People Do What People See

This fall I had a rare opportunity to update and revise a book I wrote 10 years ago. When I wrote The 21 Irrefutable Laws of Leadership, I attempted to share everything I knew about leading people by teaching the timeless principles I had discovered. The book became very popular, appeared on The New York Times best-seller list and remained on the BusinessWeek best-seller list for nearly two years. It is by far the book I'm best known for.

However, not long after the book was published and I began teaching the leadership laws internationally, I realized that I had left out a couple of very important concepts. When my publisher, Thomas Nelson, invited me to revise the book, I jumped at the chance. I had learned so much in those 10 years, and I wanted to share it. What began as a minor update turned into a major revision in which I rewrote about 70% of the book.

One of the concepts I included in the new edition is something I call "The Law of the Picture: People Do What People See." It deals with the importance of the examples leaders give to their people. You see, good leaders must communicate vision clearly, creatively, and continually. However, the vision doesn't come alive until the leader models it.

Good leaders are aware that others do what they do. And they always keep in mind that:

1. Followers are Always Watching What Leaders Do

If you are a parent, you have probably already realized that your children are always watching what you do. And just as children watch their parents and emulate their behavior, so do employees who are watching their bosses. If the bosses come in late, then employees feel like they can, too. If the boss cuts corners, employees cut corners. People do what people see.

Followers may doubt what their leaders say, but they usually believe what they do. And they imitate it. Former U.S. Army General and Secretary of State Colin Powell observed, "You can issue all the memos and give all the motivational speeches you want, but if the rest of the people in your organization don't see you putting forth your very best effort every single day, they won't either."

2. It's Easier to Teach What's Right than to Do What's Right

Mark Twain quipped, "To do what is right is wonderful. To teach what is right is even more wonderful -- and much easier." That's one of the reasons why many parents (and bosses) say, "Do as I say, not as I do."

One of my earliest challenges as a leader was to raise my living to the level of my teaching. I can still remember the day I decided that I would not teach anything I did not try to live out myself. That was a tough decision, but as a young leader I was learning to embrace the Law of the Picture. Norman Vincent Peale said, "Nothing is more confusing than people who give good advice but set a bad example." I say, "Nothing is more convincing than people who give good advice and set a good example."

3. We Should Work on Changing Ourselves Before Trying to Improve Others

Leaders are responsible for the performance of their people. The buck stops with them. Accordingly, they monitor their people's progress, give them direction, and hold them accountable. And to improve the performance of the team, leaders must act as change agents. However, a great danger to good leadership is the temptation to try to change others without first making changes to yourself.

As a leader, the first person I need to lead is me. The first person that I should try to change is me. My standards of excellence should be higher for myself than those I set for others. To remain a credible leader, I must always work first, hardest, and longest on changing myself. This is neither easy nor natural, but it is essential.

4. The Most Valuable Gift a Leader Can Give is Being a Good Example

A survey conducted by Opinion Research Corp. for Ajilon Finance asked American workers to select the one trait that was most important for a person to lead them. Ranked No. 1, with 26% of votes, was leading by example. Second, at 19%, was strong ethics or morals. More than anything else, employees want leaders whose beliefs and actions line up.

Leadership is more caught than taught. How does one "catch" leadership? By watching good leaders in action!

So as you approach the end of the calendar year and start thinking about the performance of the people you lead, stop for a moment of honest reflection and ask yourself this question: What kind of example am I setting? If you're setting a high standard for integrity, competence, work ethic, and professional growth, if you're being all that you desire your people to be, then you're setting up yourself, your people, and your organization for success. If not, you need to make some changes.

Great Estates in the Granite State

New Hampshire's priciest homes tend to have one thing in common: waterfront views. The lush scenery has held the interest of wealthy buyers, even as the nation faces the worst real estate downturn in decades.

"In 1995 my lakefront homes ranged from $600,000 to $1 million," says Joe Skiffington, a builder who completes about six luxury homes in New Hampshire's Lakes Region each year. "Today they range from $2 million to $8.5 million. Prices still are going up. There's only so much lakefront."

In 2007, 20 properties sold for more than $2 million along tony Lake Winnipesaukee compared with 11 such sales in 2004, according to Adam Dow, a Realtor with Prudential Spencer-Hughes Real Estate in Wolfeboro, N.H.

Home Away from Home

Many of state's wealthiest residents live in the Lakes Region, especially Squam Lake and the 72-square-mile Lake Winnipesaukee. Other high-end destinations include the seacoast, which stretches 18 miles from Massachusetts to Maine and includes Rye, the site of the state's first settlement and the historic seaport of Portsmouth. Lake Sunapee in western New Hampshire is close to ski slopes and attracts famous vacationers including rock star Steven Tyler.

Wealthy buyers see New Hampshire as a four-season destination where they can hike, bike, and sail in the spring, summer, and fall, and ski, skate, and ice fish in the winter. They move to New Hampshire for the natural beauty, proximity to Boston, and the tax benefits -- the state has neither an income tax nor a sales tax. During the last couple decades, new mansions have popped up where early 20th century camps and cottages once stood. The land is just too valuable these days to justify a modest getaway pad, real estate agents say.

"People are using them more as a home than just a place to throw a towel," Dow says. "They want the same luxury they have in their primary residences."

Custom-Designed Lodgings

Buyers are willing to pay a premium for large parcels they can remake to fit their needs. One 29-acre compound along the shores of Lake Winnipesaukee is on the market for $15 million. The property includes two primary residences, boathouses, docks, beaches, and a large barn with a two-story stone fireplace, a commercial-grade kitchen, and a surround-sound entertainment system. Previous owners have used the barn to display collectible cars.

Republican Presidential candidate Mitt Romney's 11-acre estate on the shores of Lake Winnipesaukee includes a contemporary six-bedroom lake house and a stable, which was converted into a guesthouse, according to a recent Newsweek article.

Guesthouses are common; so are pools, elevators, and chef's kitchens. But you'll also find stone fireplaces, wooden interiors, and log exteriors designed to replicate the warmth and informality of a lodge.

"Though it's a $6 million or $7 million home, you're still putting your ski boots up on the coffee table," Skiffington says.

Business and Pleasure

Corporate executives, politicians, and entertainers come to New Hampshire to escape attention. "They come here because they're left alone," says Rick Mazzarella, director of fine homes for Prudential Spencer-Hughes Real Estate. "They are not inundated by the media and they're not bothered by the residents."

But it's not just those seeking a secondary property who appreciate New Hampshire's many attractions. The state is also a good place to work, as it's home to offices for Thermo Fisher Scientific (NYSE:TMO - News) in Hampton, Timberland (NYSE:TBL - News) in Stratham, Bentley Pharmaceuticals (NYSE:BNT - News) in Exeter, and New Hampshire Thrift Bancshares (NasdaqGM:NHTB - News) in Newport, to name a few.

Major private employers in New Hampshire include Brookstone, regional health-care providers Catholic Medical Center and St. Joseph Healthcare, and financial companies TD Banknorth and Fidelity Investments.

Why You Could Soon Be in a Flood Zone

Back in 2001 the Federal Emergency Management Agency (FEMA) launched an ambitious effort to bring its maps of the U.S. into the digital age. Many of the maps, meant to show flood-prone areas, hadn't been reviewed for 20 years or more, even as two trends intensified: a pattern of more severe storms nationwide and stepped-up real estate development that made water absorption more difficult in certain regions. Updated maps are starting to come online, with many more due to be approved over the next three years. By the time FEMA is finished, homeowners could find they are living in a new flood zone with financial risks they hadn't anticipated. Here are answers to key questions about the FEMA changes.

What does this mean for me?

If you live in an area deemed to be flood-prone and you have a federally backed mortgage, you may be required to buy flood insurance. In one spectacular example, maps in El Paso County, Tex., could designate as many as 7,000 additional homes as being in a high-risk zone because the Rio Grande levee system failed to meet government standards.

Your odds of ending up in a freshly designated flood zone are greater if you live in areas where FEMA is putting most of its resources, including such states as Louisiana, Ohio, and Florida.

How do I get flood insurance?

Basic homeowners' policies don't cover damage from floods caused by water entering a house from the outside. Your best option is to buy it from FEMA's National Flood Insurance Program, through an agent with a participating company that sells the policies. You can only buy an NFIP policy if you live in one of the 20,300 communities that participate in FEMA's flood program. Those localities have agreed to take steps to reduce flood risk and to enact emergency plans.

What does it cover?

Unfortunately, coverage is fairly limited. The most you can buy is $250,000 for building damage and $100,000 for the contents of your home. Flood insurance also won't cover such things as a finished basement or the living expenses you might have to pay while your house is being repaired. If you're in a high-risk area, you'll pay as much as $2,462 annually in premiums. Closer to the coast, premiums can be double that amount.

What if I want more extensive coverage?

You might be able to sign on with one of a handful of insurance companies offering other options. There are excess-coverage policies, which pay for damages above the NFIP's $250,000 limit, available from Chubb, Fireman's Fund Insurance, and others. In some cases you have to be an existing client to buy one.

Is the insurance worth it even if I don't live in a flood-prone area?

Flood damage is probably a lot more common than you think. Plus, the NFIP's rates are fairly inexpensive. For homes in low- to moderate-risk zones that haven't been flooded, there's a preferred-risk policy, with premiums of up to $317 annually.

2008 could see volatility of 2007

NEW YORK - The start of a new year often brings jokes about crystal balls, but with the arrival of 2008, many investors are ruefully saying they don't need fortunetelling gimmicks — they know that the problems that made 2007 painful and turbulent aren't going away with a change in the calendar.

The concerns about slowing economies, a weakening U.S. consumer and further tightness in the credit markets are likely to dog investors at least early on in 2008, observers say. While it is impossible to say with any certainty what will happen, few expect that the bumpy ride investors unwittingly began in mid-2007 will soon end.

A few Wall Street veterans agreed to weigh in with some of their predictions for 2008.

Q. Will the U.S. fall into recession?

A. "Right now, we've upped the odds," said Quincy Krosby, chief investment strategist at the Hartford, which oversees about $330 billion in assets. "We've always thought that the U.S. would be able to narrowly skirt a recession. For us the key is the employment data."

She contends the economy sits at a crossroads and whether a recession occurs will depend on whether unemployment remains low and whether the housing market can bottom out. She said the Federal Reserve will also need to continue to lower interest rates.

Q. Growth funds, which invest stocks likely to increase earnings and revenue but often don't pay big dividends like so-called value stocks, did well in 2007. Will that continue?

A. "We expect to see large cap growth outperform," said Krosby. "It's very difficult for investors to realize that a shift has gone on. That shift took place a number of months ago when we saw the baton go from small-cap to large-cap and now to large-cap growth. Large-caps come into their own during (economic) slowdowns."

Q. What will come of financial instruments such as mortgage-backed securities made infamous in 2007 when they hurt the performance of financial stock funds?

A. "You know Wall Street and the geniuses who created this — they're going to create something else in its stead," said Krosby. "The demand was fostered by a global demand for yield. This is why it popped up all over the world."

Funds — even normally safe money market funds — invested in products based on mortgages that were bundled and sold off to investors. But a weakening housing market made some of the assets underlying those investments shaky, as some homeowners found it impossible to make their mortgage payments.

Q. Funds that invested in areas such as emerging markets like China and other overseas economies were strong in 2007. How will such funds fare in 2008?

A. "If history repeats itself, then emerging market investors are due for big disappointment" because such spectacular growth is hard to sustain long-term, said Jack Ablin, chief investment officer at Harris Private Bank in Chicago, which oversees assets of more than $55 billion. "That's probably the most gnawing question keeping me awake at night."

Q. What kind of change might investors see in 2008 from 2007?

A. "I think that this global market isn't quite as disconnected as investors have hoped so I think that Europe weakens and that the European Central Bank will actually find themselves behind the eight ball and so the dollar will strengthen on the back of European rate cuts," said Ablin.

Q. Will sector-specific funds that showed strength in 2007 continue apace in 2008?

A. "The sectors that were the strongest in 2007 could be among the weakest in 2008 on the theory that we have recessionary tendencies in the world's largest economy and Europe and Japan aren't that far behind," said Joe Battipaglia, market strategist for the private client group at Stifel, Nicolaus & Co., which has $32 billion in client assets. He contends a slowdown in the U.S. economy would dampen demand for commodities such as oil and that a correction in emerging-market stock markets like China is due.

Q. Will large-cap funds continue to outrun small-cap funds?

A. "I think that will continue because these companies do tend to be more globally diversified and can be more of a safe-haven than small caps," said Battipaglia.

Big oil taking political beating ahead of earnings

HOUSTON (Reuters) - Eye-popping profits earn respect on Wall Street but the billions big oil companies reaped in the fourth quarter are raising the wrath of U.S. presidential candidates trying to cater to voters' pocketbooks.

Large oil companies have long been a target of politicians -- mostly Democrats, who blame them for gouging consumers at the gasoline pump during periods of high crude oil prices.

The rhetoric, which in years past has resonated with middle-class voters, will get louder in coming weeks as the majors publish stellar earnings results during the heart of the primary season for the U.S. presidential election.

Executives from big oil companies "better get very thick brown bags to put on their faces when they go out in public," said Fadel Gheit, analyst with Oppenheimer & Co.

The situation intensified this week as crude oil prices briefly climbed to a record $100 per barrel on the New York Mercantile Exchange. And that jump in crude did not go unnoticed on the campaign trail.

Democratic presidential contender John Edwards waged an attack on soaring oil company profits while campaigning in Iowa on Wednesday.

Exxon Mobil Corp's (XOM.N) "profits last year were at record numbers," he said. "At the same time, all of you know what you are paying for gasoline at the pump, and it's not getting better."

The tactic is familiar to industry experts who see little coming of the headline-grabbing calls for more regulation.

"This is a perennial political strategy," said Jon Cartwright, director of research at BOSC Inc, a division of BOK Financial. "To the best of my recollection, every summer for the last 20 years politicians have complained about the price of gasoline. But when all the smoke clears they've done nothing."

PROFITS SOAR

Exxon, the biggest U.S. company, is expected to post a fourth-quarter profit of $9.66 billion, just below the $9.84 billion it earned a year ago, according to Reuters Estimates. On an annual basis, earnings could reach close to $39 billion.

ConocoPhillips (COP.N) is expected to report a quarterly profit of $3.8 billion and Chevron Corp (CVX.N) is forecast to earn over $4.28 billion, riding the wave of record oil prices.

While the hefty figures are sure to garner the attention of the candidates, the companies point out that crude oil prices are set in the global market. And bottlenecks in U.S. refining capacity can exacerbate jumps in motor fuel prices.

"Vilifying oil is not going to get us to where we need to be," said Rayola Dougher, senior economic adviser with the American Petroleum Institute, the lobbying arm of the energy industry. "It's a challenge politically for the oil industry to make the case to develop more supplies. Our candidates have to be more realistic about energy security."

U.S. Senator Hillary Clinton, who is also seek the Democratic presidential nomination, has been a consistent critic of Exxon. After the company reported a second-quarter profit of more than $10 billion in July, she renewed a call for the elimination of oil company tax breaks.

Still, oil at $100 a barrel can be a double-edged sword for those searching for the commodity and moving it to the market. Refining margins remain razor thin, and the competition for resources has grown fierce as governments, eyeing higher energy prices, tighten their grip on resources.

Those governments -- from the state of Alaska and province of Alberta in Canada to Russia, Venezuela and Kazakhstan -- have moved to increase taxes or control of the energy sector.

"Milking the oil cow is the greatest thing that's ever happened to these countries," Gheit said.

If there is a soft spot in earnings for the coming quarter, it is likely to be in the refining margins, which reached record levels in the first half of 2007 but fell sharply over the subsequent months as crude oil price gains outstripped those of gasoline, heating oil and diesel.

In fact, ConocoPhillips said on Wednesday in a news release that its U.S. refining margins fell by more than 25 percent from the third quarter, but were higher than the year-ago level in most regions.

Still, oil companies point out that they spend tens of billions of dollars each year to find and pump oil from far-flung sites around the globe. Compared to many other sectors, their profit margins are thin.

"If Exxon could generate the same profit margins that Microsoft Corp (MSFT.O) does, then Exxon could rule the world," BOSC's Cartwright said.

Bed Bath warns of weak 4th qtr, stock slumps

NEW YORK (Reuters) - U.S. home goods retailer Bed Bath & Beyond Inc (BBBY.O) posted a lower quarterly profit on Thursday and warned its fourth-quarter results would be lower than expected, sending its shares down almost 10 percent.

Bed Bath & Beyond, which operates the Bed Bath & Beyond, Christmas Tree Shops, Harmon Stores, and buybuy BABY chains, said it expects its fourth-quarter earnings to range between 64 and 67 cents a share, below analysts' average forecast of 77 cents, according to Reuters Estimates.

The fourth-quarter warning is especially worrisome for the retailer as it includes almost all the holiday shopping days.

"It's a weak forecast. The numbers are going to come down significantly tomorrow and the stock will too," Morgan Keegan analyst Laura Champine said.

"There's been a deceleration in traffic into the holidays and that's obviously having an impact ... The consumer is slowing, period," said Champine, who has a "market perform" rating on the stock.

Bed Bath's shares fell 3.4 percent during Thursday's regular session on the Nasdaq to $27.40, a new 52-week low. In February, the shares traded as high as $43.32.

"Given the softer sales environment and the likely margin pressures, we are trimming our earnings expectations for both the near-term and into next year," Sanford Bernstein analyst Colin McGranahan said in a research note.

"We expect sluggish demand and heightened promotional intensity to continue, which will likely make the next several quarters challenging as well," wrote McGranahan, who has a "market perform" rating on the stock.

The company also estimated full-year earnings will range between $2.08 and $2.11 per share. Analysts, on average, were expecting full-year earnings of $2.19 a share, according to Reuters Estimates.

Bed Bath's third-quarter profit fell to $138.2 million from $142.4 million. Earnings per share rose to 52 cents from 50 cents a year earlier due to fewer shares.

Its sales rose to about $1.8 billion, the Union, New Jersey-based retailer said in a statement.

Analysts, on average, were expecting the company to earn 51 cents a share for the quarter on about $1.76 billion in sales, according to Reuters Estimates.

Comparable store sales, a key retail measures of sales at stores open at least a year, rose about 0.8 percent

Bed Bath & Beyond has been operating in a challenging sales environment as consumer appetite for home goods has waned in the midst of a weak U.S. housing market and rising food and fuel costs.

With the no end in sight to the current housing crisis, Champine said home retailers are likely to struggle in the near-term.

"I don't see any signs of life this year," Champine said. "It's likely to get worse."

Shares of Bed Bath & Beyond trade at 12.83 times full-year earnings, a discount to upscale rival Williams-Sonoma Inc (WSM.N), which trades at 13.61 times.

Monsanto 1Q profit nearly triples

ST. LOUIS - Monsanto Co. reported Thursday that its first-quarter earnings nearly tripled because of surprisingly strong herbicide and seed sales in Latin America. It boosted its earnings forecast for the year, sending its shares up by 8.5 percent.

The world's biggest seed company earned $256 million, or 46 cents per share, during the first fiscal quarter ended Nov. 30 — almost triple its profit of $90 million, or 16 cents per share, during the same period last year.

Revenue during the first quarter surged 36 percent to $2.1 billion, from $1.54 billion in the prior-year period.

The results beat expectations on Wall Street, where analysts had predicted a profit of 35 cents per share on revenue of $1.87 billion, according to a poll by Thomson Financial.

Monsanto's stock rose $9.45, or 8.5 percent, to $120.92 Thursday after rising to a 52-week high of $123 in earlier trading. Its shares have traded as low as $49.10 over the past year.

Unexpectedly strong Latin American sales of the herbicide Roundup caused Monsanto to increase its year-end profit forecast to between $2.50 to $2.60 a share from between $2.20 to $2.40 a share.

Analysts polled by Thomson Financial expect Monsanto to deliver profits of $2.59 per share this year, near the high end of Monsanto's new guidance.

CEO Hugh Grant said he was impressed with the jump in Roundup sales, but the company still plans to reap most of its future profit growth from developing new genetically engineered seeds.

"While we're delighted with the work of the Roundup teams globally, our success in seeds and traits will ultimately determine how we meet our 2008 commitments and our 2012 targets," Grant told analysts during a conference call Thursday morning.

Rising sales of Roundup in Brazil and Argentina mean the herbicide will deliver roughly $1 billion in gross profit by the end of the year, up from the $950 million the company estimated just over a month ago, said Chief Financial Officer Terrell Crews.

The company said total seed and genomics sales rose to $836 million from $680 million in the year-ago quarter. Agricultural sales rose to $1.26 billion from $859 million a year ago.

Microsoft Expected To Post 77% Earnings Gain In Second Quarter

With a full year of Windows Vista under its belt and holiday sales of Halo 3 in the books, Microsoft should post strong results when it reports fiscal second quarter earnings later this month.

Microsoft disclosed Wednesday that it will issue the report on Jan. 24 after the close of Wall Street trading.

Analysts expect the software maker to post per-share earnings for the period of 46 cents on revenue of $15.9 billion, according to a survey by Thomson Financial.

By comparison, Microsoft a year ago reported second quarter earnings per share of 26 cents on revenue of $12.5 billion. Earnings for that period were offset by the company's deferral of $1.64 billion in revenue to the third quarter to account for a Windows Vista upgrade program.

Analysts believe Microsoft will blow past those numbers in this year's second quarter on the strength of sales of Vista, Office 2007, and Halo 3 -- all of which debuted last calendar year.

Vista and Office 2007 were released last January. Halo 3, a first-person shooter for the Xbox 360, smashed a number of industry sales records after hitting stores in September.

Microsoft's second quarter numbers also should provide some insight into whether the company's efforts to boost its presence in the digital advertising market are paying off. The report will reflect the first full quarter in which online agency aQuantive -- acquired by Microsoft in August for $6 billion -- has been part of the company's operations.

For the full fiscal year ending in June, analysts predict Microsoft will report earnings of $1.81 on $59.35 billion in sales.

Monsanto profit jumps, raises 2008 forecast

NEW YORK (Reuters) - Agricultural company Monsanto Co (MON.N) said on Thursday its quarterly profit nearly tripled, helped by strength in its corn seed and herbicide businesses, and raised its 2008 forecast.

Net income rose to $256 million, or 46 cents per share, in the first quarter ended November 30 from $90 million, or 16 cents per share, a year earlier.

That profit beat both the company's and analysts' forecasts for earnings of 35 cents per share, according to Reuters Estimates.

The St. Louis, Missouri-based company reported net sales of $2.1 billion, up 36 percent from a year earlier.

Sales of corn seed and traits during the quarter jumped to $467 million from $360 million a year ago, while sales of its Roundup and other glyphosate-based herbicides climbed to $1.0 billion from $649 million.

The company raised its forecast for 2008 earnings to between $2.50 and $2.60 per share from its November forecast of $2.20 to $2.40 per share.

Free cash flow for 2008 is now expected to be between $900 million and $1 billion, up from the earlier forecast of $800 million to $900 million.

Monsanto said those forecasts did not include a likely gain from sister company Solutia's emergence from bankruptcy protection, which could add 22 cents to 24 cents per share in the second quarter. Monsanto holds some environmental liabilities for Solutia.

Shares in Monsanto traded up 3.5 percent in pre-market action on the New York Stock Exchange. Those shares more than doubled during 2007, rising from $52.53 to $111.69 per share, outpacing the 28 percent gain in the Dow Jones Chemicals Index (.DJUSCH).

Gulf Arab stocks still appealing after rally: Nomura

DUBAI (Reuters) - Gulf Arab stock markets will continue to attract foreign investors seeking to tap a regional economic boom even after a rally in the fourth quarter left "few bargains" on regional bourses, Nomura said on Sunday.

All seven stock markets in the world's top oil-exporting region rose at least 24 percent in 2007 after four of them, including Saudi Arabia's, dropped more than 35 percent in a stock market crash a year earlier.

"There are few ... bargains left but valuations should be supported by a resilient macro-economic environment, lower interest rates, moderate earnings growth and plentiful liquidity," Nomura said in a note on Sunday.

"In relative terms the Gulf remains an appealing place to invest, but valuations by conventional measures have become extended," the Japanese investment bank said.

Saudi Arabia's stock market, the largest in the Arab world, surged almost 43 percent in the fourth quarter, the best-performing index in the Arab world.

The world's largest oil exporter plans to allow foreigners to invest in its stocks through domestic funds, its stock market regulator said in December.

HSBC said last month it was creating two indexes with funds and products to give foreign investors exposure to Saudi stocks.

After the fourth-quarter rally, shares of Saudi Basic Industries Co (2010.SE), the world's largest chemicals firm by market value, were trading at 14.9 times expected 2007 earnings, Nomura said.

"Despite the higher prices and more challenging valuations there are no indications of a major correction at this stage," Nomura said.

"Foreign investors ... appear to have embraced the oil-growth story and raised their holdings directly or through nominee accounts," it said.

Oman's benchmark was the Gulf Arab region's best performer last year, rising almost 62 percent.

Gulf Arab markets "are likely to continue attracting new foreign capital as long as fund inflows remain strong," Nomura said.

Stocks sink on jobs data; tech plummets

NEW YORK - Wall Street fell sharply Friday after the government's much-anticipated employment report showed weaker-than-expected job growth and a rise in the unemployment rate. The Nasdaq composite index, also pummeled by a downgrade of Intel Corp., skidded more than 3.5 percent, while the Dow Jones industrials fell more than 1.5 percent.

The Labor Department's report that employers raised payrolls by only 18,000 and that the nation's unemployment rate rose to its highest level since November 2005 unnerved investors, who worried that a weakening job market will hurt consumer spending and tip the economy toward recession.

A better-than-expected reading on the nation's service economy briefly pulled stocks off their lows but wasn't enough to shake investors' concerns.

Investors had been awaiting the jobs report for weeks as they tried to determine whether the economy would continue to benefit from robust consumer spending even as sectors like home construction, mortgage writing and manufacturing slow. Wall Street is concerned that areas of weakness could puncture growth if consumers can't depend on a solid job market.

Manufacturers, construction companies and financial services companies all cut jobs during the month amid an anemic housing market. Retailers also made reductions.

The December report showed employers added the fewest jobs to their payrolls since August 2003. Economists had predicted much stronger growth and an unemployment rate of 4.8 percent. Instead, unemployment climbed to 5 percent in December from 4.7 percent in November. While 5 percent unemployment is still considered good by historical standards, the increase from November clearly made some investors nervous.

"It's a scary number, no question about it. No matter how good you wanted to feel about the economy averting a recession, there is far less conviction than even two or three days ago," said Joe Balestrino, senior portfolio manager at Federated Investors.

The technology-focused Nasdaq fell for the sixth straight session and showed its steepest percentage decline since a market pullback on Feb. 27 last year. The Nasdaq declined 98.03, or 3.77 percent, to 2,504.65, in part after the downgrade of Intel, but also because its smaller-capitalization components are seen as more vulnerable in an economic slowdown.

For 2008, the Nasdaq is down 5.57; in all of 2007, the index rose 9.81 percent.

The Dow fell 256.54, or 1.96 percent, to 12,800.18, while the Standard & Poor's 500 index declined 35.53, or 2.46 percent, to 1,411.63.

It was the steepest point drop for the Dow and the S&P 500 since Dec. 11. In 2008, the Dow is off 3.5 percent and the S&P is down 3.86 percent.

The Russell 2000 index of smaller companies fell 23.41, or 3.14 percent, to 721.60 and hit a fresh 52-week low.

Declining issues outnumbered advancers by more than 3 to 1 on the New York Stock Exchange, where consolidated volume came to 4.05 billion shares, compared with 3.30 billion traded Thursday.

Bond prices rose as investors sought the safety of government-backed debt after the employment reading. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.87 percent from 3.89 percent late Thursday.

A Federal Reserve announcement Friday that it is ramping up the amount of cash available to banks through a new auction process did little to calm the markets. After two auctions of $20 billion each, the Fed has now scheduled auctions Jan. 14 and Jan. 28 at $30 billion each.

The dollar was mixed against other major currencies. Gold prices, which have risen to nearly 30-year highs in recent days, declined.

Light, sweet crude fell $1.27 to settle at $97.91 a barrel on the New York Mercantile Exchange. Oil touched $100 per barrel this week for the first time, stirring concerns about inflation.

The employment figures overshadowed a report from the Institute for Supply Management, a business group, which said its December index of non-manufacturing activity showed the nation's service sector grew in December. However, the pace was slightly slower than in November and the index fell to 53.9 in December from 54.1 the prior month. Analysts had expected a deeper decline.

It's been a difficult start to 2008 on Wall Street. After selling off in the final session of last year on Monday, investors spent the first three sessions of the new year absorbing a weaker-than-expected reading on the manufacturing sector, oil that reached $100 a barrel and Friday's dismal employment numbers.

"It's hard to point to any piece of data in recent weeks that makes you feel comfortable," said Balestrino, noting that many bullish investors had hoped a strong jobs picture would lift Wall Street's mood.

"This the one piece that was holding up pretty well and now it's showing some weakness as well," he said. "In our business it's not the absolute number, it's the direction of the number and especially the direction versus the expectations."

In corporate news, a JPMorgan analyst lowered his rating on Intel to "neutral" from "overweight," citing a drop in chip orders from computer manufacturers during the fourth quarter and high inventories. Intel, one of the 30 stocks that comprise the Dow industrials, fell $2, or 8.1 percent, to $22.67.

Overseas, Japan's Nikkei stock average fell sharply, finishing down 4.03 percent to its lowest level since July 2006 after being closed since the previous Friday for holidays. The pullback followed uncertainty on Wall Street about the U.S. economy and rising oil prices.

Britain's FTSE 100 fell 2.02 percent, Germany's DAX index fell 1.26 percent, and France's CAC-40 fell 1.79 percent.

___

The Dow Jones industrial average ended the week down 565.69, or 4.23 percent, at 12,800.18. The Standard & Poor's 500 index finished down 66.86, or 4.52 percent, at 1,411.63. The Nasdaq composite index ended down 169.81, or 6.35 percent, at 2,504.65.

The Russell 2000 index finished the week down 50.16, or 6.50 percent, at 721.60.

The Dow Jones Wilshire 5000 Composite Index — a free-float weighted index that measures 5,000 U.S. based companies — ended Friday at 14,210.84, down 700.79 points, or 4.70 percent, for the week. A year ago, the index was at 14,269.90.

Wall Street skids as jobs data stirs recession fear

NEW YORK (Reuters) - U.S. stocks tumbled on Friday, with the Nasdaq logging its sharpest decline in nearly a year, after data showing rising unemployment stoked expectations of a recession.

Technology shares were the worst performer in a broad-based decline. The Nasdaq logged its sixth straight day of declines, after Intel Corp (INTC.O) fell 8.1 percent on concerns that businesses are unlikely to upgrade computer equipment in the face of an economic slowdown.

The U.S. Labor Department reported job creation nearly ground to a halt in December and unemployment rose to a two-year high of 5 percent.

In a sign investors were hunkering down for hard economic times, the market's rare gainers were from defensive sectors such as electric utilities, drug makers, food and other products seen as essential to daily life.

"The payroll numbers are showing that we don't have the jobs, and if you don't have job income you don't have consumers doing any spending," said Gary Shilling, president of A. Gary Shilling & Co. of Springfield, New Jersey. "I don't think there's much question we're in a recession now."

The Dow Jones industrial average (.DJI) was down 256.54 points, or 1.96 percent, at 12,800.18. The Standard & Poor's 500 Index (.SPX) was down 35.53 points, or 2.46 percent, at 1,411.63. The Nasdaq Composite Index (.IXIC) was down 98.03 points, or 3.77 percent, at 2,504.65.

The Nasdaq last suffered a six-day losing streak back in August. The index is now off more than 10 percent from its 52-week closing high set on October 31.

Intel, which was downgraded by JP Morgan on Friday two days after a ratings cut by Banc of America, fell $2.00 percent to $22.67 and is off more than 15 percent since Wednesday.

The Philadelphia Stock Exchange index of semiconductor companies (.SOXX) was near a three-year low and is down about 8 percent since the start of 2008. It was off 4.7 percent on Friday.

Coca-Cola Co (KO.N) was the sole gainer in the 30-share Dow, adding 0.2 percent to $61.85.

Among the biggest losers in the retail sector were shares of Bed Bath & Beyond Inc(BBBY.O), down 4.4 percent to $26.19 after the home goods retailer gave an earnings outlook below Wall Street estimates late on Thursday.

Department store chains were also down sharply. Shares of Macy's Inc (M.N) were down 5 percent to $22.40, Nordstrom Inc (JWN.N) lost 6.3 percent at $31.50, and JC Penney Co Inc (JCP.N) stock was down 5.5 percent at $37.64.

Power company FPL Group Inc (FPL.N) rose 2.8 percent to $68.82, making it the biggest gainer on the S&P. Shares of drug maker Abbott Laboratories (ABT.N), another stock seen as immune to recessionary pressures, rose 0.6 percent to $55.79.

FTSE falls sharply after weak US jobs data

Carphone Warehouse was one of just a handful of FTSE 100 stocks to end in positive territory Friday as the index suffered a sharp reverse.

The mobile phone retailer touched a high of 360p as dealers bet that the iPhone had been selling "like hot cakes" over the Christmas period. Carphone has the exclusive rights to distribute the Apple phone/music player, along with network operator O2.

Steve Clayton, analyst at Mirabaud Securities, said there had been a "fantastic consumer response" to the iPhone, adding it was a "sufficiently innovative product to be assured of selling well, especially in an exclusivity situation".

Carphone is due to update the market this month, although it is far from certain that it will be permitted by Apple to say how many iPhones it has sold. A lack of detail would only add to the uncertainty in an already heavily shorted stock.

The stock was further boosted by rumours that either Vodafone or Best Buy, the US retailer, were poised to bid for Carphone.

Analysts were not convinced, although a move by Best Buy, which owns just under 3 per cent of Carphone, is seen as the more likely of the two. Founders Charles Dunstone and David Ross own just over half of Carphone and are unlikely to sell out completely, although they could be interested in selling part of their holdings to Best Buy. Carphone closed up 2.6 per cent at 340¾p.

The wider market went into reverse as news of a sharp fall in US jobs growth heightened fears that the world's largest economy could be dragged into recession. The FTSE 100 ended 130.9 points, or 2 per cent, lower at 6,348.5, while the FTSE 250 slid 275.6 points, or 2.6 per cent, at 10,265.3.

The slide dragged the blue-chip index to a 1.7 per cent loss since the turn of the year, while the mid-caps are down 3.7 per cent.

Fears of a US recession hit the miners in particular, which had been higher earlier in the session. Antofagasta closed down 4 per cent at 688p, although losses were limited in Xstrata, down 1.5 per cent to £35.22, which is a rumoured target for Vale of Brazil, and Vedanta Resources, off 1.3 per cent at £21.36, said to be in the sights of Baosteel of China.

The retailers came under further pressure as dealers feared the worst for an already battered sector. Confidence was further hit by a massive profit warning from Land of Leather, down 48 per cent to 59p.

Marks and Spencer lost 4.5 per cent to 518p as Citigroup slashed its price target from 750p to 650p ahead of next week's trading update while rival Next, which this week gave up on its ambition to return to underlying sales growth in 2008, fell 5.7 per cent to £14.64 as Bear Stearns initiated coverage with an "underperform" rating. Kingfisher, owner of the home improvement chain B&Q, fell 6.8 per cent to a new low of 130p.

ITV fell 5.6 per cent to a fresh five-year low of 78.1p amid concerns about its share of the advertising and viewing markets amid scepticism about the broadcaster's new winter schedule, unveiled this week.

London Stock Exchange, down 6.3 per cent to £18.54, succumbed to profit-taking after its record high in the previous session. LSE gained 10 per cent last month.

Berkeley Group lost 18.9 per cent to £10.54 as the property company began trading without entitlement to a 200p-a-share capital return.

Moneysupermarket fell 10.6 per cent to 124¼p after UBS cut its target price for the comparison website from 235p to 155p and flagged up fears over the impact of the credit crunch.

Close Brothers was back in focus amid rumours of a £10.40 counterbid for the investment bank from Blackstone, the private equity company. Close has already rejected a 950p-a-share approach from Cenkos, a smaller UK rival, and Landsbanki of Iceland, while others suitors are also reported to have cast an eye over the company. Its shares ended up 1.6 per cent at 965p.

David Schwartz: I don't plan to follow the random path

A good example is the high likelihood of a loss from January 5-13. Since 1990, the FTSE 100 rose just once during this period versus a whopping 17 declines.

The single exception to the rule occurred in 1997 when the Dow Jones Industrial Average kicked off the year by setting several all-time highs. But even during this euphoric time, the FTSE 100 remained in the red until the final day of the period when a fresh Dow record finally triggered a rally to wash away the red ink.

Many Random Walk fans do not trust repetitive patterns such as this one. Their mantra is to dismiss such trends as random occurrences that are likely to end as quickly as they began.

Who knows? Random Walkers might be right. There are no certainties when it comes to investing. My own view is that a substantive issue drives this trend - perhaps worries about the upcoming earnings season.

Whatever the cause, 17 dips out of 18 tries does not look or feel like a random event to me. For this reason, I plan to put my money where my mouth is with a Footsie down bet.

Looking further ahead, the trend for the rest of the month is likely to be influenced by those upcoming earnings announcements. I shall probably remain on the sidelines until the underlying trend tips its hand. The only exception might be a trade or two within a small group of shares that I know very well and feel comfortable with.

Some traders are happy to take short-term punts with shares they are not especially familiar with. But I believe that scattergun approach is dangerous during uncertain times. I prefer to trade shares that I have lived with and know their fundamentals, normal daily trading patterns, investor bulletin board gossip and what chartists are thinking. It gives me confidence to quickly open or close positions during uncertain times like now.

A good example is Vanco, a designer and installer of telephone networks. I have traded this share several times since first writing about it a few months ago.

I am comfortable with Vanco for several reasons. Prices fell massively in the past 18 months. The shares are now in a base-building phase. The company is optimistic about its future growth prospects. From my vantage point, downside risk for this share is now lower than it has been for several years.

Another plus for short-term traders like me is that Vanco shares are tightly held. A limited number are available to the public. This causes price fluctuations to be exaggerated.

As the graph shows, the last rally ran out of steam about two months ago near 200p. Prices are again approaching this level. If shares break out above 200p, I shall increase my holdings by a large margin to catch a healthy continuation rally.

Conversely, a failure to penetrate 200 is a clear signal to sell because the shares remain trapped in a trading range of roughly 150p to 190p. Either way, Vanco is a comfortable share to trade during uncertain times.

European shares mixed, London higher

LONDON (AFP) - Europe's main stock markets performed mixed Friday at the end of a tough week for global equities owing to record-high oil prices that risk fuelling inflation and slowing economic growth.

London's FTSE 100 index was up 0.72 percent at 6,526.00 points in early afternoon trade, while Frankfurt's DAX 30 fell 0.33 percent to 7,882.61 points and in Paris the CAC 40 was flat at 5,547.98.

The DJ Euro Stoxx 50 index of eurozone shares edged up 0.09 percent to 4,337.49 points.

The European single currency fell to 1.4715 dollars.

"Equity markets will most likely trade for several months the way they traded for the last six -- sideways with considerable volatility -- and Wall Street can be expected to set the pace with its upside limited by poor earnings momentum and its downside by lower interest rates," said Mike Lenhoff, chief strategist at Brewin Dolphin stockbrokers.

US stocks closed mixed Thursday as oil hit a record high of 100.09 dollars a barrel, stoking inflation concerns ahead of Friday's key US employment report, dealers said.

Japanese share prices slumped 4.0 percent Friday, hitting the lowest level in 17 months as investors fretted about the health of the US economy and a surge in crude oil prices, dealers said.

They said that a stronger yen also rattled the Tokyo market on its first trading session of 2008 because of the negative impact on exporter earnings.

In London the FTSE was being supported by buoyant mining stocks and a sharp gain for mobile phone retailer Carphone Warehouse.

Mining giant Rio Tinto won 2.94 percent to 5,528 pence and Anglo-Australian rival BHP Billiton gained 2.76 percent to 1,641 pence on soaring commodity prices.

On Thursday, gold struck an historic level of 868.89 dollars an ounce on the London Bullion Market.

Carphone Warehouse meanwhile saw its share price soar 8.21 percent to 359.25 pence to top the FTSE 100, on rumours that the retailer has enjoyed strong sales of Apple's iPhone and on vague takeover speculation, dealers said.

"There are many stories around. There was a story yesterday (Thursday) that iPhone sales have been much better than expected and Vodafone bid rumours," said one London-based trader.

Carphone Warehouse is one of only three retailers allowed to sell Apple's trendy new touch-screen iPhone in Britain -- the others being Apple and mobile phone operator O2.

Jobs data raise recession fears on Wall Street

Wall Street stocks fell on Friday after unemployment rose sharply and employers added far fewer jobs than expected last month raising fears the US economy is on the verge of tipping into recession.

Non-farm payrolls increased just 18,000 in December, compared with a revised 115,000 the previous month, the worst reading since August 2003. The payroll figure was much lower than an expected 70,000 increase.

Unemployment jumped from 4.7 per cent to 5 per cent, the highest rate since November 2005. Economists had expected an uptick to just 4.8 per cent.

The construction, manufacturing and retail sectors all saw job losses which were only partially offset by gains in the professional and technical services.

US markets are acutely sensitive to unemployment data as they are considered a leading indicator of a potential economic downturn.

"If you start to have an uptick in unemployment it can cause a domino effect and the Fed has to deal with that aggressively," Doug Roberts, chief investment strategist at Channel Capital Research, said.

"I think they're going to have to do something along the lines of [an interest rate cut of ] 50 basis points to get market confidence."

After the data was released, stock index futures sold off and treasury prices surged while the dollar retreated.

Less than an hour after the opening bell, the S&P 500 was down 1.1 per cent at 1,431.28. The Nasdaq Composite shed 1.6 per cent to 2,560.78 while the Dow Jones Industrial Average slipped below the 13,000 level, declining 0.9 per cent to 12,939.34.

Bond yields plunged as traders looked for safety in US Treasuries. The yield on the two-year Treasury note sank 11 basis points to 2.70 per cent while the 10-year Treasury note yield fell 5 bp to 3.84 per cent.

The dollar fell against the euro, trading 0.3 per cent lower at $1.4800. Against the yen the US currency slipped 1.1 per cent to Y108.08.

The futures market priced in a higher chance of a 50 basis point interest rate cut at the end of the month. Fed funds futures for February reached a contract high in price, reflecting a 3.89 per cent funds rate by the end of the month, down from 3.92 per cent on Thursday. The Fed funds rate currently stands at 4.25 per cent.

"The report raises the odds of a 50 basis point cut in January," Drew Matus, economist at Lehman Brothers, said.

European stocks turned negative after the employment data was released. The FTSE Eurofirst 300 index fell 1.1 per cent, the FTSE 100 lost 1 per cent, while the Cac 40 fell 1.4 per cent in France. Asian equity markets closed mainly higher with the notable exception of the Japan's Nikkei which plunged 4 per cent to its lowest close in 17 months.

Traders looked to position themselves more defensively and moved into "recession-proof" sectors including healthcare, utilities and consumer staples.

Among the few stocks trading to the upside were large-multi-national consumer companies including Procter & Gamble, up 0.2 per cent at $72.48 and Coca Cola, 0.5 per cent higher at $62. Investors have favoured these companies in recent months as they have a high proportion of international revenues, limiting their exposure to the US consumer.

US small cap stocks fell again continuing an abject performance in recent days. The Russell 2000 small cap index was down 1.3 per cent at 735.66 in early trade having closed lower for each of the last five sessions, sinking a total of 8.1 per cent.

The index outperformed the S&P 500 for the first time in eight years last year, finishing 2007 in negative territory, as traders bet that large companies with a high proportion of exports would better ride out a US economic downturn.

Bed, Bath & Beyond fell 8.8 per cent to $24.98 after the retailer forecast fiscal fourth-quarter earnings below Wall Street's expectations and said same-store sales would be flat. The shares closed 3.4 per cent lower at $27.40 on Thursday but sank 8 per cent in after-hours trading.

Boeing (NYSE:BA) outperformed on a poor day for equities after after it reported a record 1,413 commercial plane orders last year and delivered 441 jets, its best performance in six years. The shares slipped 0.7 per cent to $86.35.

Gold was trading $8.10 lower at $861.10 while crude oil prices slipped $1.28 to $97.90. Both commodities set new record highs on Thursday.

The S&P 500 rose as much as 0.7 per cent on Thursday before closing flat at 1,447.16 with a majority of stocks ending the session lower. The Nasdaq Composite fell 0.3 per cent to 2,602.68 while the Dow Jones Industrial Average rose 0.1 per cent to 13,056.72.

FTSE loses gains after weak US jobs data

London lost intraday gains on Friday, after news of weaker-than-expected job creation in the US resurrected fears of a recession in the world's biggest economy.

The FTSE 100 fell under the flatline after the report, trading 0.4 per cent lower at 6,4541.2, a loss of 26 points wiping out a small rally of about 0.5 per cent was wiped out by the data.

Only 18,000 jobs were created outside the agricultural sector in December, against forecasts of up to 70,000 .

Cairn Energy lost 1.5 per cent to £29.03 after disappointing news from one of its oil and gas prospects in Bangladesh. The company confirmed it had abandoned a potential well in the region after it came up dry.

Retailers failed to receive a lift from news of strong festive sales at unlisted high street bellwether John Lewis. The department store chain reported an 8 per cent increase in sales in the week to December 29.

But investors stayed cautious on the sector after DSG International (NASDAQ:DSGIF)'s profit warning on Thursday and news of lower like-for-like sales at fashion chain Next, down a further 2.1 per cent at £15.19. DSG was 1.3 per cent lower at 77p. Marks & Spencer lost 1.8 per cent to 533p.

Kingfisher, the operator of the B&Q home improvement chain fell the furthest, down 5.5 per cent to 131.9p, also under pressure from news of weaker house price inflation adding to the uncertain outlook for the UK property market.

Elsewhere on the High Street, jewellery retailer Signet Group was 5.5 per cent weaker at 60½p after Credit Suisse cuts its price target on the stock to 65p from 75p, holding its "neutral" rating.

Dealing room rumour of bid interest in Carphone Warehouse sent shares in the retailer to the top of the index, up 6 per cent to 352p on talk that existing investor Best Buy (NYSE:BBY) of the US was poised to increase its stake.

Mining stocks took their turn to make gains on the outlook for robust commodities prices. Xstrata rose 1.9 per cent to £36.39, with Lonmin up 0.9 per cent at £32.30 and Rio Tinto 1.7 per cent higher at £54.68.

Continuing weakness among mid-cap investment companies, unsettled by the uncertain market outlook for 2008, continued to weigh on the FTSE 250, down a further 0.4 per cent to 10,496.0 after losses of more than 1 per cent during the previous session.

FTSE higher as bid talk spurs gains

London equities rose on Friday, supported by fresh bid talk and a resurgent mining sector.

The FTSE 100 started the session 0.7 per cent stronger at 6,521.9, a rise of 42 ½ points.

Dealing room rumour of bid interest in Carphone Warehouse sent shares in the retailer to the top of the index, up 6 per cent to 352p on talk that existing investor Best Buy (NYSE:BBY) of the US was poised to increase its stake.

Mining stocks took their turn to make gains on the outlook for robust commodities prices. Xstrata rose 1.9 per cent to £36.39, with Lonmin up 0.9 per cent at £32.30 and Rio Tinto 1.7 per cent higher at £54.68.

Continuing weakness among mid-cap investment companies, unsettled by the uncertain market outlook for 2008, continued to weigh on the FTSE 250, down a further 0.4 per cent to 10,496.0 after losses of more than 1 per cent during the previous session.

Investors were waiting for a sense of direction from closely-watched US employment data, due out at 1.30pm London time. The report was expected to offer insight into the timing of the Federal Reserve's rate-cutting cycle, as well as the prospects for a recession in the world's biggest economy. Economists forecast the creation of 70,000 jobs in December.

On the downside, Cairn Energy lost 1.5 per cent to £29.03 after disappointing news from one of its oil and gas prospects in Bangladesh. The company confirmed it had abandoned a potential well in the region after it came up dry.

Retailers failed to receive a lift from news of strong festive sales at unlisted high street bellwether John Lewis. The department store chain reported an 8 per cent increase in sales in the week to December 29.

But investors stayed cautious on the sector after DSG International (NASDAQ:DSGIF)'s profit warning on Thursday and news of lower like-for-like sales at fashion chain Next, down a further 2.1 per cent at £15.19. DSG was 1.3 per cent lower at 77p. Marks & Spencer lost 1.8 per cent to 533p.

Elsewhere on the High Street, jewelery retailer Signet Group was 5.5 per cent weaker at 60½p after Credit Suisse cuts its price target on the stock to 65p from 75p, holding its "neutral" rating.

Japanese stocks dive on reopening

Japanese stocks plunged Friday on the first day of trading of 2008, closing more than 4 per cent lower at their weakest levels in a year and a half as a slumping dollar and fears of a US recession battered investor confidence.

The benchmark Nikkei fell by as much as 5 per cent before finishing the half-day opening session down 4.03 per cent at 14,691.41. This was its lowest close since July 2006 and more than 100 points below its low point last year of 14,837.66, set on November 21.

The broader Topix index fell 4.32 per cent to 1,411.91.

The dollar was trading below Y109, close to its weakest level against the Japanese currency in a month, hurting shares of export-reliant manufacturers. Sony (NYSE:SNE) fell 6.6 per cent to Y5,790 and Nintendo declined 4.9 per cent to Y63,600.

Nissan (NASDAQ:NSANY) suffered its worst fall in six years after it reported a drop in US sales, plunging 9.2 per cent to Y1,230. Mazda lost 7.7 percent to close at Y515 and Toyota (NYSE:TM) fell 4.3 per cent to Y6,040.

The fall in shares helped push Japanese government bond futures to a one-month high, with March futures later retreating slightly to close up 0.51 points at 137.32. Gold rose about $2 an ounce to trade at around $865 though it remained below the record $869 set on Thursday in New York.

A fresh surge in the price of oil, which topped $100 a barrel for the first time this week, has added to concerns that the US economy could be headed for a sharper than expected downturn that could pinch growth around the world.

The fall in Japanese share prices outpaced the Dow Jones average's 2.3 per cent decline from Dec. 28 through Thursday, during which Tokyo markets were closed for the New Year holiday.

Yoshimi Watanabe, minister for financial services, sought to stem the decline, saying Japanese stocks are now a relative bargain at a price-to-earnings ratio of about 15.

Trade was frenetic, with about twice as many shares changing hands compared with the last week of 2007.

Financials Drag Down Large-Cap And Value Funds In December

U.S. diversified stock funds on average fell 0.37% in December. They fell 3.08% in the fourth quarter following a 0.93% gain in third quarter, according to Lipper Inc. That left them up 6.32% for the year.

So it wasn't the best of years, it wasn't the worst of years. The annual gain put them below the long-term average of about 10%.

Stock funds in 2007 were 0.4 percentage point below their 10-year average annual return of 6.72%, but 7.47 points below their five-year average of 13.79% and 3.61 points below their 15-year average of 9.93%.

Growth Lengthens Lead

Growth funds lengthened their lead over value for the year. Managers expect growth to continue outperforming value in the new year.

"Relative to value stocks, the growth environment is trading at historically pretty low valuations," said John Wallace, co-manager of RS MidCap Opportunities (NASDAQ:RSMOX - News).

"So that's encouraging to us looking forward into '08."

Value has trumped growth in all size categories the past 10 and 15 years. After such a long run, they're no longer cheap relative to growth, managers say.

The outlook for the economy also bodes better for growth stocks. "Value stocks were more exposed to the cycles of the economy. So they benefit more when the economy is strong," said Glenn Fogle, co-manager of American Century Heritage (NASDAQ:TWHIX - News) and American Century Vista (NASDAQ:TWCVX - News), which together have more than $6.4 billion in assets. "Conversely, they suffer more when economic growth slows, as it has this year."

One of the main reasons that growth has outperformed for the first time in years is that financials -- the worst hit group in 2007 -- were the largest sector of the value index, says ING Investment Management's Brian Gendreau. As an investment strategist, he helps oversee $12 billion in asset allocation funds.

"Growth stocks tend to do well in the late stages of an expansion, and that's where we think we are," Gendreau added. "When growth is scarce, people are willing to pay a lot for growth, and growth is scarce right now."

Troubles in housing, financial and the credit markets are weakening economic growth, Gendreau says. But things won't be clear until March, when companies roll out fourth-quarter results.

Mid-cap growth funds, up 0.56%, saw the biggest advance in December. Large-cap growth funds were the least hit among size and style funds in fourth quarter. They let up just 0.03% while mid-cap growth fell 1.06%.

Overall, mid-cap growth funds outdid their large and small counterparts by a wide margin in 2007.

"That may be because there are so many very, very large financial stocks (like Citigroup (NYSE:C - News) and Merrill Lynch (NYSE:MER - News)) that had a disproportionate impact on the large-cap indexes," said American Century's Fogle. "And the mid-cap (index) is more diversified."

Meanwhile, about 75% of investment managers says they're bullish on large-cap growth stocks, according to Russell Investments' most recent quarterly survey, which polled almost 300 managers.

And 61% of managers are bullish on foreign developed markets -- the second most popular category. About 60% of managers are bullish on mid-cap growth while only 47% are so on small-cap growth.

Reluctance To Lend

"We're in an extraordinary tight credit environment with the subprime crisis. There's a real extraordinary reluctance to lend. That tends to make financing for smaller and midsize companies that much more problematic," said David Reilly, director of portfolio strategies at Rydex Investments, which has $15.7 billion in assets under management.

"In a risk-adverse environment, you want the liquidity of larger-cap stocks," said Reilly.

He expects the outperformance in large caps to last awhile.

"Small caps outperformed for a good five or six years up until about less than a year ago. If you look at the cycle of capitalizations, these tend to run for multiyear cycles," Reilly said. "So if history gives us any guide, then we're still in the very early stage of the large-cap cycle."

Russell's Investment Manager Outlook found that managers are optimistic about the new year. Seventy-six percent of managers think the market will rise in 2008 while only 15% believe it will decline. In comparison with last year, 86% said the markets would rise and 12% thought it would drop.

"The current market is similar to the market of 1990-92, when we experienced spiking oil prices, a slumping real estate market, a falling fed funds rate, the savings & loan crisis and low consumer confidence," said Neil Hennessy, president and portfolio manager of Hennessy Funds, with more than $2 billion in assets.

During that period, the market returned an average of almost 10% per year -- -0.58% in 1990, 23.93% in 1991, 7.35% in 1992, he notes.

Different Background

The difference is that in the early '90s, inflation was 6.5%; today it's 3.5%. The 30-year bond was yielding 9.5%; today it's yielding 4.8%. The fed funds rate was at 9.75%; today it's at 4.5%.

"With history as our guide, we believe that economic conditions bode very well for 2008," Hennessy said. "And barring an unforeseen catastrophe, there is no reason the Dow won't climb to 15,000 and beyond."

A Holiday To Forget For Retail Stocks, ETFs

In a post-holiday funk, you took down the tree, threw out the mistletoe and started worrying about your retail investments after a slow shopping season.

But hold on. The holiday season isn't over. And it might not be as gloomy as you think.

Consumer worries about the economy and tightening credit seemed to keep holiday spending below last year's level. Because the November-December holiday period accounts for 25% of the year's sales, that could mean lower overall sales.

Retailers with an international presence seem to be especially hurting. Across the pond, debt-ridden U.K. consumers delivered one of the worst holiday sales seasons ever.

Retail exchange traded funds echoed the slump. Two of the bigger retail ETFs, the 11/2-year-old SPDR S&P Retail (AMEX:XRT - News) and the 2-year-old PowerShares Dynamic Retail (AMEX:PMR - News), hold an IBD Relative Strength Rating of just 28. Both fell more than 15% year to date.

Most Stocks Down

The funds count some of retail's heaviest hitters among their holdings -- and their results weren't pretty. Among the 58 retailers in the SPDR Retail fund, only Urban Outfitters (NasdaqGS:URBN - News), the second largest holding, showed a year-to-date gain -- and that wasn't even half a percent. Of the 30 holdings in the PowerShares retail fund, three showed a gain. Gap (NYSE:GPS - News), held by both funds, had one of the bigger falls, at nearly 5%.

Some analysts say projected holiday sales increases of 3.5% might still happen. What? How?

Gift cards. Standard & Poor's equity researchers said Wednesday they believe post-holiday gift-card redemptions will give retailers the hoped-for sales boost.

An S&P survey in November showed more than half of the 1,100 shoppers polled by InsightExpress planned to give gift cards this year. Four out of five of those surveyed said they'd spend the same or more on cards as they did in 2006, when gift cards were 32% of total holiday spending.

The big test is happening now. Retailers expect some 25% of gift-card redemptions to take place during the week following Christmas. More than two thirds of the cards will likely be redeemed by January's end.

Still Optimistic

Retailers are optimistic that all's not lost. Some have put out fresh merchandise at full price, while others are slashing prices by as much as 70% to move product and bump up sales.

HOLDRs Retail (AMEX:RTH - News) reflects some of that optimism. With 18 holdings -- all of them large chains such as Home Depot (NYSE:HD - News), Target (NYSE:TGT - News) and Kohl's (NYSE:KSS - News) -- the fund has a 47 RS. More than 80% of the fund's holdings are in its top 10.

Amazon (NasdaqGS:AMZN - News) especially helped keep the fund floating. It was the only one of the fund's holdings that showed a gain for the year.

US retail and tech stocks disappoint

Wall Street stocks had a sluggish day as news of an increase in private sector employment and new factory orders was offset by weakness in technology and retailers.

Traders welcomed strong results from Monsanto (NYSE:MON), the agribusiness, but poor December sales at Ford (NYSE:F) and General Motors (NYSE:GM) weighed on the car sector.

Equities paused after a sharp sell-off the previous day, prompted by soaring commodity prices and a contraction in the manufacturing sector.

However consumer discretionary stocks fell sharply, dragging the economically sensitive sector more than 20 per cent below its previous market peak, the definition of a "bear market".

The S&P 500 rose as much as 0.7 per cent before closing flat at 1,447.16 with a majority of stocks ending the session lower. The Nasdaq Composite fell 0.3 per cent to 2,602.68 while the Dow Jones Industrial Average rose 0.1 per cent to 13,056.72.

The onset of a bear market in the consumer discretionary sector was a worrying signal for investors sensitive to indications of a US economic slowdown. The sector has lost 21.2 per cent of its value since its peak last June.

Although a slump in the homebuilders has contributed to the sector's decline, the inclusion of an array of other well-known US consumer companies on a list of significant fallers suggests a broader malaise.

"It's the retailers, the hoteliers, the casual dining sector - the whole consumer sector is getting smashed right now," said Jay Wong, portfolio manager at Payden & Rygel.

Office Depot has fallen 65 per cent during the period, discount retailer Big Lots has lost 53 per cent, JC Penney, the department store operator, has shed 51 per cent while Marriot International, the hotel chain, is down 29 per cent.

Stocks rose in early trade on Thursday after the Commerce Department said new factory orders increased 1.5 per cent in November, much greater than the expected rise of 0.4 per cent.

But traders remained cautious as the data came only a day after a sharp contraction in the December ISM manufacturing index.

Investors reacted favourably to news that the private sector added 40,000 jobs in December. Although modest, the figure prompted stock futures to rally as some traders had feared the number would be negative.

Weekly jobless claims fell 21,000 to 336,000, below an expected level of 345,000.

US markets remain acutely sensitive to employment news, with many analysts pointing to jobs as the key indicator of whether the US economy will fall into recession. The Labor Department is on Friday due to release keenly awaited data on US non-farm payrolls.

State Street (NYSE:SBZ) on Thursday became the latest financial company to reveal exposure to the troubled US mortgage market. The money manager said it would take a $279m charge for the fourth quarter, but the stock closed 8.2 per cent higher at $85.37 after its 2007 operating profit outlook, which excludes the charge and other costs, beat Wall Street estimates

In the biotechnology sector, Monsanto beat Wall Street estimates after reporting fiscal first quarter net income of $256m, almost treble last year's figure. The group raised its 2008 earnings guidance and the shares rose 8.5 per cent to $120.92.

Celgene (NASDAQ:CELG) gained 7.7 per cent to $49.85 as it passed a regulatory hurdle to the completion of its acquisition of Pharmion.

Sciele Pharma rose 11.4 per cent to $22.10 after it received regulatory approval for four dosage strengths of a drug to treat high blood pressure. Onyx Pharmaceuticals (NASDAQ:ONXX), the top performing US stock in 2007, rose 4 per cent to $57.98. The stock made a return of 425 per cent for investors last year.

The drug retailing sector lagged, after last month's pharmacy same-store sales disappointed analysts. CVS Caremark fell 6.6 per cent to $36.77 and Rite Aid (NYSE:RAD) fell 15.2 per cent to $2.28.

Carmakers were in focus as Toyota overtook Ford to claim the number two position in the US market. Ford's sales of cars and light trucks declined 9.2 per cent in December, while sales at General Motors sales slid 4.4 per cent. The shares fell 2.3 per cent to $6.45 and 2 per cent to $23.92 respectively.

Gold miners were among the best performers as the precious metal held near record highs. Barrick Gold (NYSE:ABX) rose 5.9 per cent to $48.71.

Wall Street higher on jobs data

Wall Street stocks crept higher on Thursday after news of a modest increase in private sector employment and a larger-than-expected rise in new factory orders cheered cautious investors.

Traders also welcomed strong results from Monsanto (NYSE:MON), the agribusiness, which helped to allay concerns about US corporate earnings.

Equities rebounded from a sharp sell-off the previous day, prompted by soaring commodity prices and a contraction in the manufacturing sector.

At midday, the S&P 500 was up 0.4 per cent at 1,453.45. However, stocks lacked a firm foundation, with almost half of the 500 stocks trading to the downside amid weakness in homebuilders, chipmakers and car companies.

The Nasdaq Composite rose 0.1 per cent to 2,612.84 while the Dow Jones Industrial Average rose 0.5 per cent to 13,110.94.

The Commerce Department said new factory orders increased 1.5 per cent in November, much greater than an expected 0.4 per cent rise.

However traders remained cautious in spite of the positive data as it came only a day after a sharp contraction in the December ISM manufacturing index.

Investors reacted favourably to news that the private sector added 40,000 jobs in December. Although modest, the figure prompted stock futures to rally as some traders had feared the number would be negative.

Weekly jobless claims fell 21,000 to 336,000, below an expected level of 345,000 but the four-week moving average rose slightly.

US markets remain acutely sensitive to employment news with many analysts pointing to jobs as the key indicator of whether the US economy will fall into recession. The Labor Department is on Friday due to release keenly awaited data on US non-farm payrolls.

"Going into the key employment data, the latest ADP number will fit with the idea that growth continues to lose momentum helped by pending softer employment income, but not to the point where it resolves the debate about whether the economy tips into recession or simply records a period of very soft growth," Alan Ruskin, chief international strategist at RBS Greenwich Capital, said.

State Street (NYSE:SBZ) on Thursday became the latest financial company to reveal exposure to the troubled US mortgage market. The money manager said it would take a $279m charge for the fourth quarter to set up a reserve to deal with legal exposure arising from bad subprime mortgage bets.

However, the stock rose 6.9 per cent to $84.28 after State Street's 2007 operating profit outlook, which excludes the charge and other costs, beat Wall Street estimates while the company forecast revenue growth of 30 per cent for 2007.

In the biotechnology sector Monsanto beat Wall Street estimates after reporting fiscal first-quarter net income of $256m, almost treble last year's figure. The company also raised its 2008 earnings guidance and the shares rose 7.4 per cent to $119.74.

Sciele Pharma rose 12.9 per cent to $22.40 after it received regulatory approval for four new varieties of a drug to treat high blood pressure. Onyx Pharmaceuticals (NASDAQ:ONXX), the top performing US stock in 2007, rose 6.1 per cent $59.16. The stock made a return of 425 per cent for investors last year.

Drug retailers sector lagged on Thursday after last month's pharmacy same-store sales disappointed analysts.

CVS Caremark fell 7.2 per cent to $36.50 after the company said same-store sales were "lighter than anticipated". Rite Aid (NYSE:RAD)fell 10.8 per cent to $2.40 after same-store sales fell 0.5 per cent and Walgreen (NYSE:WAG), shed 6.4 per cent to $34.97 after it said said same-store sales rose only 2.6 per cent.

Carmakers were also in focus ahead of the release of December's car sales figures. Analysts expect a 4 per cent decline. General Motors (NYSE:GM) fell 4.3 per cent to $23.37 after its chief executive warned of a flat US car market in 2008.

The transport sector, seen as an economic bellwether by many investors, continued to struggle amid sharply elevated crude oil prices. YRC Worldwide, the trucking company, fell 9.3 per cent to $14 after Wachovia downgraded the shares to "underperform" because it expects negative investor sentiment to continue.

Gold miners were among the best performers as the precious metal held near record highs. Barrick Gold (NYSE:ABX) rose 5.9 per cent to $48.75 while Yamana Gold (AMEX:AUY) rose 6.9 per cent to $14.83.

Technology, one of last year's most bankable sectors, continued to lag amid concerns about earnings growth. Chipmakers were sold again after Banc of America Securities downgraded the shares of several companies citing limited upside potential. Intel (NASDAQ:INTC) fell 2.5 per cent to $24.72 while AMDdeclined 3.6 per cent to $6.88.

Oil stocks fuel gains on FTSE

London equities were higher in afternoon trade on Thursday, with momentum coming from the the heavily-weighted oil sector as the prospect of $100 crude prices moved closer.

The FTSE 100 turned 0.4 per cent higher to 6,442.5 in afternoon trade, a rise of 26 points helped by positive trading on Wall Street after as the US private sector jobs market showed a modest increase. In early New York trade, the S&P 500 rose 0.3 per cent to 1,452.1 whilst the Dow Jones Industrial Average was 0.3 per cent higher at 13,085.3.

The Institute for Supply Management's survey into US manufacturing activity surprised investors who had expecting a steady reading, and helped send the Dow Jones Industrial Average to its worst ever start to a New Year, losing 220 points to 13,043.96.

But after a single, small deal from an independent trader sent crude prices briefly over the $100 a barrel for the first time, the outlook for continued strength in oil prices during 2008 boosted resource stocks. In early London trading crude prices stood at $99.34 a barrel.

Tullow Oil topped the FTSE 100 with a 2.2 per cent advance to 659p, Royal Dutch Shell rose 0.7 per cent to £21.12 and BP was 1.1 per cent higher at 622½p. Cairn Energy was 0.4 per cent stronger at £29.64.

Retail stocks were hit hard by the first bad news from the Christmas trading season.

DSG International, the company behind the Curry's Digital and PC World chains, warned profits would miss forecasts by up to £50m. It blamed poor sales of computer products and offered a more cautious outlook for the rest of the year. Panmure Gordon reduced its price target on the shares to 100p from 125p, but retained its "hold" rating.

Fashion retailer Next fell 2.3per cent to £16.28 after it said like-for-like sales to Christmas Eve fell 3.2 per cent, although it continued its policy of holding price discounts until the new year. The shares fell 2.7 per cent to £16.21.

That had a knock-on effect across the high street. Home Retail Group, the operator of Argos, lost 6.7 per cent to 298.8p, the biggest single faller on the senior index. Kingfisher, owner of the B&Q home improvement brand, lost 3.5 per cent to 141½p. Marks & Spencer, lost 3 per cent to 543½p despite a broker upgrade from Panmure gordon, which raised its stance on the stock to "buy" from "hold".

Man Group, the world's largest-listed hedge fund, lost 2.6 per cent to 545½p after Cazenove reduced its rating on the shares to "in line" from "outperform". The investment bank also reduced its stance on New Star Asset Management and Liontrust Asset Management to "underperform" from "in line". Shares in the companies fell 1.9 per cent to 185½p and 1.4 per cent to 330p respectively.

Wall Street set to edge higher on jobs data

US stocks were set for a cautious start on Thursday as fears about a US economic slowdown and soaring commodity prices continued to weigh on investor sentiment but as the private sector jobs market showed a modest increase last month.

Less than an hour before the opening bell, S&P 500 futures were up 4.1 points at 1,462.50, Nasdaq futures were up 2.5 points at 2,072.50 but futures for the Dow Jones Industrial Average were flat at 13,136.

A monthly employment report showed the US economy added 40,000 jobs in December and, although modest, the figure prompted US Treasuries to pare early gains while stock futures rallied.

Economists had forecast a figure of 50,000 new jobs but some traders had feared the number would be negative. However the ADP Employer Services report revised the number of jobs created in November down to 173,000 from 189,000.

The Labor Department is due to release monthly data on US payrolls on Friday.

"Going into the key employment data, the latest ADP number will fit with the idea that growth continues to lose momentum helped by pending softer employment income, but not to the point where it resolves the debate about whether the economy tips into recession or simply records a period of very soft growth near stall speed at close to one per cent," said Alan Ruskin, chief international strategist at RBS Greenwich Capital.

Weekly jobless claims fell 21,000 to 336,000, below an expected level of 345,000. Claims for the prior week were revised up to 357,000 from the originally reported 349,000 level.

The four-week moving average was 343,750, slightly above the previous week's level of 343,500. Continuing claims rose 46,000 to 2.761m.

Stocks fell sharply on Wednesday after an index of manufacturing activity contracted sharply, increasing fears that the US economy is heading toward a recession.

Crude oil hit a record $100 a barrel while gold soared to a record high above $850 an ounce, treasuries rose sharply and the dollar fell against major currencies.

State Street (NYSE:SBZ) on Thursday became the latest financial company to reveal exposure to the troubled US mortgage market.

The asset manager said it would take a $279m charge for the fourth quarter because of legal and other costs related to subprime mortgage bets.

However, the shares rose 3 per cent to $81.25 in the pre-market after the company's 2007 operating profit outlook, which excludes the charge and other costs, beat Wall Street estimates. State Street also forecast 30 per cent revenue growth for 2007.

In earnings news Monsanto (NYSE:MON), the biotechnology firm, beat Wall Street estimates when it reported fiscal first-quarter net income of $256m, compared with $90m last year. Sales rose 36 per cent to $2.1bn, beating consensus estimates and the company also raised its 2008 earnings guidance. The shares rose 3.5 per cent in the pre-market.

European stocks were mixed ahead of the open on Wall Street. The FTSE Eurofirst 300 index was down 0.5 per cent but the FTSE 100 rose 0.2 per cent. Asian equity markets closed mainly lower led by a 2.4 per cent fall on the Hang Seng.

Bond prices rose sharply early on Thursday pushing short-dated yields to their lowest level in more than three years, as traders looked to position themselves more defensively. However prices weakened following the ADP jobs data.

The yield on the two-year Treasury note was down 8 basis points at 2.79 per cent but later traded 3bp lower at 2.85 per cent. The 10-year Treasury note was flat at 3.91 per cent from 3.88 per cent earlier.

The dollar fell against major currencies early in New York. The US dollar slipped 0.2 per cent to a one-month low against a basket of major currencies. The US currency fell 1 per cent against the yen to Y108.50, while against the euro the dollar eased 0.2 per cent to $1.4755.

Gold hit a record high for a second consecutive day reaching $866.10 an ounce.

Meanwhile oil prices hovered near the $100 a barrel mark early in New York. US crude prices were trading 28 cents lower at $99.34.

US blue chips stocks on Thursday recorded their worst start to a new trading year since 1983

The Dow Jones Industrial Average fell 1.7 per cent to 13,043.96 points, the S&P 500 closed 1.4 per cent lower at 1,447.16 and the Nasdaq Composite shed 1.6 per cent to 2,609.63.

Wall Street futures down; eyes on Monsanto

FRANKFURT (Reuters) - Stock index futures fell before the start of Wall Street trading on Thursday with the focus on quarterly earnings from agriculture company Monsanto (MON.N), jobs data and the Iowa presidential election caucuses.

In addition to Monsanto, home furnishings retailer Bed Bath & Beyond (BBBY.O) is the only S&P 500 company scheduled to report quarterly results.

"Today there is U.S. Challenger job cuts, ADP employment and initial jobless claims, all of which are likely to be looked at closely ahead of tomorrow's U.S. nonfarm payrolls," ABN said.

The Challenger report on December job cuts is due at 7:30 a.m. EST, the ADP December employment report at 8:15 a.m. EST and the Labor Department's weekly first-time jobless claims at 8:30 a.m. EST.

"Ahead of the U.S. employment report tomorrow, the effect of jobless claims on the market should be noticeably limited. The focus is more likely to be on the ADP employment survey," Commerzbank said.

But Goldman Sachs said the jobless claims data would be "an important staging post" for gauging the prospect of further rate cuts by the Federal Reserve. "We believe consumer-related equities are not yet out of the woods and broad cyclical equities remain vulnerable," Goldman Sachs said.

"Ongoing industrial weakness suggests that the outperformance of bonds over equities that has been a feature of the last quarter could continue," it added.

More clarity on that front could come from U.S. factory orders for November due at 10:00 a.m. EST.

With oil having hit $100 per barrel, eyes will also be on U.S. weekly inventory numbers due at 10:30 a.m. EST.

STOCKS IN FOCUS

At 5:55 a.m. EST, Dow Jones futures were down 0.2 percent, S&P 500 futures fell 0.1 percent and Nasdaq futures traded 0.3 percent lower.

The indicative Dow Jones index (.DJII), which tracks how the Dow stocks are traded in Frankfurt, was up 0.2 percent.

Stocks in focus could include Ford (F.N) and General Motors (G.M) as carmakers are due to release December U.S. sales data.

Eyes could also be on Superior Energy (SPN.N), which rose 7.4 percent in extended trade on Wednesday after the company said it has been awarded $750 million in contracts to decommission seven production platforms in the Gulf of Mexico.

Media companies such as NBC, part of General Electric (GE.N), News Corp. (NWSa.N), and Comcast (CMCSA.O) could be in the spotlight following an online report in The New York Times that The Weather Channel is to be put up for sale and could fetch more than $5 billion.

Polymer products maker Myers Industries (MYE.N) and packaged ice maker Reddy Ice Holdings (FRZ.N) are at the centre of leverage buyout deals under pressure to fall apart, according to arbitrage traders, after mortgage and vehicle fleet company PHH (PHH.N) terminated its $1.8 billion sale to General Electric and Blackstone (BX.N) due to the credit crunch.

The process of choosing the next U.S. president begins on Thursday in Iowa, which opens the state-by-state battle to choose the candidates for the November election.

The Democratic caucus begins at 7:30 p.m. EST, with Republicans starting 30 minutes later. Results could begin to appear within an hour or two.

On Wednesday, the Dow got off to its worst-ever start to a year, falling 1.7 percent. The S&P 500 (.SPX) lost 1.4 percent and the Nasdaq (.IXIC) dropped 1.6 percent.

Recession fears, weak holiday hurt U.S. retail stocks

New York (Reuters) - Retail stocks fell on Wednesday as a lackluster holiday shopping season and shrinking U.S. factory production stoked fears of a recession, analysts said.

Investors had been closely tracking the progress of the season, worrying that consumers would pare spending with rising food and fuel costs.

Early returns from retailers' most important time of year depressed the market.

The Dow Jones U.S Retailers Index (.DJUSRT) fell 1.97 percent, while the Standard & Poor's Retailing Industry Group index (.GSPMS) slid 2.1 percent.

BJ's Wholesale Club Inc (BJ.N) was one of the biggest drags on the sector, plunging as much as 12 percent after JP Morgan downgraded it due to valuation and concerns that December sales at its stores open at least a year may be below plan.

"Retailers had one of the worse indexes for the year and they're going to be worse this year," said Howard Davidowitz, chairman of New York-based retail consulting firm Davidowitz & Associates Inc.

Lowered expectations from companies like Target Corp (TGT.N), Office Depot Inc (ODP.N) and Sears Holdings Corp (SHLD.O) -- which are fighting to stave off eroding sales -- are a harbinger of things to come for the beleaguered sector, Davidowitz said.

"What you've got is a retail recession. Earnings are going to be horrendous .... Investors are taking a step back and I think they're right," he added.

BJ's stock fell as low as $29.72, before closing $4.00 weaker at $29.83. Target slid 49 cents to $49.51 and Office Depot dropped 40 cents to $13.51, both on the New York Stock Exchange. Sears rose 95 cents to $103 on Nasdaq.

The weekly report on chain store sales, meanwhile, pointed to weak post-holiday bargain hunting.

Chain-store sales fell 0.2 percent in the latest week, according to the International Council of Shopping Centers, while data from Redbook Research pointed to a 0.7 percent decrease.

Stifel Nicolas analyst Richard Jaffe wrote in a December 26 research note that all signs pointed to a lackluster holiday shopping season.

"A late surge by customers and deep discounting by retailers were unable to sufficiently drive Christmas sales, likely resulting in a sales and earnings shortfall," he wrote.

"A lack of a compelling fashion -- particularly in the women's sector and a cautious consumer contributed to weak holiday sales."

Retail stocks were also hurt by data showing U.S. manufacturing taking a sharp turn for the worse last month, said Mark Coffelt, chairman of Empiric Funds in Austin, Texas.

"The purchasing manufacturing index is down. The conclusion that people are reaching is that the holiday season is weak," he said, adding that 90 percent of the short positions his firm holds is in retail stocks.

The Institute for Supply management's index plunged to 47.7 last month, its weakest since April 2003. A reading below 50 points to contraction.

"The net result of a slowing economy is it's going to hurt earnings," Coffelt said. "The consumer is going to have to spend less."

Asian markets strong in 2007

BANGKOK, Thailand - Asian stock markets had a strong, if volatile, year with China leading the pack as investors bet on the region's continued growth prospects.

Several exchanges notched gains of more than 20 percent and among Asia's major markets, only Japan and New Zealand ended the year with losses.

But the outlook for 2008 remained clouded by soaring oil prices, accelerating inflation in both China and India, and above all, the health of the U.S. economy.

"More will be revealed after one or two months of data on the U.S. side to see what's the state of the U.S. economy, especially the consumer spending," said Song Seng Wun, chief executive of CIMB-GK Research Pte. Ltd. in Singapore.

"If (the U.S. economy) can hold, then we should be reasonably intact," Song said.

The Shanghai Composite Index climbed 96.7 percent on the year, the world's best performing major bourse for 2007. Japan's Nikkei 225 fell 11.1 percent and the benchmark NZX-50 in New Zealand fell 0.3 percent.

Elsewhere, Jakarta's JSX index gained 52.1 percent, the Bombay Stock Exchange's Sensex index rose 47.1 percent and Hong Kong's blue chip Hang Seng rose 39.3 percent.

Other large gains were made in South Korea and Malaysia, where the benchmark indices rose almost a third since the last trading day of 2006. The main indices in Singapore and Australia gained 16.6 percent and 11.8 percent, respectively, for the year.

Most benchmarks recovered from midyear dips that followed a wave of defaults on risky loans made in the U.S. housing market. Banks, including powerhouses Citigroup Inc., Merrill Lynch & Co. and JPMorgan Chase & Co., invested heavily in mortgage-backed securities and lost billions.

As the subprime damage spread to Europe and Asia, banks around the globe became more wary about lending money, which sparked concerns about slowing business investment and growth.

On Friday, a report from Goldman Sachs said mortgage-related writedowns at U.S. banks may deepen, helping to send several markets lower on their last trading day of 2007 and fostering broad pessimism about the U.S. economy next year.

In addition, oil prices that looked as if they had given up on their chase for the $100 mark are now back above $96 a barrel, raising new concerns about their impact on growth.

Oil prices and the unfolding credit crisis in the United States have extensive ramifications in Asia, which depends on exports to the world's largest economy for growth. The U.S. is the world's largest consumer of oil. In addition to cutting the buying power the American consumer, rising energy costs can cut into industrial demand.

"We will remain hostaged by what's happening overseas, particularly in the U.S. economy ... and also oil prices," said Astro del Castillo, managing director of Manila-based brokerage First Grade Holdings.

"Those are the two major factors that will influence not only the (Philippine) market but also most economies as well," he said.

Asian markets were roiled in their last two days of trading for the year by the assassination of Pakistani opposition leader Benazir Bhutto.

Pakistani stocks suffered their biggest one-day loss ever Monday. The Karachi Stock Exchange's benchmark 100-share index plunged 694.92 points, or 4.7 percent, to 14,077.16.

The KSE 100 index still finished the year 40 percent higher than at the end of 2006.

Analysts continue to be cautiously optimistic about Asian economies, primarily based on the performance of economic engines running full-tilt in China and India.

Once worry about the credit crisis and its impact on the U.S. and global economies dissipates, many analysts say funds will resume their flow to Asian stock markets.

"Most Asian markets are still moving higher as can be seen by our economic performance. Hopefully (fund managers) will be attracted by such," said del Castillo.

The outlook for the broader region next year appears promising, agreed Park So-yeon, a strategist at Korea Investment & Securities Co. in Seoul.

The Kospi — South Korea's main stock benchmark — was unlikely to match this year's performance in 2008, though sectors with China exposure were likely to remain strong, she said. Continued demand for commodities in China and India is likely to fuel growth, she said.

"The Asian business cycle is very good. China and Indian demand is very good."