Wall Street cuts gains by the close as optimism about WaMu, mergers, gives way to concern about earnings

Stocks ended mixed Monday, as investors welcomed news that Washington Mutual could see a $5 billion investment, but showed caution ahead of the quarterly earnings period, due to get underway after the close.

The Dow Jones industrial average and the broader Standard & Poor's 500 index both gained a few points. The Nasdaq composite lost 0.3%.

The major gauges struggled higher through the morning as investors welcomed corporate news, including the latest for the possible Microsoft-Yahoo combination and $5 billion investment for mortgage lender Washington Mutual.

But a spike in oil, gold and gas prices and some selling in the technology sector dragged on stocks in the afternoon, with the Nasdaq ending the session lower.

After the close, Dow component and aluminum producer Alcoa reported quarterly earnings that fell from a year ago and missed estimates on sales that fell from a year ago and beat estimates. As is traditional, Alcoa's earnings mark the unofficial start of the quarterly reporting period.

Results for the overall S&P 500 are expected to decline versus a year ago, due largely to a big drop in financial sector results amid the credit and housing market crises.

No big market-moving earnings are due Tuesday, with the focus instead on the morning's economic news.

The February pending home sales index is due in the morning and the minutes from the last Federal Reserve policy meeting are due in the afternoon.

Investors will also be sorting through comments from a pair of Fed officials expected late Monday night. Federal Reserve Vice Chairman Donald Kohn and San Francisco Fed President Janet Yellen are both expected to speak tonight in San Francisco.

Washington Mutual rumors. Earlier, financial stocks had rallied as investors continued to bet that the worst is over with for the market.

The potential ($5 billion) Washington Mutual investment was important for investor sentiment amid ongoing questions about whether the credit crisis has seen a turning point, said Joseph Saluzzi, co-head of equity trading at Themis Trading.

Private equity is generally seen as the smart money, and its been sitting on the sidelines lately, he said. So if this deal turns out to be true and the smart money is seeing value in companies like Washington Mutual, that's a good sign.

He said the market was also benefiting from an improvement in sentiment seen last week, when investors welcomed news that UBS and Lehman Brothers are raising cash - and took in stride a dismal March jobs report.

Washington Mutual is in talks to receive a $5 billion investment from private equity firm TPG and other investors, The Wall Street Journal reported. Shares jumped 29%.

Microsoft said over the weekend that Yahoo has three weeks to agree to a takeover or face a proxy fight for control of the company. On Monday, Yahoo said it isn't opposed to a deal, but wants a better offer than the current $41 billion.

Swiss drugmaker Novartis is buying 25% of Alcon with an option to ultimately buy more than 75% of the eye-care company in a deal that could be worth as much as $38 billion.

Market breadth was mixed. On the New York Stock Exchange, winners topped losers by 9 to 7 on volume of 1.27 billion shares. On the Nasdaq, decliners narrowly edged advancers on volume of 1.78 billion shares.

Commodity prices. U.S. light crude oil for May delivery rose $2.86 to settle at $109.09 a barrel on the New York Mercantile Exchange.

COMEX gold for June delivery rose $11.80 to $925 an ounce.

Other markets. The dollar rose versus the euro and the yen.

Treasury prices slumped, raising the yield on the benchmark 10-year note to 3.56% from 3.46% late Thursday. Bond prices and yields move in opposite directions.

U.S. Stocks Fall After GDP Trails Forecast, Jobless Claims Rise

U.S. stocks dropped for a second day after the economy grew less than forecast, jobless claims jumped and Federal Reserve Chairman Ben S. Bernanke said some smaller banks will probably collapse.

JPMorgan Chase & Co. led financial shares to their first drop in five days after Goldman Sachs Group Inc. and Merrill Lynch & Co. cut their profit estimates. The Standard & Poor's 500 Financials Index extended its decline after Bernanke said that in many cases small banks need to raise more capital. Sprint Nextel Corp., the third-biggest U.S. wireless carrier, retreated to a five-year low after reporting a record $29.5 billion loss.

The S&P 500 declined 12.97 points, or 0.9 percent, to 1,367.05 at 11:20 a.m. in New York. The Dow Jones Industrial Average decreased 126.34, or 1 percent, to 12,567.94. The Nasdaq Composite Index lost 19.68, or 0.8 percent, to 2,334.1. About seven stocks fell for every two that rose on the New York Stock Exchange.

We're still seeing the fallout from housing, and the credit crunch is still unfolding, said Alan Gayle, senior investment strategist and director of asset allocation at Trusco Capital Management in Richmond, Virginia, which oversees $17 billion of equities. It seems like every credit rock you turn over has something crawl out from underneath it. That makes us relatively defensive.

The U.S. economy in the fourth quarter grew at an annual rate of 0.6 percent, less than forecast and reflecting reduced estimates for spending and construction. Initial jobless claims increased by 19,000 to 373,000 in the week ended Feb. 23, the Labor Department said. Total benefit rolls rose for a second straight week to the highest since October 2005.

Profit Slump

The S&P 500 has dropped 6.9 percent this year on concern the collapse of subprime mortgages and a slowdown in the world's largest economy will drag down profits. Profit slumped 16 percent on average at the 440 members of the S&P 500 that reported fourth-quarter results so far, according to Bloomberg data. During the first quarter, earnings will decline 1.6 percent, according to the average analyst estimate.

Markets tend to bottom out fairly slowly, Bruce McCain, head of investment strategy at Key Private Bank in Cleveland, which manages $30 billion, said in a Bloomberg Television interview. We don't want to be too quick to commit money only to see markets roll over with a wave of bad news. We're much more optimistic about the economy later this year.

Sprint Nextel fell 72 cents to $8.23 on the NYSE. The company's per-share loss was $10.36 as customers defected and it wrote down the value of the purchase of Nextel Communications Inc. Sprint also eliminated its dividend.

Goldman, Merrill

JPMorgan lost $1.45 to $42.96. Goldman Sachs and Merrill Lynch reduce their forecasts on expectations of writedowns in the value of its home-equity loans.

Financial shares lost 2.6 percent, the most among 10 industries in the S&P 500. Bernanke, testifying before Congress about the state of the economy, said there probably will be some bank failures. Large banks will likely be spared because they have enough cash to stay solvent, he added.

American International Group Inc. fell on speculation the insurer may report its first quarterly loss in five years. AIG, the world's biggest insurer, fell $1.32 to $50.93. Chief Executive Officer Martin Sullivan, who has failed to win the confidence of shareholders since he succeeded Maurice Hank Greenberg in 2005, may report a fourth-quarter loss of $1.20 a share, according to Goldman Sachs analyst Tom Cholnoky.

`Disproportionately Shared'

The problem in the banking industry is disproportionately shared by the largest names, said Matthew DiFilippo, director of research at Stewart Capital Advisors, which manages $1 billion in Indiana, Pennsylvania.

Most U.S. stocks retreated yesterday as a slump in utilities and drugmakers offset speculation Federal Reserve Chairman Ben S. Bernanke will cut interest rates to avert a recession.

Mylan Inc. sank $1.09 to $12.06. The company said it had a quarterly loss of $1.38 billion on expenses from its $6.9 billion purchase of Merck KGaA's generics unit.

Thornburg Mortgage Inc. tumbled $1.93, or 17 percent, to $9.61. The mortgage lender that specializes in adjustable-rate loans said it may have to sell assets to meet lenders' demands for increased collateral as prices of mortgage-backed bonds extended declines this month.

Thornburg has already met $300 million of margin calls, depleting its available cash and reducing its ability to meet future demands for more collateral, it said in a filing with the Securities and Exchange Commission today.

The gain in gross domestic product from October through December matched the government's advance estimate issued last month and followed a 4.9 percent third-quarter pace, according to revised figures issued today by the Commerce Department in Washington. The median estimate in a Bloomberg News survey of economists projected a 0.8 percent increase.

U.S. Stocks Rise on Rate-Cut Speculation, Fannie, Freddie Caps

U.S. stocks rose for a fourth day after Federal Reserve Chairman Ben S. Bernanke said policy makers will act quickly to boost growth and regulators allowed Fannie Mae and Freddie Mac to buy more mortgages.

Fannie Mae and Freddie Mac, the biggest sources of financing for U.S. home loans, rallied and led the market's rebound after the government removed restrictions on the size of their portfolios. Citigroup Inc., American Express Co. and General Motors Corp. led gains in the Dow Jones Industrial Average, which fell earlier after orders for durable goods dropped more than forecast in January.

The Standard & Poor's 500 Index climbed 4 points, or 0.3 percent, to 1,385.29 at 11:27 a.m. in New York, capping its longest stretch of gains this year. The Dow average added 54.63 points, or 0.4 percent, to 12,739.55, rebounding from a loss of 0.6 percent. The Nasdaq Composite Index rose 13.24, or 0.6 percent, to 2,358.23. About three stocks gained for every two that fell on the New York Stock Exchange.

If liquidity is restored to the mortgage market it has a good chance of restoring liquidity to the rest of the credit markets, said Thomas Lee, chief U.S. equity strategist at JPMorgan Chase & Co. in New York. There's a lot of companies having a tough time accessing capital because the banks are at the center of the credit crisis.

Bernanke's comments prompted traders to increase bets on larger rate cuts. He told Congress that the Fed will act in a timely manner to insure against downside risks to the economy. Stocks fell earlier after the Commerce Department said bookings for products meant to last several years decreased 5.3 percent in January.

Fannie, Freddie

Fannie Mae rose $2.82, or 10 percent, to $29.79. Freddie Mac climbed $1.91, or 7.6 percent, to $27.12. The limits on the size of the companies' mortgage portfolios, imposed after accounting errors at the government-chartered companies, will be lifted on March 1, according to a statement sent by e-mail today from the Office of Federal Housing Enterprise Oversight.

Citigroup Inc., the biggest U.S. bank, climbed 44 cents to $25.39. Goldman Sachs Group Inc., the largest securities firm, rallied $3.55 to $176.25.

Traders boosted bets that the Fed will cut interest rates by 0.75 percentage point to 2.25 percent by the central bank's March meeting. Fed funds futures trading shows 12 percent odds of a three-quarter point cut, compared with no chance yesterday. The remaining bets are for a half-point reduction to 2.5 percent.

`Hit the Ground Running'

The Fed has really hit the ground running in 2008 trying to keep this going, but it looks as though they're pushing on a string, Peter Sorrentino, who helps manage $15 billion as senior portfolio manager at Huntington Asset Advisors in Cincinnati, said in an interview on Bloomberg Television. The capital flows around the globe are overwhelming what the Fed is able to do at this juncture.

Autodesk Inc. dropped $6.36 to $32.74. The software maker reported fourth-quarter profit, excluding compensation and acquisition costs, of 52 cents a share. That missed the 54-cent average of analysts' estimates.

Amgen Inc. lost $1.02 to $46.80. Johnson & Johnson, the world's biggest health-products maker, slipped 63 cents to $63.09. A study published in this week's Journal of the American Medical Association found that cancer patients who take anemia drugs sold by the companies have a 10 percent higher risk of dying than those who didn't take the treatments.

The risks of the anemia drugs are well-defined, and the newly published analysis looks exactly like what we've seen before, Roger Perlmutter, Amgen's head of research and development, said in an interview.

U.S. Stocks Rally in Final 30 Minutes, Gain for Week, on Ambac

U.S. stocks rallied in the final 30 minutes of trading, helping the market post its second straight weekly gain, as speculation bond insurer Ambac Financial Group Inc. may be rescued overcame concern bank earnings will falter.

American International Group Inc. and JPMorgan Chase & Co. led the Dow Jones Industrial Average's 243-point turnaround. Ambac, which guarantees more than $500 billion in debt, climbed the most in three weeks after CNBC reported that the bailout to salvage its AAA credit rating may be announced next week.

This will cheer us up, if it in fact turns out to be true, said Bill Stone, who helps oversee $77 billion as chief investment strategist at PNC Wealth Management in Philadelphia. People are buying into the story.

The Standard & Poor's 500 Index climbed 10.58 points, or 0.8 percent, to 1,353.11, ending the week up 0.2 percent. The Dow average added 96.72, or 0.8 percent, to 12,381.02. The Nasdaq Composite Index increased 3.57, or 0.2 percent, to 2,303.35. About two stocks gained for every one that fell on the New York Stock Exchange.

Stocks dropped earlier, led by financial shares, on concern that profits at brokerage firms will decline and lower demand for mortgages will curb growth at Fannie Mae and Freddie Mac. Saving Ambac's AAA credit rating for the municipal and asset- backed securities guaranty units would help banks and debt investors limit losses.

Nine of 10 industry groups in the S&P 500 ended the day higher, as the rally in the final half hour reversed declines that earlier had sent every group except for one lower.

Ambac Speculation

Ambac, the second-largest bond guarantor, climbed $1.48, or 16 percent, to $10.71 after CNBC on-air editor Charles Gasparino said the bailout may be announced on Monday or Tuesday, citing bankers working on the deal. Gasparino also said the entire deal could fall apart. The Financial Times reported that banks including Citigroup Inc., Wachovia Corp. and Barclays Plc are lining up to provide $2 billion to $3 billion to Ambac.

The company is exploring capital-raising alternatives and has had discussions with various parties, Douglas Renfield-Miller, an executive vice president at Ambac, said in a telephone interview. He declined to elaborate.

AIG, the largest insurance company, added $1.29 to $48.88. JPMorgan, the third-biggest U.S. bank, climbed 86 cents to $43.93, erasing a 2.7 percent decline. MBIA Inc., the world's biggest bond insurer, gained 28 cents to $12.18 after earlier falling as much as 9.7 percent.

There's some possibility that some of the heat on the financials because of dysfunctional credit markets will be removed, David Kotok, who helps oversee $900 million as chief investment officer of Cumberland Advisors Inc. in Vineland, New Jersey, said in an interview on Bloomberg Radio.

$2.4 Trillion Insured

Speculation about whether the companies in the bond- insurance industry will maintain the AAA credit ratings they rely on to insure about $2.4 trillion in securities has contributed to larger-than-average price swings in the U.S. stock market. Intraday moves in the Dow industrials averaged 234 points this week, more than three times the average of a year ago.

The S&P 500 has lost 7.8 percent this year, while the Dow has dropped 6.7 percent on concern the worst housing slump in a quarter century will drag the economy into a recession.

Federal Reserve Bank of Dallas President Richard W. Fisher said today the U.S. will probably see slower economic growth rather than a deeper slump.

The most likely scenario is that the U.S. will avoid a prolonged period of negative economic growth, Fisher said during an interview today before a speech in Fort Worth, Texas, without mentioning the term recession. He also said he's hearing increasing expressions of concern about inflation from executives he speaks with, which has gotten my attention.

Financials Turn Around

The CNBC report sparked a turnaround in the S&P 500 Financials Index, which had dropped as much as 1.9 percent after Sanford C. Bernstein & Co. analyst Brad Hintz slashed his first- quarter profit estimates for U.S. securities firms and Merrill Lynch & Co.'s Kenneth Bruce said the worst housing market in a quarter century will stifle earnings at Fannie Mae and Freddie Mac through 2011. The financials ended the day up 1.6 percent, with 81 of its 92 members posting gains.

Goldman Sachs Group Inc., the biggest U.S. securities firm, gained $2.54 to $177.71 after earlier dropping as much as 2.2 percent. Lehman Brothers Holdings Inc. added 8 cents to $54.22, recovering from a 3.2 percent tumble. Bear Stearns Cos. increased $2.93 to $85.16.

Hintz cut his first-quarter earnings estimates for the firms by more than 40 percent, saying slumping credit markets, combined with weak revenue from underwriting and advisory fees, will hurt profits.

Fannie, Freddie

Fannie Mae slipped 27 cents to $28.72. Freddie Mac fell $1.14 to $26.61. Bruce downgraded the shares to sell from neutral and said the companies may report significant losses in their fourth-quarter results.

Discover Financial Services added 94 cents to $15.10. Morgan Stanley advised buying shares of the fourth-largest credit-card network, saying it will likely report earnings that top analysts' consensus estimates this year because of lower- than-expected credit losses.

Express Scripts Inc. gained $1.55 to $66.31. The third- largest U.S. manager of drug benefits raised its 2008 earnings forecast and reported profit that beat analysts' estimates as clients used a higher proportion of cheaper generic medicines.

Intuit Tumbles

Intuit Inc. plunged the most in the S&P 500 after the largest maker of tax-preparation software trimmed its annual profit forecast because of slowing sales growth to small companies and a higher tax rate. The shares dropped $2.74, or 9.2 percent, to $27.05 for the biggest decline since February 2006.

Makers of computer chips and related machines retreated after a trade group said North American orders for semiconductor equipment fell 23 percent in January from a year ago.

KLA-Tencor Corp., the second-largest U.S. maker of chip- manufacturing equipment, fell 41 cents to $42.54. Intel Corp., the biggest chipmaker, declined 48 cents to $19.82.

Some 1.42 billion shares changed hands on the NYSE, 11 percent less than the three-month daily average.

With no major economic reports due today, investors will look to next week for further clues on the economy. A report on Feb. 25 will probably show existing home sales declined in January, while a release on Feb. 27 is likely to show a drop in durable goods orders for the same month, according to economists' estimates compiled by Bloomberg News.

Small Caps Slump

The Russell 2000 Index fell 0.1 percent today after Credit Suisse Group said smaller companies may post bigger declines than their larger counterparts as tougher bank lending standards cut their profits.

Nicor Inc. dropped $1.04 to $36.36, the lowest price since April 2005. The Naperville, Illinois-based natural-gas utility forecast 2008 profit of as much as $2.40 per share. That compares with the $2.82 average of analysts' estimates compiled by Bloomberg.

Europe's Dow Jones Stoxx 600 Index fell 0.8 percent after RWE AG, Germany's second-largest utility, reported its first loss since 2000 and Morgan Stanley cut its profit forecast for Renault SA, a French carmaker.

The MSCI Asia Pacific Index lost 0.6 percent as Toyota Motor Corp. and Samsung Electronics Co. declined.

Treasury two-year notes posted their first weekly drop this year and the dollar fell to a three-week low against the euro.

U.S. Stocks Drop, Led by Banks and Tech Companies; Intel Falls

U.S. Stocks Drop, Led by Banks and Tech Companies; Intel Falls

U.S. stocks fell for the first time this week after analysts said Intel Corp. may be hurt by slower computer sales and Federal Reserve Chairman Ben S. Bernanke warned that tighter credit will restrain growth.

Intel, the world's largest chipmaker, slumped the most in eight days. Merrill Lynch & Co. and Goldman Sachs Group Inc. led brokers lower after Lehman Brothers Holdings Inc. predicted more writedowns from credit-market losses. The declines overshadowed a rally in energy shares sparked by faster-than-expected Japanese economic growth that sent Tokyo's Nikkei 225 Index to its biggest gain since 2002.

The Standard & Poor's 500 Index lost 3.27 points, or 0.2 percent, to 1,363.94 at 10:48 a.m. in New York. The Dow Jones Industrial Average slid 45.84, or 0.4 percent, to 12,506.4. The Nasdaq Composite Index decreased 7.42, or 0.3 percent, to 2,366.51. Almost two stocks declined for every one that rose on the New York Stock Exchange.

There are probably more writedowns to come, and that's going to impact things, said Kurt Brunner, who helps manage $1.6 billion at Swarthmore Group Inc. in Philadelphia. It's been nice to see three up days in a row, but I don't think we're in a steady upward trend. You're still going to have pockets of weakness. We're not in a robust, healthy economy.

'Source of Restraint'

Bernanke's comments added to concern that credit-market losses will spread beyond the financial industry after the world's largest banks and securities firms wrote down $146 billion since the beginning of 2007.

More-expensive and less-available credit seems likely to continue to be a source of restraint on economic growth, Bernanke said in prepared remarks to a Congressional committee.

Merrill slid 8 cents to $52.10. Goldman lost 97 cents to $179.21. Financial companies in the S&P 500 lost 1 percent as a group.

Intel lost 55 cents to $20.67.

The key downside risk to our view is a significant deceleration in PC unit growth and lack of meaningful margin expansion, analysts including James Covello and Simon F. Schafer wrote in a report. The brokerage maintained its buy recommendation on the shares, saying Intel's fundamentals remain unchanged.

Micron Technology Inc., the largest U.S. maker of memory chips, and Novellus Systems Inc. were downgraded to sell from neutral at Goldman. Micron lost 18 cents to $7.21. Novellus, a maker of equipment that helps turn silicon wafers into computer chips, fell 41 cents to $24.30.

Energy Rally

Energy shares climbed after Japan's economy grew twice as fast as estimated and U.S. jobless claims fell, sending crude oil up $1.09 to $94.36 a barrel.

Exxon Mobil Corp., the world's largest publicly traded oil company, rose 97 cents to $86.46 and Chevron Corp., the second- largest U.S. oil producer, climbed $1.26 to $83.38.

Comcast Corp. surged $1.33, or 7.5 percent, to $19.14. The largest U.S. cable television operator said fourth-quarter profit rose 54 percent, topping analysts' estimates. The company also said it will buy back $6.9 billion of its stock over two years and pay its first dividend in almost a decade.

MBIA Inc., the world's biggest bond insurer, gained 71 cents to $12.35 after saying it is equipped to survive the slump in prices of mortgage securities and dismissed suggestions that the industry needs a rescue or stronger federal oversight.

A bailout of highly credit-worthy companies who, at most, are at risk of losing the very highest ratings available, is misplaced, MBIA Chief Financial Officer Charles Chaplin said in prepared remarks to be delivered today at a hearing of the House Financial Services subcommittee on capital markets in Washington.

The MSCI World Index added 0.8 percent to 1,457.68 and Europe's Dow Jones Stoxx 600 Index gained 0.8 percent after climbing as much as 1.3 percent.

Oil prices extend rise above $93 a barrel

Oil up on market gains, supply worries, as Venezuela continues to battle with Exxon Mobil.

Oil prices extended their modest rise Thursday, supported by Wall Street's overnight gains and threats to U.S. oil supplies.

Wall Street rallied Wednesday after the U.S. Commerce Department said retail sales rose unexpectedly last month. Energy investors often view the equity market as a barometer of economic health, worrying that any slowdown in growth will lead to a corresponding slump in energy demand.

Traders also remain concerned about Venezuelan President Hugo Chavez's threat to halt oil sales to the United States in response to Exxon Mobil Corp.'s bid to freeze billions of dollars in Venezuelan assets. Exxon Mobil is challenging the nationalization of its Venezuelan oil ventures in U.S. and European courts.

A federal judge in New York on Wednesday confirmed the freezing of $300 million in cash held by Venezuela's state-run oil company, finding it probable that Exxon Mobil will win its legal battle against the company.

But Venezuelan Oil Minister Rafael Ramirez vowed earlier in the day to defeat Exxon Mobil in its legal battle with Petroleos de Venezuela SA, which has threatened to halt crude sales to the U.S. oil company

"We're going to come out of this battle successful," Ramirez told a rally of oil workers in the eastern state of Anzoategui. "Exxon Mobil isn't pleased with our government. It matters little to our government what Exxon Mobil thinks."

Light, sweet crude for March delivery rose 19 cents to $93.46 a barrel in in electronic trading by late morning in Europe ahead of the opening of floor trading on the New York Mercantile Exchange.

The contract rose 49 cents to settle at $93.27 a barrel on Wednesday.

Brent crude added 78 cents to reach $94.10 a barrel on the ICE Futures exchange in London.

Investors were also heartened by U.S. President George W. Bush's signing Wednesday of the $168 billion economic stimulus package that will send tax rebate checks to millions of Americans.

Oil prices have fallen from a January record above $100 a barrel largely on concerns about economic growth and falling demand for oil and gasoline.

Traders shrugged off a mixed U.S. government inventory report that said crude oil supplies grew 1.1 million barrels last week, less than the expected 2.7 million barrel increase.

The U.S. Energy Information Administration said gasoline inventories rose 1.7 million barrels while inventories of distillates, which include heating oil, dropped 100,000 barrels last week.

Heating oil futures added 0.48 cent to reach $2.6204 a gallon while gasoline prices rose 0.78 cent to $2.3977 a gallon.

Natural gas futures rose 11.2 cents to $8.50 per 1,000 cubic feet.

AIG's Sullivan May Find Job at Stake After Writedown

American International Group Inc. Chief Executive Officer Martin Sullivan may find his job at stake after an accounting lapse led to a bigger-than-forecast drop in the value of the company's holdings.

AIG rebounded in New York trading today after saying losses from so called credit-default swaps will not be material. The company fell the most in two decades yesterday after disclosing the contracts, sold to protect fixed-income investors, declined four times more than a previous estimate. Sullivan, 53, had assured investors in December that writedowns tied to the U.S. housing market were manageable.

You have to question Sullivan's leadership ability, said Rose Grant, who helps manage $2 billion in assets including AIG shares for Boston-based Eastern Investment Advisors. People are frustrated with the performance of the stock, basically throwing in the towel. His job definitely could be in jeopardy.

Citigroup Inc. and Merrill Lynch & Co. removed their CEOs last year after they underestimated losses tied to subprime mortgages. AIG, which appointed Sullivan three years ago after accounting and sales probes led to the ouster of Maurice Hank Greenberg, said it still doesn't know what the contracts were worth at the end of 2007. The company's market value has fallen about 30 percent during Sullivan's tenure.

AIG gained $1.71, or 3.8 percent, to $46.45 at 11:33 a.m. in New York Stock Exchange composite trading. Yesterday the New York-based insurer tumbled 12 percent, the biggest daily decline since the market crash of Oct. 19, 1987.

Possible Loss

Auditor PricewaterhouseCoopers LLP found material weakness in AIG's accounting for the contracts, called credit- default swaps, the company said in a regulatory filing yesterday.

The $4.88 billion decline in value of the credit-default swaps may have wiped out AIG's fourth-quarter profit, Citigroup analyst Joshua Shanker said yesterday in a research note. Fitch Ratings said in a statement that it may lower the insurer's AA credit rating.

The insurer believes that any losses from meeting obligations on its credit-default swap portfolio will not be material to the company, AIG said in a statement today.

The company said in the filing yesterday that it has procedures to appropriately determine the fair value of its holdings. Sullivan declined to be interviewed, AIG spokesman Chris Winans said.

AIG's financial products unit issues contracts that promise to reimburse investors for losses tied to $505.5 billion of securities as of Nov. 25, including corporate debt, European mortgages and collateralized debt obligations, which bundle loans.

New Chief

Greenberg ran AIG for 38 years until he was forced to retire in March 2005, two months before then-New York State Attorney General Eliot Spitzer sued and accused Greenberg of ordering improper transactions to hide losses and inflate reserves. Greenberg has maintained he did nothing wrong.

Sullivan steered the insurer through a $1.64 billion settlement of probes started by Spitzer and federal regulators, and restatements of 2000 to 2005 results that cut profit by $3.4 billion. He also led an overhaul of AIG's accounting and regulatory systems. The company blamed those restatements on weaknesses in internal controls that it said were found after Greenberg left. PricewaterhouseCoopers, AIG's auditor for more than two decades, was rehired in October.

It is incomprehensible that yet once again, this company, its board, its CEO and CFO, and its independent auditors are saying the company doesn't have adequate controls, said Lynn Turner, former chief accountant at the U.S. Securities and Exchange Commission and now on the board of Guidance Software Inc. and the Colorado Public Employees' Retirement Association. These people should all be held accountable.

Legal Consequences

Shareholder lawsuits and an SEC investigation may follow, said Tamar Frankel, a law professor at Boston University specializing in financial regulation. A material weakness is a really red flag for the SEC, she said.

SEC spokesman John Nester declined to comment. David Nestor, a PricewaterhouseCoopers spokesman, and Ken Frydman, a spokesman for Greenberg, declined to comment.

Sullivan's accounting overhaul didn't catch the latest accounting weakness because either these are new problems or more likely, these are problems that existed before and the regulators didn't go far enough, said Edward Ketz, a Pennsylvania State University accounting professor.

Net Income

AIG's net income, which set a record under Sullivan in 2006, fell 27 percent in 2007's third quarter on losses linked to the U.S. housing slump, including a $352 million reduction in the value of the derivatives. The company, which has units that originate, insure and invest in subprime mortgages or securities, is scheduled to announce fourth-quarter results later this month.

Investors eventually will look back at yesterday's announcement and conclude they overreacted, said David Katz, chief investment officer for New York-based Matrix Asset Advisors, who supports Sullivan.

The things that he can control, we're comfortable he's done a good job managing them, said Katz, whose firm manages $1.6 billion, including 845,000 AIG shares. The subprime fallout was part of the hand he was dealt.

G-7 Says Growth May Weaken, Stops Short of Remedies

The Group of Seven nations said the U.S. economy may slow further and erode global growth, while stopping short of proposing specific measures in response.

Downside risks still persist, which include further deterioration of the U.S. residential housing markets, tighter credit conditions and heightened inflation expectations in some countries, a statement by G-7 finance ministers and central bankers said in Tokyo today. They kept up pressure on China to allow the yuan to appreciate and said they'd cooperate on foreign exchange as appropriate.

The G-7 nations are at odds on how to tackle a global slowdown sparked by a U.S. housing recession. The U.S. has encouraged its counterparts to use fiscal policy to revive growth. Japan and Canada say they won't follow suit and Germany argues attention should be paid to the causes of last year's credit- market rout rather than how to limit the economic damage.

A house-price collapse has pushed the world's largest economy close to a recession and the U.S. this week urged the G-7 to follow its example and take prudent action to protect their economies. Treasury Secretary Henry Paulson has negotiated a package, including tax rebates, worth $168 billion with Congress, and the Federal Reserve last month cut its key interest rate twice in nine days to 3 percent, the fastest easing of policy since 1990.

Slowing Growth

In all our economies, to varying degrees, growth is expected to slow somewhat in the short term, the statement said. In the U.S. risks have become more skewed to the downside.

German Finance Minister Peer Steinbrueck and U.K. Chancellor of the Exchequer Alistair Darling said yesterday that scope for coordinated action to shore up the global economy is limited.

The group consists of the U.S., the U.K., Canada, Italy, France, Germany and Japan. China didn't attend the main talks at this gathering.

The G-7 agreed that China should do more to defuse global trade tensions, reflecting European and Canadian concern that their currencies are bearing too much of the burden of the dollar's slide.

While the yuan has climbed 6 percent against the dollar since the October statement, it's risen just 2 percent against the euro in the same period. French Finance Minister Christine Lagarde said today that the stronger euro continues to pose difficulties for European exporters.

China's Yuan

We welcome China's decision to increase the flexibility of its currency, but in view of its rising current account surplus and domestic inflation, we encourage accelerated appreciation of its effective exchange rate, the statement said. The language is similar to that used by the G-7 at their last meeting in October, when they singled out the yuan.

China overtook the U.K. as the euro area's biggest supplier last year. The euro has gained 11.5 percent against the dollar in the past year.

Global price pressures are making it harder for central banks to coordinate interest-rate policy. While the Bank of England this week cut its benchmark rate for the second time in three months and European Central Bank President Jean-Claude Trichet dropped a threat to raise rates, both central banks stressed inflation risks. October's statement contained no mention of global inflation risks.

May Coordinate Action

The G-7 omitted a commitment made at the last meeting in Washington to fiscal discipline. The group said it was possible they may agree to coordinate action to spur growth and ensure financial stability in the future.

The ECB and the Fed moved in concert with three other central banks in December to alleviate the credit squeeze in the biggest act of international cooperation since the Sept. 11 terrorist attacks.

Going forward, we will continue to watch developments closely and take appropriate actions, individually and collectively, in order to secure stability and growth in our economies, the statement said.

The G-7 pledged to act on the recommendations of the Financial Stability Forum of regulators, which today proposed measures to prevent a repeat of last year's credit crisis.

Italian central bank Governor Mario Draghi, who drafted the report, said banks should publish more information about their losses and improve risk management.

The report also said authorities must address potential conflicts of interest at credit-rating companies and improve understanding of banks' off-balance sheet positions, according to the statement.

The G-7 also asked the International Monetary Fund and the Basel, Switzerland-based Financial Stability Forum to report at the next meeting in April on their respective roles in identifying potential vulnerabilities and enhancing early warning capabilities, it said.

Global Recession Risk Grows as U.S. `Damage' Spreads

The U.S. economy may already be in recession; other countries might not be far behind.

Japan, Britain, Spain and Singapore, which together represent about 12 percent of the world economy, are vulnerable as fallout from the U.S. worsens their economic weakness. Even emerging markets, including China, are likely to suffer as exports to the U.S. wane.

The result: Global growth may decelerate close to the 3 percent pace economists deem a worldwide recession, from a 4.7 percent rate in 2007. Some form of global recession is inevitable at some point, former Federal Reserve Chairman Alan Greenspan said in a speech in Vancouver last week.

The developing slump puts pressure on central bankers in Japan, the U.K. and the euro region to follow the lead of Fed Chairman Ben S. Bernanke, who last week accelerated interest- rate cuts in the U.S. with an emergency move to lower the benchmark rate by three-quarters of a percentage point. Policy makers may follow that with another cut of as much as half a point after a two-day meeting that starts tomorrow, futures trading indicates.

The odds are shifting toward a more significant global monetary easing, says Richard Berner, co-head of global economics for Morgan Stanley in New York.

Jim O'Neill, chief economist at Goldman Sachs Group Inc. in London, says growth in the first half of 2008 may be the weakest since 2002 and maybe even 2001, during the last global downturn. The economy is slowing everywhere, he says.

Stocks Fall

Stocks retreated in Europe and Asia today, led by commodity producers and banks, on growing concern the global economy is slowing and companies may report more losses linked to subprime mortgages. U.S. index futures dropped and Treasury notes rose for a second day.

A worldwide recession doesn't require a global contraction in output, which rarely happens; economists at the International Monetary Fund say it would take a slowdown in global growth to 3 percent or less. By that measure, three periods since 1985 qualify: 1990-1993, 1998 and 2001-2002.

The contagion from the U.S., which according to the IMF represents about 21 percent of the global economy, is spreading via multiple channels. Less spending by American consumers and companies reduces demand for imported goods. The meltdown of the U.S. subprime-mortgage market has pushed up credit costs worldwide and forced European and Asian banks to write down billions of dollars in holdings. Tumbling U.S. stock prices are dragging down markets elsewhere.

`Collateral Damage'

We'll see more collateral damage, says Allen Sinai, chief economist at Decision Economics in New York. The risk of a global recession is rising.

Such a catastrophe, while increasingly possible, isn't yet probable, economists say. Sinai puts the odds at 20 percent. Nariman Behravesh, chief economist at Global Insight in Lexington, Massachusetts, reckons it's about 30 percent.

The global implications of a U.S. recession dominated discussions last week at the World Economic Forum in Davos, Switzerland. In Washington, the IMF postponed publication of its latest world economic forecast, originally due Jan. 25, to take into account recent market turbulence.

Japan's economy is particularly at risk. Its housing market is slumping as stricter building-permit rules drag home starts to a four-decade low.

Tokyo Steel

A drop in construction demand led Tokyo Steel Manufacturing Co., the nation's biggest maker of steel girders, to lower its profit forecast Jan. 22.

It's highly likely Japan is already in a recession or will enter one this quarter, Tetsufumi Yamakawa, chief Japan economist at Goldman in Tokyo, wrote in a report published today.

The yen's 13 percent rise versus the dollar in the last six months is also taking a toll. The Japanese currency reached a 2 1/2-year high of 104.97 to the dollar last week. That is near the break-even point for Japan's exporters, who say they can remain profitable as long as the currency is weaker than 106.6, according to a government survey.

Kozo Yamamoto, head of the ruling Liberal Democratic Party's monetary policy panel, urged the Bank of Japan to cut its benchmark interest rate, already the lowest in the industrialized world at 0.5 percent.

Concerns over a recession are emerging not only in the U.S., but in Japan as well, Yamamoto said in a Jan. 23 interview. The BOJ should cut rates back to zero immediately.

Credit Crunch

Singapore may already be in a recession. Its economy contracted for the first time in 4 1/2 years in the fourth quarter as factory output slowed and electronics exports dropped. The cooling local real estate market worsened the slowdown for financial services firms.

Housing is also slumping in the U.K., where loans for home purchases dropped to a two-year low last month. The credit crunch moved into its fourth month in December, Michael Coogan, director general of the Council of Mortgage Lenders in London, said Jan. 21. Lending volumes are likely to remain weak for the next few months.

Retail sales fell in December by the most in 11 months. ScS Upholstery Plc, owner of 96 sofa stores in the U.K., said Jan. 14 that earnings will suffer after disappointing December and January business.

The U.K.'s biggest nightclub owner, Luminar Group Holdings Plc, said Jan. 18 that sales growth slowed as Britons spent less on nights out.

`Gloomy Picture'

It's a gloomy picture for the consumer, says James Knightley, an economist at ING Financial Markets in London. The prospect of recession is becoming more realistic.

Retailers Tesco Plc and Marks & Spencer Plc this month called for interest-rate cuts to help consumers, who have 1.4 trillion pounds ($2.76 trillion) of debt. Economists surveyed by Bloomberg predict the Bank of England will lower its main rate a quarter percentage point, to 5.25 percent, on Feb. 7.

Spain is also grappling with a housing boom gone bust. Banco Bilbao Vizcaya Argentaria SA, Spain's No. 2 lender, predicts property prices will fall this year and building permits will drop 25 percent.

With more than 18 percent of gross domestic product coming from construction, Spain's economy is particularly susceptible to weakness in real estate.

Spanish Construction

The main problem lies in construction but it has already spread to other sectors, says Gilles Moec, senior economist at Bank of America in London.

With other European countries, including Germany, showing signs of slowing, European Central Bank President Jean-Claude Trichet faces pressure to abandon his tough anti-inflation stance and cut interest rates. We'll see rate cuts in the European Union and in the U.K. this year, Barclays Plc President Bob Diamond said Jan. 24 in Davos.

Hopes that China's fast-growing economy can take up the slack from a U.S.-led slowdown seem misplaced.

If there is weakness in the world economy, the impact on the Chinese economy will be very serious, says Yu Yongding, director of the Chinese Academy of Social Sciences and a former adviser to the central bank.

China's growth slowed to a year-over-year pace of 11.2 percent in the fourth quarter, from 11.5 percent and 11.9 percent in the third and second quarters, respectively.

In Davos, Klaus Kleinfeld, chief operating officer of Alcoa Inc., the world's third-largest aluminum producer, said he foresees a difficult year. I don't think the world can decouple itself from what's happening in the U.S.

U.S. Stocks Decline on Citigroup's Loss, Drop in Retail Sales

The U.S. stock market resumed its January swoon after Citigroup Inc. reported a record loss, retail sales unexpectedly dropped and falling oil prices dragged down energy shares.

Citigroup, the largest U.S. bank, declined the most since November in New York Stock Exchange trading after cutting its dividend by 41 percent because of rising home-loan defaults. Exxon Mobil Corp., the biggest U.S. oil company, posted its steepest drop in seven weeks. Wal-Mart Stores Inc., the world's largest retailer, tumbled on a report showing sales at chain stores slumped in December for the first time since June.

The Dow Jones Industrial Average, which had its biggest gain for the year yesterday, slid 182.25, or 1.4 percent, to 12,595.9 at 10:30 a.m. in New York. The Standard & Poor's 500 Index lost 25.06, or 1.8 percent, to 1,391.19, bringing its 2008 decline to 5.3 percent. The Nasdaq Composite Index decreased 44.7, or 1.8 percent, to 2,433.6. More than 10 stocks retreated for every one that rose on the NYSE.

There's probably going to be more pain in the financial stocks, said Bartley Barnett, head of listed trading at Memphis-based Morgan Keegan Inc., which manages $120 billion in client assets. The weak consumer is the thing permeating this entire market. We've had a lot of companies have to adjust numbers down due to a weak consumer.

Cash Infusions

The declines added to three weeks of losses that wiped out more than $800 billion in value from U.S. shares. Merrill Lynch & Co. and Citigroup were forced to turn to outside investors for a second time in two months to replenish capital. Wall Street banks have received $59 billion from investors, mostly in the Middle East and Asia, to shore up balance sheets battered by more than $100 billion of writedowns from mortgage-related losses.

Financial companies in the S&P 500 are projected to report a 69 percent average drop in profits in the fourth quarter, dragging earnings for the overall index down 10 percent, according to a Bloomberg survey of analysts.

The dollar approached a record low versus the euro, making U.S. exports more attractive to foreign buyers, after the drop in retail sales bolstered speculation the economy is headed for recession. Prices paid to U.S. producers unexpectedly fell in December, pushed down by a decline in energy prices.

Citigroup decreased $1.63, or 5.6 percent, to $27.43. The fourth-quarter net loss of $9.83 billion, or $1.99 a share, compared with a profit of $5.1 billion, or $1.03, a year earlier. Citigroup also cut its dividend by 41 percent, announced 4,200 job cuts and said it will receive $14.5 billion from outside investors to shore up depleted capital.

'No End of Bad News'

There seems to be no end of bad news, Laszlo Birinyi, president of Birinyi Associates Inc., said in an interview with Bloomberg Television. Trying to bottom-fish may work when you're out there angling, but I'm not sure it works with financial markets,

Exxon lost $1.74, or 1.9 percent, to $89.09 after the retail sales report sent crude oil down 2.6 percent to $91.78 a barrel in New York, its lowest level in more than three weeks.

Merrill tumbled $1.62 to $54.35 after the third-biggest U.S. brokerage sold $6.6 billion in preferred shares. Merrill's convertible securities will pay a 9 percent annual dividend until they automatically turn into shares in 2 3/4 years. The investment group will get fewer shares if Merrill's stock price climbs above $61.31 and more if it drops below $52.40, according to the company's statement.

Wal-Mart slipped 48 cents to $47.19. The Commerce Department said sales at U.S. retailers fell 0.4 percent in December, capping the weakest year since 2002. Sales declined for the first time since June, following a revised 1 percent gain in November, the Commerce Department said. Purchases excluding automobiles also decreased 0.4 percent.

State Street

State Street Corp. dropped $3.11 to $81.75. The world's largest money manager for institutions said fourth-quarter earnings fell 28 percent after setting aside $618 million to settle legal claims stemming from losses on subprime mortgages. The company said 2008 growth will be at the lower end of its target ranges.

Williams-Sonoma Inc. dropped $2.20, or 9.9 percent, to $20. The seller of gourmet cookware reported a decline in holiday sales and lowered its fourth-quarter profit forecast amid the worst housing slump in 27 years. Sales at stores open more than a year fell 0.4 percent for the nine weeks through Dec. 30, the company said.

Genentech Inc. decreased $2 to $68.64. The world's second- biggest biotechnology company said sales of its top product, the cancer drug Avastin, fell short of analysts' expectations.

Traders held steady in their bets for an interest-rate cut. Fed fund futures show a 44 percent probability the Federal Reserve will lower its benchmark interest rate by 0.75 percentage point this month. Before Jan. 11, traders saw no chance of a three-quarter point cut to 3.5 percent. The balance of the odds are for a half-point cut.

Fed Signals Shift as Traders Anticipate Deeper Rate Reductions

Federal Reserve officials signaled they've shifted their stance in favor of taking out greater insurance against the growing risk of recession.

Fed Governor Frederic Mishkin said today that policy makers must be ready to abandon inertia and act decisively in cases of major financial disruptions. Philadelphia Fed Bank President Charles Plosser, whom economists consider to be the toughest on inflation, said he's now most concerned about consumer spending.

The comments, following Chairman Ben S. Bernanke's speech yesterday pledging substantive additional action, spurred traders to predict a faster and deeper pace of interest-rate cuts. That strategy would be a break from the forecast-driven policy approach to date, Fed watchers said. Mishkin joined Bernanke in stating the strategy is now one of insurance.

I am delighted the Fed is moving in a very different direction, said former Fed governor Lyle Gramley, now a senior adviser at the Stanford Group in Washington. Risk-management is what they should be doing.

Mishkin, 57, a former collaborator with Bernanke on academic research, said in New York today that waiting too long to ease policy could result in further deterioration of the macroeconomy and might well increase the overall amount of easing that would eventually be needed.

Disappointing Markets

While the Fed cut the benchmark rate by a half-point, more than anticipated in September, officials have since disappointed some investors by refusing to commit to a series of reductions. When lowering borrowing costs in October and December by a quarter-point each, policy makers refrained from saying that growth was a bigger concern than inflation.

By the time they met Dec. 11, officials acknowledged that the Fed's stance appeared to be somewhat restrictive, minutes of the session showed last week.

They underestimated the magnitude of the credit shock, said Brian Sack, senior economist at Macroeconomic Advisers LLC in Washington. The markets got it a lot faster than the Fed and now they are catching up.

Plosser, 59, said he's certainly open to more rate cuts, in an interview with PBS's Nightly Business Report today. By contrast, when he spoke Nov. 27 he warned that the Fed's rate cut the previous month posed a risk to inflation expectations.

The most thing we are concerned about right now is consumer spending, Plosser said today.

Boston Fed President Eric Rosengren, 50, said today in South Burlington, Vermont that declining house prices are likely to dampen consumer and business confidence in spending.

`Gasoline on the Fire'

Rosengren, Plosser and especially Mishkin arguably poured more gasoline on the fire after Bernanke's remarks, Ian Morris, chief economist at HSBC Securities USA Inc., said in a note to clients. The market is betting that the Fed may cut in an inter-meeting move, wrote Morris, who yesterday doubled his rate-cut call for this month to a half-point.

Traders anticipate at least a half-point reduction in the target rate for overnight loans between banks this month, according to contracts quoted on the Chicago Board of Trade.

Odds of 0.75 percentage point of reductions this month jumped to 34 percent, from zero yesterday, futures show. That suggests some investors see the chance of a move before the Federal Open Market Committee meets Jan. 29-30, with an additional cut when it gathers.

Bernanke's Opportunity

Bernanke, 54, will have another opportunity to send signals on rates Jan. 17, when he testifies on the economic outlook before the House Budget Committee.

This week's shift may have been driven by the Labor Department's Jan. 4 report showing the jobless rate jumped to 5 percent in December, economists said. The figures also showed the first decline in private-sector employment since 2003.

We stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks, the Fed chief said to the Women in Housing and Finance and Exchequer Club in Washington. The committee must remain exceptionally alert and flexible.

Pending Sales of Existing U.S. Homes Fell in November

The number of Americans signing contracts to buy previously owned homes fell more than forecast in November, signaling further deterioration in housing.

The National Association of Realtors' index of pending home sales decreased 2.6 percent to 87.6, following a 3.7 percent gain in October that was larger than previously estimated, the group said today in Washington.

The figures underscore Treasury Secretary Henry Paulson's forecast today that the U.S. housing recession will continue, posing the biggest risk to economic expansion. Economists said more stringent lending practices after the collapse in subprime lending and prospects that home prices will keep falling are deterring buyers.

There is no evidence it is bottoming, Paulson said today about the housing market. He added that a plan designed to stem a wave of foreclosures may need to be expanded beyond subprime homeowners.

Economists forecast the index of signed contracts for existing homes would fall 0.7 percent following a previously reported 0.6 percent October increase, according to the median of 33 projections in a Bloomberg News survey. Estimates ranged from a drop of 3 percent to a 0.3 percent increase.

Compared with a year earlier, the index was down 19 percent.

`Further to Fall'

Inventories are still high, and home prices have further to fall in order to lift affordability, said Justin Smirk, senior economist at Westpac Banking Corp. in London. There's more bad news to come in housing before it gets better. Westpac forecast pending sales would drop 2.5 percent.

The housing slump is likely to last well into 2008, hurting economic growth and prompting Federal Reserve policy makers to lower interest rates, analysts said.

Stocks extended gains following the report, led by miners and energy products as the price of oil rebounded. Treasury securities fell as the gain in stocks reduced demand for the relative safety of U.S. government debt. The benchmark 10-year note yielded 3.88 percent at 10:33 a.m. in New York, up from 3.83 percent late yesterday.

Today's report showed pending resales fell in three of four regions. Purchases decreased 13 percent in the Northeast, 4.1 percent in the Midwest and 2.1 percent in the West. Sales rose 2.3 percent in the South.

The bigger gain in October than previously estimated suggested the market may be stabilizing, according to Lawrence Yun, the group's chief economist.

`Uncertain' Outlook

Although there could be some minor slippage in the first quarter, existing home sales should hold in a narrow range before trending up, Yun said in a statement. The exact timing and the strength of a home-sales recovery is a bit uncertain.

Paulson, speaking during a visit to New York on CNBC television, said evidence shows the housing decline has further to run.

The Treasury chief indicated the outlook may prompt an expansion of the plan Bush administration officials brokered with mortgage lenders last month. The initiative was designed to make it easier to negotiate affordable loans and freeze some adjustable-rate mortgages at current rates.

One thing we will consider is maybe expanding this beyond subprime borrowers to other borrowers, Paulson said.

Unsold Homes

There was a 10.3 months' supply of previously owned homes on the market in November at the current sales pace, compared with an average 6.5 months in 2006 and 4.5 months a year earlier.

That excess is one reason property values are dropping. Home prices in 20 U.S. metropolitan areas fell in October by the most in at least six years, based on the S&P/Case-Shiller home- price index. The decrease, reported last month, was the biggest since the group started keeping year-over-year records in 2001.

Record foreclosures are adding to the supply of unsold homes and will weigh further on prices this year, economists said.

We'll probably see more weakness in existing home sales given that inventories are so high, said James O'Sullivan, a senior economist at UBS Securities LLC in Stamford, Connecticut. Prices may keep dropping for a while.

Tougher lending rules are adding to market woes. A third of planned home sales were canceled or delayed in September, October and November because of loan problems, according to the results of a survey of 2,416 real-estate agents issued yesterday.

The Realtors association estimates 5.7 million homes will be sold in 2008, little changed from an estimated 5.65 million last year. Purchases of new homes will fall to 669,000 from 773,000.

KB Home

KB Home, the fifth-largest U.S. homebuilder, today reported a fourth-quarter loss as tumbling demand for new homes forced the company to write down land values. Los Angeles-based KB Home operates in 13 states, including California, Florida, Nevada and Arizona.

A report last week showed the labor market weakened in December, fueling concern the real-estate slump is spilling over to the rest of the economy.

The jump in the unemployment rate caused some economists to raise the odds of recession. Harvard University economist Martin Feldstein, member of the group that dates U.S. economic cycles, said the chance of recession had risen to more than 50 percent.

Central bankers said economic growth would probably be somewhat more sluggish than their previous estimate, according to minutes of the Dec. 11 Federal Open Market Committee meeting released last week. Policy makers cited housing and weaker consumer spending.

Fed's Plosser

While traders anticipate the Fed will lower its benchmark rate by at least a quarter point this month, Philadelphia Fed Bank President Charles Plosser said he hasn't made up his mind yet.

A substantially weaker outlook than expected, particularly if that weakness is projected to be more prolonged than anticipated, may require further adjustments to policy, Plosser said in a speech in Gladwyne, Pennsylvania.

The real-estate agents' group began reporting pending home resales in March 2005 and has supplied historical data back to February 2001. The gauge is considered a leading indicator because it tracks contract signings. The group's existing-home purchases report tracks closings, which typically occur a month or two later.

Brutal selloff on Wall Street

Dow tumbles over 250 points after weaker-than-expected jobs report revives recession worries. The Nasdaq plunges.

Stocks tanked Friday, with the Dow shedding over 250 points, after a weaker-than-expected December jobs report exacerbated recession fears.

The Dow Jones industrial average tumbled almost 2 percent. The broader S&P 500 index lost around 2.5 percent. The Russell 2000 small-cap index fell 3.2 percent.

The Nasdaq composite lost 3.8 percent, or just over 98 points. According to Stock Trader's Almanac, it was the tech-heavy index's biggest one-day point loss since Sept. 17, 2001, the first day the market reopened for trading after having been closed in the aftermath of 9/11. On that day, the Nasdaq lost 115.83 points.

A weaker-than-expected unemployment rate sparked a big stock selloff. Bonds rallied, as investors sought safety and the dollar fell versus other major currencies. Oil and gold prices retreated from recent records.

Employers added 18,000 jobs to their payrolls last month, short of forecasts for 70,000 and down from a revised 115,000 in the previous month. The 18,000 figure marked the weakest monthly jobs growth since August 2003.

The unemployment rate, generated by a separate survey, rose to 5 percent - a more than two-year low - from 4.7 percent in the previous month. Economists thought it would rise to 4.8 percent.

Average hourly earnings, the report's inflation component, rose 0.4 percent after rising a revised 0.4 percent in the previous month. Economists thought wages would rise 0.3 percent.

Stocks have been volatile for months as investors have mulled the fallout from the housing and credit market crises, and worried that the economy could be heading into recession.

The weak labor market report amplified those worries.

"In September, October and November we saw pretty solid payroll numbers, indicating that although the economy was in a bit of a slowdown, the jobs market was holding up, giving us some sort of floor," said Georges Yared, chief investment strategist at Yared Investment Research. "That floor was pulled out from under us this morning."

In the next few months, investors will be looking to see if the December employment report was a temporary indication or the start of a longer-term downtrend for the labor market.

"Jobs growth in the month was moribund and we should expect it to be moribund for a while," said Brett Hammond, chief investment strategist at TIAA-CREF. "But I think we shouldn't get too overwhelmed by the notion of a recession yet."

He said that economic growth prospects look to pick up in the second half of the year, and that by that point the housing issues will be "through the trough," although the woes for that sector won't be over yet.

In the short-term, investors will be looking to see how the Dec. jobs report impacts near-term Federal Reserve policy, with bets now rising that the central bank could cut rates more aggressively, perhaps at the next meeting on Jan. 29 and 30. (Full story)

The Federal Reserve announced Friday that it will lend up to $60 billion this month to banks through its new auction process as a means of easing the credit crunch.

Treasury prices climbed, as investors sought safety in the comparably less risky government debt. The rise lowered the yield on the 10-year note to 3.84 percent from 3.89 percent late Thursday. Treasury prices and yields move in opposite directions.

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

U.S. light crude oil for February fell $1.27 to settle at $97.91 a barrel on the New York Mercantile Exchange, after hitting a record trading high above $100 a barrel during Thursday's session.

COMEX gold for February delivery fell $3.40 to settle at $869.10 an ounce, pulling back from an all-time high hit Wednesday.
Jobs weak, unemployment soars

Stock declines were broad based, with 29 out of 30 Dow components falling, led by tech stocks such as Intel, IBM and Hewlett-Packard and financial companies such as Citigroup and JP Morgan Chase.

Intel's decline followed a JP Morgan downgrade to "neutral" from "overweight." Separately, the chipmaker said it is pulling out of the One Laptop Per Child program.

Intel also trades on the Nasdaq and was among the 96 components of the Nasdaq 100 that fell on the session.

A slew of retail stocks fell on concerns that weaker job growth will slam consumer spending. The S&P Retail index lost nearly 4 percent.

Market breadth was negative. On the New York Stock Exchange, losers topped winners by more than three to one on volume of 1.26 billion shares. On the Nasdaq, decliners beat advancers four to one as 2.07 billion shares changed hands.

In other economic news, the Institute for Supply Management's reading on the services sector showed a smaller monthly decline than economists had been expecting.

Wall Street also considered the results from Thursday's Iowa caucuses, which kicked off the 2008 presidential election. Former Arkansas Gov. Mike Huckabee won on the Republican side and Sen. Barack Obama of Illinois won for the Democrats.

Stocks were mixed Thursday as a jump in factory orders helped temper concerns about inflation as oil and gold prices hit record highs.

Source - CNN Money

Dow drops over 250pts, Wipro declines 6%

US stocks tumbled on Friday as a sharp rise in unemployment data heightened fears that the economy is heading into a recession.

Both the main indices, the Dow and the Nasdaq Composite, had their worst three-day start to a year. While the Dow had its worst start since the Great Depression, the Nasdaq Comp never had such a start since inception in 1971.

While the Dow plunged 256.54 points (1.96%) to 12,800.18, the Nasdaq Composite was down 98.03 points (3.77%) at 2,504.65.

Indian ADRs, too, closed with sharp losses on Friday. Wipro declined nearly 6% to $13.66. HDFC Bank was down over 5% at $121.53. Infosys, Satyam, ICICI Bank and Tata Motors also declined.

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

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.

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

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