4.14 percent from 4.24 percent late Thursday. Treasury prices and yields move in opposite directions.

In currency trading, the dollar gained versus the euro and slipped against the yen.

U.S. light crude oil for January delivery fell 64 cents to settle at $90.63 a barrel on the New York Mercantile Exchange.

COMEX gold for February delivery rose $1.30 to settle at $799.30 an ounce.

U.S. Stocks Drop as Inflation Tops Forecasts; Amazon, EBay Fall

U.S. stocks fell, heading for their steepest weekly drop in more than a month, after accelerating inflation raised concern higher prices will slow economic growth.

Merrill Lynch & Co. slid on a CNBC report that writedowns at the third-biggest U.S. securities firm may increase by as much as $6 billion. Black & Decker Corp. declined the most in five months after the largest U.S. power-tool maker cut profit forecasts. Amazon.com Inc. and EBay Inc. retreated after Internet research firm ComScore Inc. said holiday online sales grew at the slowest pace ever.

The Standard and Poor's 500 Index declined 8.24, or 0.6 percent, to 1,480.17 at 12:54 p.m. in New York. The Dow Jones Industrial Average slid 82.1, or 0.6 percent, to 13,435.86. The Nasdaq Composite Index lost 14.32, or 0.5 percent, to 2,654.17. About three stocks dropped for every one that rose on the New York Stock Exchange. Benchmarks in Asia fell, while most European indexes rose.

The markets will have some indigestion with this inflation number, said Michael Strauss, who helps oversee about $43 billion as market strategist and chief economist at Commonfund in Wilton, Connecticut. Consumers are recognizing they really have to hunker down as they see their heating oil costs and their gasoline costs.

The consumer price index climbed 0.8 percent in November, the most since September 2005, the Labor Department said. Prices excluding food and energy rose 0.3 percent, also more than forecast.

Dollar Surges

The dollar advanced the most against the euro since May 2005 on speculation the Federal Reserve won't cut interest rates again. Odds that the Fed will hold its benchmark lending rate at 4.25 percent at its January meeting rose to 22 percent after the report, up from no chance since the last quarter-point rate-cut on Dec. 12.

Black & Decker slumped $5.65, or 7.1 percent, to $74.48. The largest U.S. power-tool maker said it expects fourth-quarter profit excluding some items to be $1.03 a share. The tool maker had previously predicted earnings of at least $1.55 a share.

Retail stores lost 1.6 percent for the steepest decline among 24 industry groups in the S&P 500. Amazon.com, the biggest online bookstore, fell $2.29 to $90.11. EBay, the largest Internet auctioneer, dropped $1.16 to $32.93.

Internet sales from Nov. 1 through Dec. 11 increased 19 percent to $20.5 billion, Reston, Virginia-based ComScore said. Online sales in November and December may rise 20 percent, a record low for the industry, and slower than the 26 percent pace a year earlier.

'Getting Hit'

U.S. retailers may report the slowest sales growth since 2002 this year as higher fuel and food costs discourage spending during the holiday season, the National Retail Federation said.

The consumer is getting hit by higher energy prices and given the state of the overall housing market, we're expecting consumers to pull in their spending, said Rose Grant, who helps manage about $2 billion at Eastern Investment Advisors in Boston. We don't think consumer spending will be as strong as in past quarters.

Merrill Lynch lost 72 cents to $57.11. S&P 500 financial stocks slipped 0.8 percent.

Goldman Sachs Group Inc. added $3.71, or 1.8 percent, to $212.19. The world's biggest securities firm may post record full-year profit of more than $11 billion on Dec. 18, boosted by $4 billion from bets on subprime mortgage-related lending, the Wall Street Journal reported, citing analysts.

The gains by a few traders who speculated that subprime securities would lose value helped to compensate for $1.5 billion to $2 billion of losses elsewhere, the newspaper said. A Goldman spokesman declined to comment, according to the Journal.

BioMarin Pharmaceutical Inc. had its steepest gain since 2003, climbing $6.81, or 23 percent, to $36.57. The maker of treatments for rare disorders won approval from U.S. regulators to market a pill for a childhood disease that can cause mental retardation.

Source - Bloomberg

U.S. Economy: November Consumer Prices Rise More Than Forecast

U.S. consumer prices rose the most in more than two years last month on record energy costs, reinforcing the Federal Reserve's concern that inflation remains a risk to the economy.

The consumer price index increased 0.8 percent in November, up from 0.3 percent the previous month, the Labor Department said today in Washington. Prices excluding food and energy climbed 0.3 percent, also more than economists anticipated. Another report from the Fed showed industrial production expanded, after declining in October.

The inflation figures may explain the Fed's decision to lower its benchmark interest rate by a quarter point this week, disappointing some investors who said the cut wasn't deep enough to combat the economic slowdown. Some traders trimmed bets on a reduction in January, though most still see another cut in borrowing costs.

There is no question inflation is going to remain a concern for policy makers, said David Resler, chief economist at Nomura Securities International Inc. in New York, who correctly forecast the increase in so-called core prices. This certainly will give some policy makers pause about the advisability and desirability of further rate cuts.

Economists surveyed by Bloomberg News forecast consumer prices would rise 0.6 percent, according to the median of 80 estimates. Predictions ranged from gains of 0.4 percent to 1 percent. Prices excluding food and energy were forecast to rise 0.2 percent.

Market Reaction

Treasuries initially dropped after the report, sending 10- year note yields to the highest in a month, then recouped most of the losses. Ten-year yields rose to 4.22 percent at 10:23 a.m. in New York, from 4.20 percent late yesterday. The dollar extended its rally, while stocks fell.

Consumer prices increased 4.3 percent in the 12 months to November, the most since June 2006. The monthly gain was the biggest since September 2005.

The core rate increased 2.3 percent in the 12 months to November, up from a 2.2 percent October year-over-year gain.

It puts the Fed in somewhat of a bind, said Sal Guatieri, senior economist at BMO Capital Markets in Toronto, which correctly forecast the rise in the core figure. There are some legitimate concerns about inflation pressures. This report suggests we might be seeing early stages of pass- through to consumers from rising energy expenses.

Rate Expectations

Traders pared their expectations of a quarter-point Fed rate cut at the next meeting, on Jan. 29-30, according to futures prices on the Chicago Board of Trade. Odds of a reduction to 4 percent slipped to 84 percent, from 96 percent yesterday.

Prices are rising as economic growth is slowing after a third-quarter spurt. Gross domestic product will expand at an annual rate of 1 percent this quarter, according to the median estimate in a Bloomberg survey of economists published on Dec. 11.

Black & Decker Corp., the largest U.S. power-tool maker, today lowered its quarterly and annual profit forecasts because of costs tied to a recall and a slowdown in U.S. consumer spending.

U.S. industrial production increased 0.3 percent in November, exceeding the median forecast of 0.2 percent, after a 0.7 percent drop that was bigger than previously estimated, Fed figures showed today.

Inflation also accelerated in Europe. Prices in the 13- nation area rose 3.1 percent in November from the same month last year, the most since May 2001 as food prices soared.

Energy Costs

The U.S. consumer-price report showed energy prices jumped 5.7 percent, after a 1.4 percent increase in the prior month. Gasoline prices climbed 9.3 percent and fuel oil costs jumped 14.2 percent, the most since February 2003.

Crude oil prices on the New York Mercantile Exchange averaged $94.63 a barrel last month compared with $85.66 in October. The cost reached a record $99.29 a barrel on Nov. 21. Regular gasoline at the pump exceeded $3 a gallon for most of November, according to the American Automobile Association.

U.S. carriers boosted ticket prices seven times since Sept. 1 to combat rising jet-fuel prices. The latest attempt was rolled back Dec. 3 after Continental Airlines Inc. decided against an increase, suggesting a slowing economy may rein in prices in coming months.

High oil prices are one of the top challenges facing the industry today, Tom Horton, chief financial officer of AMR Corp., parent of American Airlines, said last week at a conference.

Grocery Prices

Others are making increases stick. Kroger Co., the biggest U.S. grocery chain, this week said it charged shoppers more to recoup higher costs for cereal and cheese, helping boost third- quarter profit by 18 percent.

The consumer price index is the government's broadest gauge of costs for goods and services. Almost 60 percent of the CPI covers prices that consumers pay for services ranging from medical visits to airline fares and movie tickets.

Apparel, prescription drugs, hospital services and airfares led the increase in the cost of living last month.

Food prices, which account for about a fifth of the CPI, increased 0.3 percent for a second month.

Renting Costs

Rents, which make up almost 40 percent of the core CPI, also rose. A category designed to track rental prices for owner- occupied homes rose 0.3 percent, compared with a 0.2 percent increase the month before.

Slowing growth will help damp price pressures, economists said. The Fed's preferred gauge of inflation, which is tied to consumer spending and excludes food and energy costs, will rise 1.8 percent in 2008 after a 1.9 percent gain this year, according to the median estimate of economists surveyed by Bloomberg this month. The measure would be within the range forecast by policy makers.

Economic growth will slow to a 1 percent pace this quarter, a fifth the rate of the previous three months, the Bloomberg monthly survey said. Economists also trimmed estimates for the first quarter of 2008 to 1.5 percent.

Other price reports also reflected surging fuel bills. Wholesale prices rose 3.2 percent in November, the biggest jump in 34 years, the Labor Department reported yesterday. The increase was driven by a record one-month gain in energy costs. Excluding food and fuel, producer prices rose 0.4 percent.

The two reports reflect differences in timing. In calculating wholesale prices, the government asks survey participants to report costs as of the Tuesday of the week that includes the 13th. Consumer prices are based on average costs over the entire month.

Source - Bloomberg

Housing Crash Deepens in 2008 as U.S. Realtors See Record Drop

For U.S. homeowners, builders, bankers and realtors, the crash of 2007 will only get worse in 2008.

Everyone from mortgage-finance company Fannie Mae to Lehman Brothers Holdings Inc. expects declines next year. Existing home sales will drop 12 percent and existing home prices will fall 4.5 percent, Washington-based Fannie Mae says. Lehman analysts estimate almost 1 million mortgage loans will default in 2008, up from about 300,000 this year.

We're only halfway through the housing shock, said Ethan Harris, chief U.S. economist at New York-based Lehman, the fourth-biggest U.S. securities firm by market value. It's just a matter of time before the weakness spreads to the rest of the economy.

The housing market collapse has been anything but the soft landing that Federal Reserve Bank of San Francisco President Janet Yellen and David Lereah, former chief economist at the National Association of Realtors in Chicago, predicted for real estate at the start of 2007.

Median home prices declined in the U.S. this year, the first annual drop since the Great Depression, according to forecasts from the National Association of Realtors.

I'm not going to sit here and tell you it's going to turn real strong next year, said Jim Gillespie, chief executive officer of Coldwell Banker Real Estate LLC, the largest U.S. residential brokerage, according to Franchise Times. It's not going to turn real strong next year.

`Let the House Go'

Analysts at New York-based CreditSights Inc. predict housing won't rebound until 2009, at best. Moody's Economy.com Inc., the economic forecasting unit of Moody's Corp. in New York, says home sales will hit bottom next year, declining 40 percent from their peak. And U.S. Treasury Secretary Henry Paulson's plan to slow foreclosures won't help those who already are facing the loss of their homes, like C.W. and Sandy Hicks of Las Vegas.

The Hickses refinanced the mortgage on their four-bedroom, 1,300-square foot home two years ago. Their $237,000 adjustable- rate loan resets every month, and now their monthly payment has jumped 50 percent to $2,700. The couple can't afford it.

Source - Bloomberg

India's Sensitive Index Climbs to Record; Tata Steel Advances

India's Sensitive Index climbed to a second straight record. Tata Steel Ltd., the world's fifth- biggest steelmaker, rose after announcing a $1.5 billion investment in an iron-ore mine overseas.

Profit margins at Corus will improve significantly once the ore is shipped, Vishal Chandak, an analyst at Emkay Share & Stock Brokers Ltd., said in Mumbai. This is good news.

Infosys Technologies Ltd. led software exporters lower on concern the U.S. Federal Reserve's quarter-point rate cut won't be enough to avert a recession in their largest export market.

The Bombay Stock Exchange's Sensitive Index rose 84.98, or 0.4 percent, to 20,375.87, surpassing yesterday's 20,290.89 record. The S&P/CNX Nifty Index on the National Stock Exchange gained 62.05, or 1 percent, to 6,159.30. Nifty futures for December delivery added 1.2 percent to 6,178.

Tata Steel rose 28.6 rupees, or 3.4 percent, to 864.45. The mine will supply Tata's European mills in the next two to three years, Managing Director B. Muthuraman said. Supplies from the project will help lower costs at Tata's mills in Europe that were acquired as part of its 6.83 billion pound ($14 billion) takeover of Corus Group Plc in April.

U.S. stocks tumbled the most in a month yesterday, sending the Standard & Poor's 500 Index 2.5 percent lower.

Recent developments, including deterioration in financial market conditions, have increased the uncertainty surrounding the outlook for economic growth and inflation, the Federal Open Market Committee said in a statement after yesterday's meeting, when the benchmark interest rate was cut to 4.25 percent.

U.S. Growth Concerns

Infosys, India's second-biggest software exporter, dropped 58.25 rupees, or 3.3 percent, to 1,684.80. Satyam Computer Services Ltd., the fourth largest, declined 10.55 rupees, or 2.4 percent, to 431.15.

Investors were speculating on a 50 basis-point rate cut which did not happen, said Sanjay Dongre, who oversees about $1 billion in stocks at UTI Asset Management Co. in Mumbai. The Fed also pointed to slowing growth in the U.S. economy.

Indian software companies get more than half their sales from the U.S.

Overseas funds bought a net 3.01 billion rupees ($76 million) of Indian shares on Dec. 10, boosting their total equity purchases this year to $16.8 billion, according to the Securities & Exchange Board of India's Web site.

The following stocks rose. Stock symbols are in parenthesis after company names.

Edelweiss Capital Ltd. (EDEL IN) surged 684.95 rupees, or 83 percent, to 1,509.95 on its first day of trading. The Indian financial services company raised 6.9 billion rupees selling shares at 825 rupees each in an initial share sale.

Reliance Capital Ltd. (RCFT IN) added 89.75 rupees, or 3.7 percent, to 2,511.50. The Indian financial services provider controlled by billionaire Anil Ambani said its unit Reliance Capital Asset Management Ltd. will sell a 5 percent stake to Eton Park Group. Eton Park, a global investor, will pay 5.01 billion rupees for the stake, Reliance Capital said in a stock-exchange filing, valuing the company at 100 billion rupees.

Television Eighteen India Ltd. (TLEI IN) added 3 rupees, or 0.6 percent, to 488.10. The media firm, which runs the CNBC-TV18 channel, said it agreed to buy a majority stake in Infomedia India Ltd., a publisher of business and telephone directories. Infomedia slid 13.85 rupees, or 5.4 percent, to 244.25.

UTV Software Communications Ltd. (UTV IN) climbed 65.7 rupees, or 6.9 percent, to 1,025.10. Future Group is offering more than Walt Disney India to buy a 51 percent stake in UTV Software, DNA Money reported, without saying where it got the information. Future Group denied the report.

Source - Bloomberg

Asian Stocks Fall Most in 3 Weeks on Growth Concern

Asian stocks declined, sending a regional benchmark to its biggest loss in three weeks, after the Federal Reserve said U.S. economic growth is slowing and Morgan Stanley said Japan may enter a recession.

Mitsubishi UFJ Financial Group Inc. led banks lower on speculation that a quarter-point interest-rate cut by the Fed yesterday won't be enough to halt credit-market losses. Samsung Electronics Co. and BHP Billiton Ltd. retreated on concern demand for electronics and raw materials will slump in Asia's largest export market.

Market sentiment has been shaken, said Yang Haeman, who manages the equivalent of almost $1 billion at NH-CA Asset Management in Seoul. A U.S. slowdown is already quite certain and investors now are also worried that this will result in a global slowdown.

The MSCI Asia Pacific Index fell 1.5 percent to 162.81 as of 11:17 a.m. in Tokyo, set for its largest drop since Nov. 21. Almost seven stocks fell for each that gained among the benchmark's 1,140 members.

Japan's Nikkei 225 Stock Average lost 1.8 percent to 15,749.87 after climbing yesterday to the highest since Nov. 7. Canon Inc. also slipped after the yen strengthened against the dollar, reducing the value of exporters' overseas sales. Benchmarks declined in all markets open for trading.

U.S. stocks tumbled the most in a month yesterday, sending the Standard & Poor's 500 Index and Dow Jones Industrial Average lower by more than 2 percent.

Increased Uncertainty

Mitsubishi UFJ, which had more than $2 billion in subprime- related investments at the end of September, lost 1.8 percent to 1,206 yen. Japan's biggest publicly traded bank also declined after the Asahi newspaper reported it has been asked to invest in a U.S. bailout fund for financial institutions with subprime loan exposure.

Recent developments, including the deterioration in financial market conditions, have increased the uncertainty surrounding the outlook for economic growth and inflation, the Federal Open Market Committee said after yesterday's meeting, when the benchmark interest rate was cut to 4.25 percent.

Mizuho Financial Group Inc., Japan's second-biggest publicly traded bank, dropped 2.8 percent to 617,000 yen. Commonwealth Bank of Australia, the nation's second-biggest lender, slipped 1.1 percent to A$60.11

Samsung, South Korea's largest exporter, slid 1.5 percent to 594,000 won. Westfield Group, the owner of 59 shopping malls in the U.S., dropped 1.7 percent to A$21.57 and James Hardie Industries NV, the biggest seller of home siding in the U.S., lost 2.1 percent to A$6.47.

Slowdown in U.S., Japan

The U.S. economy will expand at an annual pace of 1 percent in the fourth quarter, down from 4.9 percent in the previous three months, according to the median estimate in a Bloomberg News survey of economists.

Incoming information suggests that economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending, the FOMC said in its statement.

Meanwhile, Morgan Stanley's chief Japan economist Takehiro Sato slashed his 2008 growth estimate to 0.9 percent from 1.9 percent a month ago, saying the Japanese economy is headed for a mild recession that could worsen should a bigger-than- expected U.S. slowdown damp demand for exports.

Canon, the world's largest maker of digital cameras, slid 2.9 percent to 5,660 yen. Honda Motor Co., Japan's second-biggest automaker, fell 2.8 percent to 3,780 yen.

Yen, Commodities

The yen strengthened to as high as 110.63 versus the dollar from 111.81 at the close of trading in Tokyo yesterday. A stronger yen decreases the value of exporters' dollar-denominated sales when converted into local currency.

Elsewhere, shares of BHP, the world's largest mining company and Australia's biggest oil producer, fell 2 percent to A$43.30. Rio Tinto Group, the world's No. 3 mining company, dropped 2.3 percent to A$143.10.

Crude oil declined as much as 0.8 percent to $89.30 a barrel on the New York Mercantile Exchange and was recently at $89.52. Copper slid as much as 1.9 percent in New York.

We turned bearish on commodities, said Leslie Phang, who helps manage $1 billion at Commonwealth Private Bank in Singapore. Demand from China won't be enough to offset a slowdown in the U.S., Japan and Europe.

Source - Bloomberg

Wall Street to Fed: Not good enough

Stocks tank after the Fed cuts rates by a quarter-percentage point, rather than the half some had hoped. Dour comments on the economy factor in too.

Stocks slumped and bonds rallied Tuesday after the Federal Reserve cut the fed funds rate by a quarter-percentage point, as expected, but disappointed some investors looking for a bigger cut.

The Dow Jones industrial average lost 294 points, or 2.1 percent. It was the blue-chip indicator's seventh worst day of the year in terms of both the point and percentage loss.

The broader S&P 500 index lost 2.5 percent. The tech-fueled Nasdaq composite lost almost 2.5 percent. The Russell 2000 small-cap index fell 3.1 percent.

"The stock market was looking for a bigger cut and so there's some disappointment," said Georges Yared, chief investment strategist at Yared Investment Research.

The selling was also influenced by the recent rally on Wall Street, which had left the Dow and S&P 500 within reach of the record highs hit in October.

"The market has gone up in recent weeks on expectations that the Fed would cut, so you're seeing a 'buy the rumor, sell the news' reaction," said Alan Skrainka, chief market strategist at Edward Jones.

Wednesday brings the October trade balance and the weekly oil inventories report.

The central bank voted to cut the fed funds rate by a quarter-percentage point to 4.25 percent. The fed funds rate is a key short-term lending rate that influences consumer loans. The central bank has cut it three times since September, in an attempt to loosen up tight credit markets and protect the economy from falling into a recession amid the fallout in the housing market.

Many Wall Streeters had been looking for the Fed to cut rates by a quarter-percentage point, or 25 basis points, particularly after last week's upbeat November jobs report cooled some fears about the slowing economy. But some on Wall Street had been looking for a bigger cut of a half-percentage point, or 50 basis points. There are 100 basis points in one percentage point.

The Fed also cut the discount rate, which influences bank loans, by 25 basis points, versus broader expectations for a 50-basis point cut.

In the accompanying statement, the bankers changed the language to suggest the economic slowdown was more pronounced than it had been at the time of the last meeting at the end of October.

"Incoming information suggests that economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending," the bankers wrote.

That was more negative than in October, when the bankers said that economic growth was solid and strains in financial markets had eased somewhat. Although at that meeting, the bankers also said that the pace of expansion would slow as a result of the housing market correction.

Stocks had posted modest gains ahead of the decision but quickly turned lower following the afternoon decision and statement. Treasury market gains accelerated rapidly, lowering the corresponding yields.

"Clearly the stock market did not like that they [the bankers] sort of talked down the economy and then only gave them a quarter-point cut," said Joshua Shapiro, chief economist at Maria Fiorini Ramirez Inc. He said that the bond market was also reacting to the perception of a more negative economic outlook.

Treasury prices surged, lowering the yield on the 10-year note to 3.97 percent from 4.15 percent late Monday. Treasury prices and yields move in opposite directions.

In corporate news, General Electric said that 2008 earnings should rise at least 10 percent to $2.42 per share, short of expectations for earnings of $2.49 per share. The stock lost 1 percent.

Citigroup announced that Vikram Pandit would take over the job of chief executive, over a month after former CEO Charles Prince stepped down.

However, Citigroup shares tumbled regardless of the announcement, falling with the rest of the banking sector. JP Morgan Chase, Merrill Lynch, Morgan Stanley and Lehman Brothers were among the other bank stocks falling.

Declines were broad-based, with 28 of 30 Dow stocks falling, including General Motors, American Express, Alcoa, Boeing and Home Depot.

But other corporate news was less positive. Washington Mutual said late Monday that it was cutting both its dividend and more than 3,000 jobs in the wake of the housing and credit market crisis. Citi Investment Research downgraded the stock to "sell" from "hold."

Freddie Mac's chief executive said Tuesday that the company will probably lose another $5.5 billion to $7.5 billion over the next few years amid the ongoing housing market fallout.

H&R Block said it expects to report a steep quarterly loss, due to the impact of its faltering mortgage unit.

Market breadth was negative. On the New York Stock Exchange, losers beat winners by over 5 to 1 on volume of 1.55 billion shares. On the Nasdaq, decliners topped advancers by 3 to 1 on volume of nearly 2.23 billion shares.

In economic news, wholesale inventories were flat in October, the government reported, versus forecasts for a rise of 0.5 percent. Inventories rose 0.6 percent in September.

In currency trading, the dollar gained versus the euro and the yen.

U.S. light crude oil for January delivery rose $2.16 to $90.02 a barrel on the New York Mercantile Exchange.

COMEX gold for February delivery added $3.60 to settle at $817.10 an ounce.

Source - CNN Money

Oil rises, anticipating Fed rate cut

Analysts believe that an interest rate cut will ease worries about the U.S. economy and boost oil demand.

Oil prices rose Tuesday in anticipation that the U.S. Federal Reserve will cut interest rates later in the day, a move that would likely help the U.S. economy - the No. 1 oil consumer - and bolster demand for crude.

News of several crude oil pipeline shutdowns in the U.S. Midwest due to ice storms also supported prices.

Light, sweet crude for January delivery rose 38 cents to $88.24 a barrel in electronic trading on the New York Mercantile Exchange by midday in Europe. The contract had fallen 42 cents to settle at $87.86 a barrel on Monday.

In London, Brent crude futures rose 20 cents to $88.24 a barrel on the ICE Futures exchange.

The Federal Reserve is widely expected to lower its key rate, now at 4.5 percent, by a quarter of a percentage point - or perhaps more - to try to keep troubles in the housing and credit markets from sinking the economy.

"What's been weighing down on the crude oil futures market is concern about the U.S. economy," said Victor Shum, an energy analyst with Purvin & Gertz in Singapore. "If the expected cut indeed holds true or is actually larger, it will bolster the U.S. economic outlook, and that's supportive of oil pricing."

Others, however, said the rate cut would have to be something other than a quarter point to affect oil prices.

"Today all eyes will be on the Fed but with a 25-basis-point cut already priced in, it will take a surprise to move (Nymex oil) out of its current trading range," said Olivier Jakob of Petromatrix in Switzerland.

Dow Jones Newswires reported that several crude oil pipelines, including ones operated by Enbridge and Magellan Midstream Partners, were affected by power outages which forced them to shutdown. There were no estimates of when the pipelines were expected to restart.

Oil futures have dropped more than $10 from their highs in recent weeks as OPEC increased output and as demand slid in the face of high prices.

Several recent reports have suggested U.S. demand for oil and gasoline is falling even as OPEC is boosting production. Total production by the Organization of Petroleum Exporting Countries rose to 31.15 million barrels a day in November, up 40,000 barrels a day from October, according to Platts, the energy research arm of McGraw-Hill Cos. Analysts surveyed by Dow Jones Newswires predict the U.S. government will report on Wednesday that domestic oil inventories rose last week.

Some analysts expect oil futures to trade in a range around $90 until more evidence surfaces of either further demand erosion or supply growth. Others believe futures have begun a seasonal move that could take them as low as $70 a barrel.

"It's nearly the end of the year and many investors are booking profits to boost their annual returns and hence their annual bonuses," Shum said. "Given that, I don't think we're going to rally to $100 a barrel again in the remaining weeks of this year unless there are some unexpected events."

Many analysts have blamed the weakening dollar, in part, for oil's run-up to nearly $100 a barrel last month. The dollar's continuing decline against the euro and other currencies makes oil look more attractive to foreign investors.

Heating oil futures rose 0.78 cents to $2.4852 a gallon (3.8 liters) while gasoline prices rose 0.23 cent to $2.2524 a gallon. Natural gas futures added 6.9 cents to $7.101 per 1,000 cubic feet.

Source - CNN Money

Fed May Cut Interest Rates, Leave Door Open for Further Action

The Federal Reserve will probably cut interest rates today and lay the ground for more to prevent the economy from sliding into recession.

The Federal Open Market Committee will be loath to repeat language from its last meeting that risks between inflation and growth are roughly balanced, economists said. Keeping the phrase would open officials to criticism they're oblivious to the credit squeeze that's threatening growth.

They pretty much tried to draw a line in the sand by going to a balanced-risks statement at the last meeting, and now the world's changed, said Keith Hembre, who used to work at the Fed and is now chief economist in Minneapolis at FAF Advisors Inc., which manages $105 billion. Officials will leave themselves the opening for further cuts, he said.

Chairman Ben S. Bernanke is trying to steer through the housing recession that entered its third year and alleviate a jump in borrowing costs for companies and consumers. The FOMC will lower the benchmark rate by a quarter point to 4.25 percent, according to 113 of 123 economists surveyed by Bloomberg News. Seven anticipate a half-point move and three see no change.

Officials may also enhance their efforts at providing a backstop for bank funding amid a surge in demand for cash, some economists said. Options include reducing the charge for direct loans to banks by half a point, to 4.5 percent.

Most Since Recession

The Fed is scheduled to announce its decision at about 2:15 p.m. in Washington. A quarter point rate cut, after 0.75 percentage point of reductions in September and October, would mark the greatest easing of borrowing costs since the last recession in 2001.

Bernanke and Vice Chairman Donald Kohn recognized in speeches last month a deterioration in credit markets that jeopardizes lending to businesses and consumers, threatening spending. That was a shift from the Oct. 31 statement, when officials signaled they were reluctant to do more.

The reality is, markets have gotten worse in a way they couldn't have expected, and they've gotten worse to a point where there are legitimate concerns that it will spill over to the macroeconomy, said Vincent Reinhart, who was Bernanke's chief staff adviser on monetary policy before leaving in September to join the American Enterprise Institute in Washington. Not acting would be too much of a surprise.

Traders estimate a 26 percent chance of a half-point reduction today, with a quarter-point fully discounted, according to futures prices quoted on the Chicago Board of Trade.

Recession Calls

Economists including former Treasury Secretary Lawrence Summers and the chief U.S. economists of Morgan Stanley and Merrill Lynch & Co. predicted a recession in the past month as strains in credit markets increased.

The collapse of the U.S. subprime mortgage market has led Citigroup Inc., Merrill and other banks and securities firms around the world to write down about $76 billion of losses and markdowns this year.

Concern about the mounting losses diminished banks' willingness to lend cash to each other, sending funding costs higher. The three-month dollar London Interbank Offered Rate climbed to as high as 65 basis points more than the Fed's benchmark rate last week. That's the widest spread, except for on Sept. 18 when the Fed cut rates, in seven years.

Yields on two-year Treasury notes dropped as low as 2.79 percent on Dec. 4, the lowest since November 2004, as investors flocked to the perceived safety of government debt.

Demand for Cash

The scarcity of cash comes at a time when banks typically conserve funds to buttress balance sheets before closing their books for the year.

The Fed's New York branch said Nov. 26 it planned a series of repurchase agreements extending into 2008 to help fill cash shortages. Stephen Cecchetti, a former New York Fed research chief, said officials may consider further steps, such as extending discount-rate loan terms to 90 days, from 30. The outstanding loans rose to the highest since September last week.

If I backed myself into this position, I would grit my teeth and just cut, big time, said Cecchetti, who is now a professor at Brandeis University in Waltham, Massachusetts.

Some Fed officials indicated heightened concern inflation would quicken, before Bernanke and Kohn spoke two weeks ago. Philadelphia Fed President Charles Plosser said Nov. 27 that price expectations may increase because of the rate cuts.

Source - Bloomberg

China Inflation Reaches 11-Year High, Trade Gap Grows

China's inflation accelerated at the quickest pace in 11 years and the trade surplus swelled, adding pressure on the central bank to raise interest rates and let the currency appreciate faster to cool the economy.

Consumer prices rose 6.9 percent in November from a year earlier after climbing 6.5 percent in October, the statistics bureau said today. That was more than the 6.5 percent median estimate of 21 economists surveyed by Bloomberg News.

Surging food and fuel costs and a record $238 billion surplus in the first 11 months have prompted the government to name inflation and overheating as the biggest threats to growth. U.S. Treasury Secretary Henry Paulson is in Beijing to press for yuan gains that would narrow the trade gap and staunch the flow of money into the world's fastest-growing major economy.

Liquidity from the trade surplus will continue to cause the economy to overheat in 2008, said Glenn Maguire, chief Asia economist at Societe Generale SA in Hong Kong. The yuan will need to appreciate at a firmer pace, interest rates will rise and the reserve requirement for banks will go to 17 percent by the end of next year.

The yuan gained by the most in a month against the dollar. The currency, which has climbed 12 percent since a fixed exchange rate was scrapped in July 2005, rose 0.22 percent to 7.3792 per dollar as of 4:46 p.m. in Shanghai from 7.3952 late yesterday. It touched 7.3770, the highest since the end of the dollar link.

The People's Bank of China last week ordered lenders to set aside 14.5 percent of deposits as reserves, up from 13.5 percent. China's one-year lending rate is at a nine-year high of 7.29 percent after five increases this year.

U.S. Gap

The yield on the 4.68 percent bond due September 2022 rose 4 basis points, or 0.04 percentage point, to 4.72 percent.

The trade surplus climbed 14.7 percent to $26.3 billion in November from a year earlier, the third-biggest monthly total, the customs bureau said today. The $15.2 billion trade surplus with the U.S. pushed the 11-month total with that country to $149.2 billion.

The central bank will strictly control bank lending, raise interest rates this month and allow a faster pace of currency appreciation in 2008, said Liang Hong, a senior economist at Goldman Sachs Group Inc. in Hong Kong.

Export Growth

People's Bank of China Governor Zhou Xiaochuan said today that currency policy will be used to help narrow the trade gap.

A stronger Chinese currency would lower import costs and push up export prices. Export growth has slowed from 29 percent in the seven months through July to between 22 percent and 23 percent for each of the past four months, after cuts to tax incentives.

A more flexible currency is especially important now, when the risks of inflation are clearly rising in the Chinese economy, Paulson said last week. The Treasury Secretary, in Beijing for the so-called Strategic Economic Dialogue, is fending off calls in Congress for legislation to punish China for its currency policy.

The inflation rate is almost double the 3.5 percent pace in the U.S. in October. It's also more than the 3.01 percent increase in wholesale prices in India, the key inflation measure for the world's second-fastest growing economy, in the week ended Nov. 24.

China's inflation was 4.6 percent in the first 11 months, more than the central bank's 3 percent target for the year and the key one-year deposit rate of 3.87 percent.

Food makes up a third of the consumer price index and rising costs pose a threat to social stability, illustrated by a stampede last month at a cooking-oil sale that killed three people in the central city of Chongqing.

Overall, food climbed 18.2 percent. Non-food prices rose 1.4 percent, accelerating from a 1.1 percent gain in the previous month. Utility prices including water, electricity and gas rose 5.6 percent.

The inflow of cash from record exports, besides stoking inflation, has also fueled a surge in property and stock prices, with the benchmark CSI 300 Index gaining 152 percent this year. The central bank today ordered banks to tighten rules for real estate loans after property prices in 70 cities jumped 9.5 percent in October, the fastest pace in two years.

China's economy, the world's fourth largest, expanded 11.5 percent in the third quarter from a year earlier.

There's a chance the central bank will raise interest rates again before the end of this year, said Wang Tao, head of economics and strategy for Greater China at Bank of America Corp. in Beijing. The government is also likely to accelerate appreciation of the currency.

Source - Bloomberg

Bet your bottom dollar

The Fed's last two rate cuts helped send the greenback drastically lower. But experts say the worst may be over for the dollar even if the Fed cuts again.

Wall Street is betting that the Federal Reserve will deliver another rate cut at its policy meeting Tuesday, but that may not necessarily spell more doom for the dollar.

Currency experts argue that the greenback's steep decline this year has come too far, too fast and that investors have factored in one, if not more, rates cut by the Fed in the coming months.

"At these levels quite a bit of interest rate reduction is already priced into the dollar," said Shaun Osborne, chief currency strategist in Toronto at TD Securities Inc.

The dollar has managed a modest recovery in recent weeks, but is still sharply lower for the year against a number of currencies, most notably the euro and the British pound.

The U.S. Dollar Index, which measures the currency's performance against six of its biggest trading partners, is down more than 8 percent so far this year, after hitting a record low late last month.

Much of the dollar's recent decline can be blamed on the Fed's recent policy actions. In October, the central bank cut the key federal funds rate, which affects the rate at which consumers borrow on a variety of loans, by a quarter of a percentage point. That followed a half-point cut in September.

A rate cut puts pressure on the dollar since it makes dollar-denominated investments less attractive to outside investors.

Although a weak dollar also typically drives domestic and overseas demand for U.S. goods, it also poses an inflationary risk to the economy by limiting consumers' buying power overseas and pushing up the price of commodities such as oil and gold.

Traders are split as to whether the Fed will lower the federal funds rate by a quarter-point or a half-point on Tuesday.

But Tom Fitzpatrick, global head of currency strategy at Citigroup in New York, said that if the Fed cuts by a half-point, he thinks there would be "quite a sharp reaction in terms of dollar selling."

With a rate cut all but certain though, Fitzpatrick and other currency experts said investors are likely to pay close attention to what the Fed says in its statement.

At its October meeting, policymakers said that the risks of inflation and economic growth were roughly in balance. If they stick to that same script, that could bode well for the dollar, said Nick Bennenbroek, head currency strategist at Wells Fargo Bank in New York.

"The key question is whether they feel comfortable or bold enough to repeat that assertion," said Bennenbroek. "If that statement is there, then we might see the dollar stabilize or even move higher."

Whatever action the Fed takes on Tuesday, there have been encouraging signs for the U.S. economy - a bullish indicator for the greenback.

Last Friday, the Labor Department reported that the economy added 94,000 jobs in November, while the unemployment rate held steady, suggesting that the U.S. economy was unlikely to enter a recession in 2008.

Source - CNN Money