Wall Street's terrible Tuesday

Stocks sink again extending rough start to 2008, as major gauges fall 10 percent off recent highs - the technical definition of a market "correction."

Countrywide slammed on shady document claim

The nation's largest mortgage lender 'recreated' letters claiming a borrower under bankruptcy protection owed the company money, according to the New York Times.

Home sales sink, outlook darkens

Pace of pending sales slows again; Realtors now see biggest drop in home values at start of '08; forecast for price rebound pushed back to '09.

NEW YORK (CNNMoney.com) -- Contracts to sell existing homes fell in November and there could be darker days ahead for home values, which are expected to post their biggest decline on record this quarter as a full-year rebound in prices now isn't expected until 2009, according to an industry trade group.

The National Association of Realtors' Pending Home Sales Index, which measures the level of sales agreements, fell 2.6 percent to 87.6 in November, turning lower after two months of modest improvement from a record low hit in August. Economists surveyed by Briefing.com had forecast only a 0.8 percent decline.

The Realtors also cut its existing home price estimate for the current quarter to a 5.3 percent year-over-year decline, which would mean the current period would see the steepest drop in that price measure on record.

Only a month ago the group's estimate was for only a 2.5 percent drop in prices in the first quarter.

The group's forecast released Tuesday also no longer sees even a modest rebound in existing home prices this year, as it had previously forecast, and pushed back the estimate of a full-year uptick in prices to 2009.

The latest reading on pending home sales is better only than the pace of sales in August and September, when the meltdown in mortgage markets cut off the availability of mortgage financing for many buyers.

"It's not surprising, but it's certainly not good news," said Mike Schenk, senior economist at Credit Union National Association. "We may be near the bottom. But the trouble is we're likely to stay at or near the bottom for a while. It's going to take us 6 to 9 months to claw our way out of this situation, at least."

How they got housing wrong

The November reading is even worse than the 89.8 reading recorded in September 2001, the month when terrorist attacks shook buyer confidence. That reading had been the weakest month on record before the current housing downturn. An index reading of 100 represents the level of sales at the start of 2001, when the index was started.

In its first forecast for sales and the economy through 2009, the group said it expects a 3.1 percent rebound in existing home prices next year. But the trade group now sees existing home prices remaining flat this year, rather than its previous forecast of a narrow 0.3 percent recovery from 2007 levels.

"Consumers continue to wait for additional signs of market stabilization," Lawrence Yun, chief economist for the Realtors, said in a statement. "There are more people with financial capacity now than in 2005, but many are trying to market-time their purchase. As a result, the exact timing and the strength of a home sales recovery is a bit uncertain."

Home prices post record declines

The report came the same day that one of the nation's largest builders, KB Home (KBH, Fortune 500), reported a large widening of its quarterly loss. The loss was much worse than forecasts due largely to writedowns in the value of its holdings and the cost of getting out of some land purchase options.

KB Home is not the only builder to be hit by large charges due to the downturn in the housing market. No. 1 builder Lennar (LEN, Fortune 500), as well as No. 2 Centex (CTX, Fortune 500), No. 4 Pulte Homes (PHM, Fortune 500) and No. 6 Hovnanian Enterprises (HOV, Fortune 500), all reported bigger-than-expected quarterly losses due to such charges.

While No. 3 builder D.R. Horton (DHI, Fortune 500) reported a smaller-than-expected loss in late November, that followed a quarter with a loss that was much wider than forecast. In December, luxury home builder Toll Brothers (TOL, Fortune 500) posted its first loss in 22 years as a public company.  

Stocks give up gains

Wall Street can't sustain an early advance as investors eye weak housing news, rising oil and gold prices, comments from Fed officials

Wall Street looks to the Fed

As economic anxiety grows, investors await speeches from central bank officials; futures head higher on CEO shake-ups.

NEW YORK (CNNMoney.com) -- U.S. stock futures advanced early Tuesday after a lackluster session, although ongoing fears about a recession and a rise in crude prices could crimp any opening gains.

At 6:22 a.m. ET, Nasdaq and S&P futures were higher, suggesting a positive start for Wall Street. Stocks closed mixed the previous session after a choppy day of trading that was dominated by economic concerns.

Investors will keep their focus Tuesday on comments from Philadelphia Fed President Charles Plosser and Boston Fed president Eric Rosengren, who are both due to speak about the economic outlook. Plosser will be a voting member of the Fed's policy-setting committee, starting with the Jan. meeting. Rosengren was a voting member last year.

Oil prices rebounded back above $96 a barrel mark after a big selloff Monday on fears that a recession would cut demand. U.S. light crude for February delivery added 95 cents to $96.04 a barrel in electronic trading after losing nearly $3 a barrel the previous session.

Gold prices jumped $15.40 to a record $875 an ounce in early trading Tuesday, lifted by a combination of the weak dollar and high oil prices. The precious metal is seen as a hedge against both inflation and geopolitical uncertainty.

In global trade, Asian stocks ended mixed, with Japan's Nikkei edging higher to end a four-session losing streak. European stocks rose in the early going.

Among the economic reports due Tuesday are the pending home sales index and the economic outlook from National Association of Realtors. The trade group is due to release both reports at 10 a.m. ET.

The pending home sales index, which measures homes with signed sales contracts, is forecast to decline 0.8 percent for November, according to economists surveyed by Briefing.com. That would be the second worst performance on record for the seven-year old index, better than only the August 2007 reading during the worst of the mortgage market meltdown.

Another look at the battered housing market is due before the market opens when KB Home (KBH, Fortune 500) is slated to report results for its fiscal fourth quarter, which ended in November. Analysts surveyed by earnings tracker First Call forecast a loss of $1.08 a share in its fiscal fourth quarter, which would be worse than the 64 cents a share loss it reported a year earlier. The nation's No. 5 builder by revenue has reported losses in three of its previous four quarters and is forecast to report losses throughout fiscal 2008.

In other corporate news, the Wall Street Journal reported late Monday that James Cayne will give up his title as CEO of embattled investment bank Bear Stearns (BSC, Fortune 500), although he will reportedly hang on to the title of chairman. Shares of the firm gained 2.3 percent in after-hours trading Monday.

There was also a management shakeup at coffee retailer Starbucks (SBUX, Fortune 500), as Chairman Howard Schultz again assumed the CEO title after the company ousted Jim Donald from the post. The company also announced it would slow the pace of new store openings in the United States and redirect some of that expansion capital to overseas operations. Shares shot up 9 percent in after-hours trading on the news.

Software provider Microsoft (MSFT, Fortune 500) announced early Tuesday it had had made an offer to buy Norwegian enterprise search firm Fast Search & Transfer for $1.2 billion, which represents a 42 perecent premium over where Fast's shares were trading Monday on the Oslo exchange. The offer has the unanimous support of the Norwegian firm's board, according to Microsoft.

Shares of electronics retailer Circuit City (CC, Fortune 500) plunged nearly 6 percent in after-hours trading after it announced that sales at stores opened at least a year, a closely watched retail measure known as same-store sales, fell 11 percent in December. Most major retailers will report same store sales Thursday for the all-important December shopping season.

Embattled automaker Ford (F, Fortune 500) announced plans early Tuesday to invest $500 million to expand its operations in India. Shares of Ford slipped 0.7 percent in Frankfurt trading early Tuesday.

The the Hollywood Foreign Press Association scrapped plans for the traditional Golden Globes awards program, which had been set to air on NBC, a unit of General Electric (GE, Fortune 500), this Sunday, because plans to picket the show by members of the Writer Guild would likely have kept most actors and actresses away from the ceremony. The decision could suggest trouble ahead for the Academy Awards, which are scheduled to air Feb. 24 on Walt Disney (DIS, Fortune 500) unit ABC. 

WASHINGTON (AFP) - - US Treasury Secretary Henry Paulson said Monday that the housing market's woes are far from over, and that the government was studying fresh measures to minimize economic harm.

Paulson said a housing correction had been "inevitable" following years of rocketing property prices, but that the government wanted to provide effective remedies to offset the housing downturn rather than providing quick fixes.

The US housing market has been in a decline for almost two years as property sales have slumped and prices have tumbled amid tightening credit, triggering wider economic uncertainty.

"Our most immediate goal is to minimize the impact on the real economy," Paulson said in a speech to securities analysts in New York.

"This will require patience as we thoughtfully evaluate next steps. Working through the current situation and getting the policy right is more important than getting the policy announced quickly," Paulson said.

Some economists are speculating that the administration of US President George W. Bush may soon unveil a package of economic policies aimed at bolstering the US economy which is facing one of the worst housing meltdowns in decades.

Bush, in a separate speech delivered in Chicago, said officials are "working on policies to reform our mortgage markets," while acknowledging many Americans had become nervous about declining home values.

Rising energy costs, tighter credit markets, falling bank profits and concerns about job growth have led some economists to predict the country could be on the cusp of a recession.

"After years of unsustainable price appreciation and lax lending practices, a housing correction was inevitable and necessary," Paulson said, adding that the housing slump is the biggest threat facing the world's biggest economy.

The Treasury secretary underlined that interest rates on 1.8 million subprime mortgage loans are due to reset higher in the next two years, heightening the risk of further home foreclosures.

Spiking home foreclosures, especially related to subprime loans held by Americans with patchy credit records, have worsened the housing malaise.

Paulson's hint that the government is considering fresh remedies to bolster the economy comes after the administration brokered a vast mortgage relief plan last month aimed at helping up to 1.2 million distressed homeowners at risk of foreclosure.

The plan devised by Treasury officials with major lenders and investors helps some struggling homeowners to refinance subprime adjustable-rate home loans or freeze a loan's current interest rates for five years.

Paulson said the Treasury was paying close attention to how the relief plan was working, but he cautioned that the market and homeowners will likely have to weather ongoing pain for a little longer.

"Let me be clear that no single policy action will undo the excesses of the last few years. President Bush and his administration recognize the risks we face, and the primary importance of keeping the economy as strong as possible as we weather this housing correction," Paulson said.

BASEL, Switzerland (AFP) - - Global economic growth is "robust" but inflation risks remain as markets absorb the impact of the US subprime home loan crisis and higher food prices, European Central Bank chief Jean-Claude Trichet said Monday.

 

"Food is a very big problem" stoking inflationary pressures, along with higher energy costs, stock market corrections and the risks of protectionist trade policies, Trichet said in his role as spokesman for the G10 group of central bankers meeting here.

The ECB meets on Thursday to decide whether or not to raise interest rates.

Trichet had said on Saturday that the bank was ready to act to curb inflation, adding that this was expected to remain "significantly above" 2.0 percent in the eurozone in the near future.

The ECB has an inflation target of slightly below 2.0 percent.

The bank chief also said on Monday that "we have to look very carefully at the business model of banks" in the wake of the billions of dollars in losses incurred by some of the world's leading financial institutions due to their exposure to the US high-risk mortgage sector.

Banks and investment funds have made losses on trading in mortgage-backed securities, complicated financial instruments whose value is linked to US home loans.

When large numbers of US home owners began defaulting, the value of these securities plummeted and global money markets dried up as banks became nervous about lending to each other.

Switzerland's UBS, one of the most prestigious names in Swiss and European banking, last month announced a record write-off of about 10 billion dollars (6.8 billion euros) linked to its subprime exposure.

In Britain, mortgage lender Northern Rock suffered the first run on a bank in more than a century due to its subprime exposure, after it was forced to apply to the Bank of England for emergency funding in September.

Despite the downside risks, "at the global level we see confirmation that growth is continuing at a pace that is quite robust," Trichet said.

The ECB head said that coordinated actions by central banks such as his own, the US Federal Reserve, the Swiss National Bank and the Bank of England to inject much-needed liquidity into the financial markets had been "efficient."

"We have seen that the measures that have been taken by central banks proved efficient, we are reassured that the year-end has passed relatively smoothly," Trichet said.

His comments came as a European Union survey showed that confidence in the European economy fell in December to the lowest level in nearly two years but not by as much as economists had expected.

The European Commission's eurozone economic sentiment indicator slipped in December to 104.7 points in the single currency bloc -- the lowest level since March 2006 -- from 104.8 points from November.

The decline was not as sharp as the 104.0 points economists had forecast, as polled by Thomson Financial News.

Trichet stressed that the booming economies of developing nations such as China and India have proved thus far resilient in the face of the US subprime crisis.

"The emerging world is not touched," he said.

"Emerging markets have very impressive dynamics. There is no evidence that there is significant influence from the market correction which has been observed in the industrial world," Trichet said.

The World Bank said in November it expects China's economy to grow 10.8 percent this year, just down from a projected 11.3 percent in 2007.

Stocks ward off losses

Wall Street manages to stabilize at the end of a rollercoaster day. Paulson speech, Iran confrontation and falling oil prices all factor into a choppy session.

NEW YORK (CNNMoney.com) -- Stocks managed to cut losses by the close of a very choppy session Monday in which investors mulled commentary about the economy from President Bush, Treasury Secretary Henry Paulson and a Federal Reserve official, as well as news of an incident between Iran and the U.S. military.

The Dow Jones industrial average (INDU) added 0.2 percent. The broader S&P 500 (INX) index added 0.3 percent. The Nasdaq (COMPX) composite slid 0.2 percent.

Stocks seesawed on both sides of unchanged throughout the session, as investors sorted through the day's news and struggled to find stability after last week's big selloff.

Shortly before the close, the major gauges were down sharply, until a last-minute advance propelled the Dow and S&P 500 into positive territory and helped the Nasdaq cut losses.

"The market bounced around a lot today, and I think that's going to continue to be the case going forward, at least until the next Fed meeting," said John Forelli, portfolio manager at Independence Investments.

He said that in the next few weeks, investors will be parsing the economic news for what it says about growth, but also whether it implies the Fed is more likely to cut interest rates by a quarter-percentage or a half-percentage point at its meeting at the end of the month.

On Tuesday, Philadelphia Fed President Charles Plosser and Boston Fed president Eric Rosengren are due to speak about the economic outlook. Plosser will be a voting member of the Fed's 2008 policy-setting committee, starting with the Jan. meeting. Rosengren was a voting member in 2007.

Government and Federal Reserve officials spoke Monday on the outlook for the economy in the wake of the ongoing housing market fallout.

Treasury Secretary Henry Paulson, in a New York speech, said that while the Bush administration is working to counteract the housing crisis, there is no simple solution. He also sought to defend the Bush administration's plan to "freeze" rates on certain subprime mortgages. (Full story).

President Bush, speaking in Chicago, said that the economic signals are mixed, creating anxiety for many Americans, but that the economy is resilient and the nation has dealt with anxiety in the past. He also discussed the need for keeping taxes low.

Atlanta Fed president Dennis Lockhart said that negatives in the economy are picking up speed and market contacts are worried about further deterioration. Lockhart is not a voting member of the Fed's 2008 policy committee, but will be an alternate as of the upcoming Jan. 29-30 meeting.

Adding to stock skittishness was word from the U.S. military that five Iranian boats harassed three U.S. naval ships in international waters Sunday. Iran denied that the matter was a serious incident. The White House said it will confront such behavior if Iran threatens the United States or its allies. (Full story).

Stocks could benefit in the next few days from technical market factors. The major stock gauges have now fallen 10 percent from the October highs, in intraday trading Monday. Should stocks close 10 percent off the highs, that would be the technical definition of a "correction."

Such a development can often cause a bounce back effect, as was the case in November, the last time the major gauges corrected.

However, it's going to take more than technical factors for stocks to make a sustained move higher, said John Wilson, chief technical strategist at Morgan Keegan.

In addition to the technical factors, stock investors in the next few weeks will be responding to fourth-quarter earnings reports, which start pouring in Wednesday with Alcoa (AA, Fortune 500), and the upcoming economic news.

Wilson said last week's economic news was bad, but other news has been mixed. If that continues to be the case, "that would send the message to the recession bears that conditions are still OK, and that could help stocks recover a bit," he said.

Additionally, Wilson said that earnings expectations are so low that it wouldn't be hard for corporations to top expectations. These factors could help give stocks a push ahead of the next Federal Reserve meeting, when the central banks is expected to cut rates again.

Economic indictors are 'mixed' claims Bush

It is important to suggest that taxes will stay low, President says.

CHICAGO (AP) -- President Bush said Monday that economic indicators are "increasingly mixed," causing anxiety for many Americans. But he said the economy is resilient and the U.S. has dealt with anxiety before.

Bush said it was important, in a time of economic uncertainty, to send a signal that taxes will remain low.

"A lot of Americans are anxious about the economy," the president told business leaders in Chicago. "This frankly is not unprecedented," he said, pointing to the recession in the early months of his administration, terrorist attacks, corporate scandals, wars in Iraq and Afghanistan and natural disasters.

"In seven years we've had experience in dealing with anxiety," Bush said.

Bush scheduled the speech to try to calm fears that his administration would stand by and let the economy slip downward or that a recession is inevitable.

"We've had experience in dealing with anxiety. Every time, our economy has absorbed those shocks and dealt with them," he said to a gathering organized by the Illinois Chamber of Commerce.

Father of Bush tax cuts: Recession likely

Harvard economist Martin Feldstein says more tax relief, deeper Fed rate cuts needed if U.S. is to avoid recession.

NEW YORK (CNNMoney.com) -- Martin Feldstein, the Harvard economist credited with being one of the fathers of the Bush administration tax cuts, says the U.S. economy is now likely to slip into a recession, and that avoiding one will take a new round of tax cuts and interest rate cuts from the Federal Reserve.

Feldstein is president and CEO of the National Bureau of Economic Research (NBER), the organization charged with determining when the economy is in a recession and when it is growing. He told CNNMoney.com that he had thought the chance of a recession was about 50-50 even before last week.

But he said he now believes a recession is likely, as he pointed to both a report from the Institute of Supply Management showing manufacturing activity in decline for the first time in almost a year, and Friday's December jobs report that showed a jump in the unemployment rate to a two-year high.

He did not give a new percentage for the chance of a recession, saying that will depend on what both the Federal Reserve and Congress and the administration do in response to the weakness.

"It's not just clear that lower interest rates and monetary policy more generally will have enough traction because of conditions in the credit market," he said when asked if the Fed could hold off a recession. "We should have some fiscal stimulus to back that up."

Feldstein made his remarks the same day President Bush gave a speech in Chicago in which he said that economic indicators are "increasingly mixed," and he acknowledged that many Americans are growing anxious about the economy. But the president argued the economy itself is resilient.

The president did not propose any kind of short-term economic stimulus package in his comments, as some had expected, although he argued that it was important not to raise taxes and called for making permanent the tax cuts he passed early in his administration that are due to expire after he leaves office.

Feldstein said he was not surprised that there was no plan laid out on Monday, saying he expects to see it in the State of the Union address. He said an extra $300 tax credit for each tax payer, similar to what was passed in 2001, would only be a good first step this time, and that some kind of deeper cuts might be necessary if the economy starts to lose jobs.

"The precise mix is not as important as a decision that what the economy needs is an additional amount of fiscal stimulus on top of the lower interest rate. That can be a cut in personal taxes, it can be a business investment credit of the sort we had in 2003 or some combination of the two," he said.

Feldstein served as chairman of the Council of Economic Advisers during the Reagan administration. He has served as president and CEO of NBER since leaving that post in 1984, as well as serving on Harvard's faculty. He has given notice that he will be retiring from NBER in June of this year.

Feldstein said that the NBER generally waits at least six months after the economy goes into recession to meet and assign a date to the start of the downturn, and that it is nowhere near ready to call such a meeting. But he said that some stimulus is needed, even if it turns out that the economy continues to grow, albeit at a weak rate.

"What's clear is even if the economy doesn't go into a full scale recession it will be a slow year, one that would benefit from a fiscal stimulus like a $300 (tax credit.) If we're going to actually going to slip into negative GDP, I would want to see more than that."

While he did not serve in the Bush administration, he was an advisor to the campaign and was seen as a leading force in shaping the administration's tax cut strategy, as well as its push to privatize social security. He also served as the faculty advisor for several top members of the Bush administration's economic team when they were working on their doctorates in economics

Jefferies expects to lose $24 million

The investment bank says it does not have a liquidity problem but has been hurt by weakness in high yield assets.

NEW YORK (AP) -- Investment bank Jefferies Group Inc. said Monday it estimates the company will lose $24 million, or 17 cents per share, in the fourth quarter.

Jefferies attributes the expected loss to weak results in its high yield and asset management business, as well as losses in two principal trading efforts. In addition, weak credit markets led Jefferies to delay some deals.

Analysts polled by Thomson Financial, on average, forecast earnings of 33 cents per share for the quarter on revenue of $390.9 million.

Jefferies currently expects fourth-quarter revenue will range between $345 million and $365 million.

Unlike some larger investment banks, Jefferies said it has substantial liquidity and will not have to take any major writedowns or impairment charges in the fourth quarter.

Full-year earnings are expected to exceed $140 million on revenue of more than $1.55 billion, according to the investment bank. Analysts expect full-year earnings of $1.45 per share on revenue of $1.61 billion.

Jefferies (JEF) is scheduled to report final fourth-quarter and full year earnings on Jan. 23. 

Stocks set to rebound

Wall Street eyes a rebound after last week's brutal selloff; oil prices slide below $98.

NEW YORK (CNNMoney.com) -- U.S. stock futures rose early Monday as investors eyed a comeback from the previous session's brutal selloff and crude prices extended their declines.

At 6:52 a.m. ET, Nasdaq and S&P futures were higher, suggesting gains at the start for Wall Street.

Stocks tanked on Friday, sending the blue-chip Dow lower about 2 percent, after a surge in the unemployment rate and weak jobs data fueled anxiety about a recession in the U.S.

At the same time, the prospect of a U.S. downturn also raised hopes the Federal Reserve will aggressively cut rates when it meets later this month.

Lower oil prices helped support the brighter mood. U.S. light crude slid in electronic trading early Monday after crossing the $100 a barrel threshold last week. A barrel of light sweet crude lost 45 cents to $97.46 a barrel.

But while futures here were a bit higher, Asian stocks finished sharply lower on fears of a U.S. recession and weak auto sales in Japan. European markets edged slightly higher in early trading.

On the economic calendar, President Bush is due to speak about the economy later today. His speech comes amid word the White House is considering new measures to boost the economy to ward off a recession.

Treasury Secretary Hank Paulson is also speaking this afternoon. He will discuss the capital markets and the economy in New York.

Several tech stocks are in focus with the start of the Consumer Electronics Show in Las Vegas, the biggest gadget show of the year.

Microsoft (MSFT, Fortune 500) kicked off CES by announcing a string of movie and TV deals, including one to have Walt Disney Co. (DIS, Fortune 500) sell TV shows through the Xbox Live service, and a similar deal with MGM to sell movies that way. It also struck a deal with General Electric (GE, Fortune 500) unit NBC Universal to present online footage from this summer's Olympic games using Microsoft's new Silverlight software rather than the Flash software from Adobe which has been the industry standard.

Sony got a boost after Time Warner (TWX, Fortune 500), the largest publisher of DVDs, announced it would use only Sony's Blu-ray disc format for its high definition DVDs, rather than releasing HD titles in both Blu-ray and the competing HD DVD format from Toshiba, as it had been doing. Time Warner is owner of CNNMoney.com.

Napster (NAPS) also said it would start selling music downloads as unprotected MP3 files.

The Wall Street Journal reported Monday that fast food leader McDonald's (MCD, Fortune 500) is taking aim at Starbucks (SBUX, Fortune 500) with plans to install coffee bars with "baristas" serving cappuccinos, lattes, mochas and the Frappe, a rival to Starbucks' ice-blended Frappuccino, at 14,000 U.S. locations.