Asian stocks rise after US rate cut

HONG KONG (AFP) - Most Asian stock markets rose Thursday after another sharp US interest rate cut but Japan's rally aside, gains were modest due to worries that a US economic recession still looms.

The Federal Reserve chopped borrowing costs by 0.50 percentage points to 3.00 percent Wednesday, following an emergency cut last week during a global stocks meltdown, but the latest move failed to excite many Asian markets.

One exception was Japan's bourse, the biggest in Asia, which fell in early trade before rallying to close up 1.85 percent. But Tokyo's Nikkei-225 index remains around seven percent underwater since the start of the year.

Investors fret that Japan's economy will suffer as exports to the ailing US dry up. Official data released Wednesday showed US economic growth had slowed sharply to an annual rate of just 0.6 percent in the last quarter of 2007.

Share price gains elsewhere in Asia were more limited, with the Australian market ending up 0.6 percent after a volatile trading day and Taiwan's bourse closing down 0.3 percent, although South Korea rallied more than two percent.

"We're in an environment where people are completely and utterly lost as to where things are heading in the short term," said Justin Gallagher, the Sydney-based head of sales trading at ABN Amro.

Asia's other major markets were mixed, with Hong Kong falling by early afternoon and Indian shares slipping after the market in Mumbai opened. But mainland Chinese shares were trading higher.

The US rate cut had failed to boost the market because it had been widely expected, said Castor Pang, a strategist at Sun Hung Kai Financial group in Hong Kong.

"Sentiment remained cautious, with investors keeping an eye on upcoming US economic indicators," he said.

Asia's smaller markets were mostly up, with Philippine share prices ending 0.3 percent higher and Malaysian and Indonesian shares both rising during the trading day, although New Zealand closed down.

"Unfortunately, the Fed-triggered rally in US markets was halted half-way by renewed concerns about the credit market," said Choo Swee Kee, the Kuala Lumpur-based chief investment officer of TA Investment Management.

A mortgage default crisis among so-called "subprime" -- or riskier -- US borrowers has ballooned into a global credit crunch threatening a recession in the US and roiling financial markets.

The Federal Reserve slashed borrowing costs by 0.75 percentage points last week to battle the looming slowdown, while US lawmakers have just approved an urgent 157-billion-dollar economic stimulus package.

But despite that analysts and investors remain unconvinced that the measures taken so far will revive the US quickly enough to avert a big slowdown, and Wall Street fell Wednesday despite the Fed's move.

"I think they're trying to keep us out of a recession," said Robert MacIntosh, the chief economist at Eaton Vance Management in the US, after the rate cut. "Whether this is enough or soon enough or too late remains to be seen."

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Japan stocks lifted by investment deal

TOKYO - Japanese stocks rose Thursday as reports that a troubled U.S. bond insurer had closed an investment deal helped to ease concerns about the subprime loan crisis.

Traders largely ignored the U.S. Federal Reserve Bank's decision to cut two key interest rates, as the move had been widely anticipated and investors had already priced it into shares.

The benchmark Nikkei stock index rose 247.44 points, or 1.85 percent, to close at 13,592.47 on the Tokyo Stock Exchange. The index shed 0.99 percent the day before.

Tokyo shares fell in early trading, tracking overnight declines on Wall Street amid concerns that problems in the U.S. bond insurance sector could spill over into the Japanese economy.

But investor sentiment recovered midmorning on news reports that bond insurer MBIA Inc. and private equity firm Warburg Pincus had closed a previously announced investment deal. U.S. bond insurers have been under scrutiny amid concerns that securities backed by shaky mortgages would lead to a spike in insurance claims.

The Dow Jones industrial average, which gained as much as 100 points after the Fed announced its decision to cut its key rates by 50 basis points, ended Wednesday stock session down 0.3 percent. Anticipation of the Fed cut had pushed the Dow up more than 470 points this week before the downturn, and investors were ready to collect profit after the cut was announced.

Bargain-hunting in relatively undervalued blue chip stocks led Tokyo's gains, as did end-of-month buying by fund managers seeking to raise the value of their stock holdings.

"There was too much news from which investors could take cues today. While they were wondering what they should focus on, window-dressing buying brought the market up," said Masayoshi Okamoto, general manager at Jujiya Securities.

Toyota Motor Corp. jumped 5.4 percent to 5,820 yen, while Nissan Motor Co. rose 1.1 percent to 1,013 yen.

Matsushita Electric Co. surged 8.7 percent to 2,250 yen after the company said it had settled ongoing semiconductor patent lawsuits with Samsung Electronics Co. in the U.S. and Japan.

The broader Topix index, which includes all shares on the exchange's first section, added 26.20 points, or 1.98 percent, to 1,346.31.

In currencies, the U.S. dollar bought 106.46 yen at 2:50 p.m. Thursday, down from 106.95 yen late Wednesday in New York. The euro fell to $1.4879 from $1.4898.

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Outflow From U.S. Stock Funds Slows

Investors reversed November's outflow in December, putting $1.29 billion of new money into stock funds, according to the Investment Company Institute.
In November, stock funds gave up $9.94 billion as markets looked shaky in the wake of the credit crunch and a mixed economic picture.

Thanks to a declining market, December's inflow wasn't enough to prevent a 1.1% decline in stock fund assets. The major indexes were down slightly for December, despite a late-month rally. The S&P 500 dropped the most at 0.86%.

The Federal Reserve slashed its key rate to 3.5% in December, but that failed to strongly boost the markets.

December was the ninth straight month in which investors favored international funds over those that invest in the U.S.

U.S. stock funds disgorged $7.96billion to fleeing investors. The outflow was a marked decrease from November's $14.58 billion.

World equity funds took in $9.26billion in December, up from $4.64 billion in November.

Overseas equity funds continued to get a boost in performance from the sliding dollar. Though the buck rallied somewhat against the yen and the euro, it continued to slide against the British pound.

In all of 2007, stock funds picked up $92.44 billion in new money. A year earlier the total was $159.44 billion.

Cash in all stock funds was 4.2% of assets in December, the same as November's figure and up slightly from last year's 3.9%.

Inflow to hybrid funds, which invest in stocks and bonds, slowed. They drew in $810 million in December against $874 million in November. They picked up $22.13 billion for the year vs. $7.06 billion in 2006.

Bond fund inflow decelerated to $584 million from $1.96 billion in November, but taxable bond funds posted inflow of $4.05 billion, up from November's $3.08 billion.

Muni Bonds Suffer

Municipal bond flows suffered as news of financial problems at bond insurance firms spread. Investors pulled $3.48 billion from municipal bond funds, more than twice the $1.12 billion November outflow.

For the full year, taxable and muni bond funds picked up $108.52 billion in new money vs. $60.58 billion in 2006.

Money market funds flow, often erratic, fell to $35.52 billion in December, down from the previous month's $101.37 billion and October's $105.81 billion.

Much of the change was driven by retail investors as opposed to institutions.

Institutional funds had an inflow of $16.69 billion, against retail funds that took in $18.83 billion.

In November, the money funds marketed to individuals made up $40.91 billion of the inflow, a much smaller proportion than December's.

For 2007 the money market funds have taken in $660.68 billion. That handily beats 2006, when the total inflow was $246.92 billion.

Outlook For January

January looks like a month of more outflow from stock funds, with bond funds picking up slightly.

TrimTabs estimated investors pulled $5.59 billion from U.S. stock funds from Dec. 26. through Jan.26., despite the promise of a cut in the fed funds rate.

As markets such as China and Brazil, once the belles of the ball, have faltered, investors took an estimated $1.03 billion from world equity funds over the same period.

That would reverse the trend of international equities' inflow over the past several months.

Bond fund inflow is estimated at $999 million for the month through Jan. 26.

The Fed's half-point 18ate cut on Wednesday, which cut the federal funds rate to 3.0%, came too late in the month to salvage January's inflow.

In fact, the markets seemed less than thrilled with the latest Fed action, closing lower after a midday rally.

The yield on the 10-year Treasury bond went to 3.70%, boosting prices on both Treasuries and Treasury inflation-protected securities. On Dec. 26, the yield stood at 4.60%.

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Dow's rally proves shortlived

A brief rally by US stocks fizzled out in late trading yesterday after a 50 basis point rate cut by the Federal Reserve Open Market Committee failed to convince traders the US economy is on the mend.
Financial companies led a rebound immediately after the Fed cut the funds rate to 3 per cent but traders then took profits as rumours began circulating of more potential downgrades at key bond insurers.

A 50bp cut was almost universally expected and analysts said that although there was considerable downside potential if the Fed had not satisfied the market, the upside from its more aggressive stance was limited.

"People are selling any kind of rally they can get and lock in any profits they can," Ryan Larson, senior equity trader at Voyageur Asset Management, said. "Anyone who things these problems are going to disappear with a single cut has more thinking to do."

The S&P 500 closed down 0.5 per cent at 1,355.81 near its lows for the session, having earlier soared 1.7 per cent immediately after the Fed eased. Of the S&P's ten leading sector only industrials and technology ended in positive territory with telecoms and financials weakest.

The Nasdaq Composite gave up 0.4 per cent to 2,349 while the Dow Jones Industrial Average shed 0.3 per cent to 12,442.83.

"It's not a catalyst for an immediate rebound in the economy by any means. If the Fed hadn't delivered we would have been looking at a lot more red numbers," Hugh Whelan, equity manager at Hartford Investment Management, said.

The Fed has now cut interest rates by 125bp in little more than a week responding to concerns that the US economy is slowing rapidly.

"This removes the fear that things are going to get horribly bad. I think they did what they had to do and it takes that worse case scenario off the table," Bill Stone, chief investment strategist for PNC Wealth Management, said.

Further evidence of the problems the Fed is trying to tackle was provided by a report which showed the economy barely grew in last three months of 2007. For all of 2007, the US economy expanded at its slowest pace since 2002, just 2.2 per cent.

The news was a blow for those equity investors who have tentatively become more optimistic in recent days about growth prospects for US companies.

"The new leg down in housing, along with the continuation of the retrenching trend by the US consumer, is weighing on growth," said TJ Marta, strategist at RBC Capital Markets. "The Fed has a growth problem and a financial crisis to deal with."

However, a snapshot of private sector employment painted a contrasting picture, as a projection of hiring in January by ADP showed a rise of 130,000 jobs.

Although ADP numbers can be volatile, economists now expect the closely watched January employment report, due on Friday, to show a gain of 65,000, up from 18,000 in December.

The S&P financial index rallied 4 per cent off its session-low after the Fed cut rates but the sector closed in negative territory after Fitch Ratings cut bond insurer FGIC's triple-A rating to double-A. Ambac Financial and MBIA fell 15.9 per cent to $10.87 and 12.6 per cent to $13.96 respectively on fears they face downgrades from either Moody's or S&P.

Oppenheimer analyst Meredith Whitney said banks may have to write down up to $70bn if bond insurers lose their AAA credit ratings, with losses concentrated at Citigroup, Merrill Lynch and UBS.

"This is significant, as many investors are of the belief that the fourth quarter was a 'kitchen sink' for all outstanding capital hits this credit cycle," Ms Whitney said. "When it becomes clear [as we think it will] that more charges are on the horizon, we believe the market will take another turn for the worse."

Citi fell 0.1 per to $27.87 while Merrill gave up 2.4 per cent to $56.08 after its chief executive, John Thain, said the bank's net exposure to monoline insurers was $3.5bn.

In the technology sector Yahoo reported a 23 per cent decline in fourth quarter profit and gave a cautious outlook for 2008. The shares slumped 8.5 per per cent to $19.05 after several analysts downgraded the stock.

After the closing bell Amazon.com said its fourth quarter profit more than doubled to $207m, in line with expectations, but the shares, which closed up 0.4 per cent at $74.21, fell 8.3 per cent after-hours.

Rambus, the chipmaker, fared much better, soaring 17.7 per cent to $19.44 on hopes it could claim $10bn in royalties by winning a patent infringement case.

The recent rebound in US homebuilder stocks came to an end after Centex, the number four US firm, saw its fiscal third-quarter loss widen to $975.2m, much worse than analysts had feared. The shares fell 8.9 per cent to $26.41.

Merck, 3.2 per cent weaker at $46.47, fell to a $1.63bn loss after it took a big charge to cover litigation costs. Although adjusted earnings beat expectations, analysts were disappointed by sales of a cervical cancer vaccine.

Boeing was the best performing Dow component after it increased fourth quarter earnings by 4 per cent and raised its 2008 profit outlook. The shares climbed 2.3 per cent to $82.84.

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Stocks pull back after Fed rate cut

NEW YORK - A still-anxious Wall Street closed lower Wednesday, sacrificing the advance it made after the Federal Reserve cut interest rates half a percentage point. Investors collected profits after nearly three sessions of big gains, unwilling to leave money on the table amid ongoing economic uncertainty.

It wasn't surprising that the market pulled back, having suffered months of losses and having driven the Dow Jones industrials up more than 470 points so far this week ahead of the late-day downturn.

Anthony Conroy, managing director and head trader for BNY ConvergEx Group, said expectations of more downgrades of bond insurers like Ambac Financial Group Inc. and MBIA Inc. — as well as uneasiness ahead of Thursday's Commerce Department report on personal income and spending inflation — was enough to spur people to cash in profits from the market's initial gains.

Key reports on the job market and manufacturing set to arrive Friday could also add to investors' concerns about the state of the economy, which has been dragged down by a crumbling housing market and losses at major financial institutions.

"Volatility is here to stay," Conroy said. "People who think these issues will go away overnight in one Fed rate cut are mistaken."

The Federal Reserve lowered the fed funds rate, or the interest banks pay one another for overnight loans, to 3 percent, the lowest level since spring 2005. It also lowered the discount rate, or the interest the Fed charges on loans to banks, by a half-point to 3.50 percent.

Scott Fullman, director of investment strategy for I.A. Englander & Co., said it was unlikely the market's downturn was because of disappointment over the rate cut or the Fed's accompanying statement, which if anything asserted that the central bank is willing to lower rates further if needed.

The Dow, which had been up more than 200 points after the Fed's decision, finished down 37.47, or 0.30 percent, at 12,442.83.

"We're seeing profit taking ahead of the employment report on Friday," Fullman said, referring to the Labor Department's data on job creation and unemployment. "The market has had a really nice run-up this week, and investors are taking advantage of that."

Broader stock indicators also turned lower. The Standard & Poor's 500 index fell 6.49, or 0.48 percent, to 1,355.81, and the Nasdaq composite index fell 9.06, or 0.38 percent, to 2,349.00.

Government bond prices rose as the stock market pulled back. The yield on the 10-year benchmark note fell to 3.63 percent from 3.68 percent late Tuesday.

The Fed's decision to cut rates follows an emergency rate cut last week of three-quarters of a percentage point. The central bank stepped in at the time after global markets worldwide fell sharply amid fears that the U.S. economy was tipping into recession and would hurt the global growth. The move was the biggest one-day move in more than 20 years.

The rate cuts came on the same day as fresh evidence arrived that the economy had slowed significantly in the final three months of 2007. Figures showed gross domestic product expanded at a slight 0.6 percent pace in the fourth quarter, less than half what had been expected. For all of 2007, gross domestic product grew 2.2 percent, the weakest rate since 2002.

Wednesday's move was the fifth cut the Fed made since it began making reductions in September following turmoil in the credit markets and in stocks markets.

"The consumer is essentially under enormous pressure," said Thomas J. Lee, chief U.S. equities analyst at JPMorgan. Lee said that even if the $146 billion tax rebate and business incentive package proposed by the Bush administration is passed Feb. 15 by Congress, it is going to take some time to get into the hands of consumers.

The subprime mortgage crisis has been creating problems for homeowners and financial centers alike. Worries about the health of bond insurers was also believed to play a part in Wednesday's decline; Meredith Whitney, an Oppenheimer and Co. analyst, wrote in a research note before the market opened that ratings agencies are likely to downgrade already-pummeled insurers.

Meanwhile, Swiss bank UBS said it will have a $11.4 billion fourth-quarter loss mostly because of bad investments in subprime mortgages. Analysts had expected a much smaller shortfall. French bank BNP Paris Wednesday said its quarterly profit will decline by 40 percent from year-earlier levels.

And after the market closed Wednesday, Standard & Poor's downgraded about $50 billion worth of mortgage-backed securities and placed another $217 billion worth on negative watch. The ratings agency said big losses could be felt soon by smaller U.S. banks and credit unions, and European banks that have not yet revealed large write-downs. S&P said it believes total losses for financial institutions will eventually reach more than $265 billion.

On Thursday, the Commerce Department releases its December personal spending report, which includes the closely-watched personal consumption expenditures deflator. The department's GDP report showed that core prices, which exclude food and energy, rose at a 2.7 percent rate in the fourth quarter — up from 2 percent in the third quarter of 2007, and the largest quarterly jump since the spring of 2006.

If inflation becomes a bigger worry for the Fed than economic growth, as it was in the early part of last year, the central bank may hesitate to lower rates further.

Declining issues outnumbered advancers by about 3 to 2 on the New York Stock Exchange, where consolidated volume came to 4.64 billion shares, up from Tuesday's 4.07 billion.

The Russell 2000 index of smaller companies fell 9.71, or 1.38 percent, at 695.49.

Crude oil rose 69 cents to settle at $92.33 a barrel on the New York Mercantile Exchange.

The dollar was mixed against other currencies, while gold prices dipped.

Overseas markets closed lower ahead of the U.S. rate decision. In Tokyo, the Nikkei fell 0.99 percent. In Europe, London's FTSE 100 dropped 0.81 percent, Paris' CAC 40 lost 1.37 percent and Frankfurt's DAX fell 0.26 percent.

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Overview: Fed fails to boost Wall St

A second aggressive rate cut in just over a week on Wednesday from the Federal Reserve failed to help Wall Street stocks, while the dollar came under pressure and gold set a record high.

The Fed cut both the Fed funds and discount rates by 50 basis points, to 3 per cent and 3.5 per cent respectively. That came after last week's inter-meeting 75bp reduction in the funds rate.

In its accompanying statement, the US central bank said that financial markets remained under considerable stress and that recent information indicated a deepening of the housing contraction as well as some softening in labour markets.

"The Fed's number one current priority is to soften this economic downturn, and appears ready to do what it takes," said Max Bublitz, chief strategist at SCM Advisors.

Wall Street initially rallied, but returned to negative territory in the last hour of trade amid renewed jitters over the financial strength of bond insurers Ambac and MBIA. The S&P 500 rose as much as 1.7 per cent after the Fed acted, only to close down 0.5 per cent at 1,355.81.

In the US Treasury market, the two-year yield reversed an early rise and was down 5bp at 2.22 per cent. Interest rate futures rallied and priced in at least a 2.5 per cent funds rate by the end of April. "In light of what this cut means for future strategy, we look for the Fed to cut another 50 basis points in March followed by 25 basis point cuts at both the April and June meetings," said Drew Matus, economist at Lehman Brothers. "This leaves us with a terminal Fed funds rate of 2 per cent."

Longer-dated Treasury yields rose further after the rate cut as traders priced in a stronger chance that the economy will rebound and inflation rises. The yield on the 10-year bond was up 4bp at 3.70 per cent, sparking a steeper yield curve. Treasury inflation breakeven rates were wider indicating a higher expectation of inflation.

"The risks to acting so decisively can be seen in the yield curve, as 2s/10s have steepened out to nearly 150 bps on inflationary concerns and aided by the cut," said David Ader, bond strategist at RBS Greenwich Capital. "While surely not a near-term concern for the Fed, the lingering inflation concerns will undoubtedly come back into play as 2008 progresses."

John Miller, chief investment officer at Nuveen Investments said: "Inflation has not gone down and the Fed is postponing its focus of preventing inflation."

Measures of credit risk initially eased after the Fed's move. The Markit CDX index of credit default swaps that reference US investment grade rate corporations narrowed to 99.5bp from 103bp. Renewed concern about bond insurers helped push the CDX back to 106.5bp in late trade. The index is down from a recent peak around 125bp, but is up from 78bp at the start of the year.

One bright note after the latest rate cut is that further relief for holders of floating rate mortgages beckons.

"The direct effect of a rate cut is primarily going to be on adjustable rate loan resets," said Don Brownstein, chief investment officer of Structured Portfolio Management, a hedge fund manager focused on the mortgage and structured credit markets. "Particularly if Libor rates continue their return to a more normal relationship with Treasury rates, adjustable rate loans won't reset as high as they would have without the cut."

The dollar weakened almost across the board, and it closed at its weakest level against the euro. The dollar index closed just above its record low set in November and has fallen more than 2 per cent since the Fed cut rates last week.

The move by the Fed yesterday followed a mixed bag of US economic releases earlier in the day.

A survey from ADP Employer Services showed that 130,000 private sector jobs were created in January, about three times the expected increase, heightening expectations that tomorrow's crucial non-farm payrolls report could turn out to be stronger than expected.

"ADP has proved itself horribly misleading several times over the past year but the fact remains that it is the best - or least bad, anyway - single advance indicator of payrolls," said Ian Shepherdson, chief US economist at High Frequency Economics.

While there may be a bounce in the January payrolls, economists caution the trend has been weakening in recent months.

"The longer-term trends in the labour market demonstrate clear softening with the six-month moving average slowing from a gain of 180,000 at the beginning of 2007 to less than 90,000 jobs at the end of the year," said Thomas Higgins, chief economist at Payden & Rygel. "This Friday's payroll number may be a last hurrah for those who are bullish on the US economy before the economic data take a turn for the worse as we head into February and March."

Meanwhile, US fourth-quarter gross domestic product growth came in much weaker than expected. The economy expanded at an annualised rate of 0.6 per cent in the fourth quarter of last year - the slowest pace for five years and down sharply from 4.9 per cent in the third quarter.

"The pace of economic activity basically stalled out in the fourth quarter," said David Rosenberg, chief economist at Merrill Lynch. "Of course, there are going to be two more revisions to the figure before we get a final result, but this was a big haircut from the 4.9 per cent pace posted in the third quarter and 3.8 per cent in the second."

Tony Crescenzi, chief bond strategist at Miller Tabak, took a more optimistic view, saying the GDP report showed that business inventories had been "extraordinarily well managed" during the economic slowdown, boding well for the future.

Equity markets in Europe and Asia saw relatively quiet trading as investors the US rate news.

In Asia, an early attempt to build on Tuesday's gains came to nought as uncertainty about the Fed set in. In Tokyo, the Nikkei 225 Average ended 1 per cent lower, while Hong Kong shed 2.6 per cent and Seoul fell 3 per cent to a nine-month low.

European stocks adopted a similarly cautious tone, with fresh writedowns at Swiss bank UBS further damping the mood. The FTSE Eurofirst 300 index fell 0.7 per cent.

European government bonds edged back in quiet trading ahead of the Fed's decision. with the 10-year Bund yield up 3bp at 4.01 per cent. The 10-year Japanese government bond yield fell 4 bp to 1.43 per cent following the slide in Japanese equities.

In commodities, oil prices edged higher after a choppy session as investors reacted to news of a bigger-than- forecast increase in US crude inventories last week.

March West Texas Intermediate rose 69 cents to $92.33 a barrel.

The price of spot gold in New York was $8.45 higher at $932.15 after reaching a record $936.95.

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Market drops as bond insurer fears hit financials

NEW YORK (Reuters) - Stocks fell on Wednesday, led by financial shares, after a television commentator said he believed that the two biggest bond insurers will lose their top credit rating, a move that could bring more big losses to the financial sector.

The remarks by CNBC reporter Charles Gasparino came in the last hour of trading, knocking down major indexes from nearly 1.5 percent gains wracked up after an aggressive interest rate cut by the Federal Reserve.

Shares of bond insurers Ambac Financial Group Inc and MBIA Inc each finished down more than 10 percent, which contributed to financial shares ending among the day's worst performers.

"Once he (Gasparino) started talking, we got the sell-off. As soon as that went across, those shares went down immediately," said Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, New Jersey.

A credit downgrade of bond insurers could hurt further harm the banking sector and stunt the global economy as financial institutions take a hit from subsequent write-downs of their assets.

CNBC later posted a story on its Web site saying "it had learned" of possible bond insurer downgrades by Wall Street ratings agencies, without citing any source.

The Dow Jones industrial average dropped 37.47 points, or 0.30 percent, to 12,442.83. The Standard & Poor's 500 Index finished down 6.49 points, or 0.48 percent, at 1,355.81. The Nasdaq Composite Index declined 9.06 points, or 0.38 percent, at 2,349.00.

Shares of Ambac declined 17.01 percent to $10.73 on the New York Stock Exchange. Shares of MBIA fell 12.6 percent to $13.96.

FGIC Corp's bond insurance arm lost its top "AAA" rating from Fitch Ratings on Wednesday, adding to worries about the bond insurance sector. The downgrade is a blow to the insurer's business model and could also cause downgrades to more than 100,000 municipal bonds.

FGIC is owned by a group including mortgage insurer PMI Group Inc, whose stock slid 3.4 percent to $9.11 on the NYSE, and private equity firm Blackstone Group, whose stock dropped 1.8 percent to $18.65.

Shares of insurer American International Group declined 4.2 percent to $54.37, while those of Wachovia Corp slipped 2.8 percent to $36.84.

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US stocks stage rally after rate cut

Wall Street stocks enjoyed a rally on Wednesday after the Federal Reserve Open Market Committee cut the funds rate by 50 basis points to 3 per cent as traders had widely expected.

Stocks traded in negative territory for most of the morning after a disappointing report on economic growth but materials and industrial companies led a rebound after the FOMC decision.

The Fed's accompanying statement warned that financial markets remained "under considerable stress" amid "a deepening of the housing contraction as well as some softening in labour markets."

In mid-afternoon the S&P 500 was up 1.2 per cent at 1,379.80 having traded down 0.2 per cent prior to the Fed's announcement. The Nasdaq Composite put on 1 per cent to 2,382.07 while the Dow Jones Industrial Average gained 1.2 per cent to 12,633.21.

A cut of 50bp was almost universally expected with the futures market having priced in a 72 per cent likelihood of such a move. The Fed has now cut interest rates by 125bp in little more than a week responding to concerns that the US economy is slowing rapidly.

Further evidence of this contraction was provided by a report which showed the economy slowed sharply to a 0.6 per cent growth rate in the last three months of 2007, only half the rate forecast by economists and down from 4.9 per cent in the previous quarter. For all of 2007, the economy expanded at its slowest pace since 2002, growing just 2.2 per cent.

However, a snapshot of private sector employment painted a contrasting picture, as a projection of hiring in January by ADP showed a rise of 130,000 jobs.

Although ADP numbers can be volatile, economists now expect the closely watched January employment report, due on Friday, to show a gain of 65,000, up from 18,000 in December.

"There are two possible interpretations of the job situation," said TJ Marta, strategist at RBC Capital Markets. "Either we are going to experience a 'joblessness' stall in growth, just as we experienced a jobless recovery, or the economy remains somewhat insulated from the continuing credit crisis - at least for now."

Financial stocks came under pressure after UBS, the Swiss bank, took $14bn in writedowns for the fourth quarter, $4bn more than previously advised. The writedown included a $2bn hit which analysts speculated was linked to troubled monoline bond insurers.

Oppenheimer analyst Meredith Whitney said banks may have to write down up to $70bn if bond insurers lose their AAA credit ratings, with losses concentrated at Citigroup, Merrill Lynch and UBS.

"This is significant, as many investors are of the belief that the fourth quarter was a 'kitchen sink' for all outstanding capital hits this credit cycle," Ms Whitney said. "When it becomes clear [as we think it will] that more charges are on the horizon, we believe the market will take another turn for the worse."

Citi rose 1.4 per cent to $28.31 after the Fed decision, while Merrill gave up 0.8 per cent to $56.99 after its chief executive, John Thain, said the bank's net exposure to monoline insurers was $3.5bn.

Earnings news was led by Yahoo, which reported a 23 per cent decline in fourth quarter profit and gave a cautious outlook for 2008. The shares slumped 8.6 per per cent to $19.03 after several analysts downgraded.

The recent rebound in US homebuilder stocks came to an end after Centex, the number four US firm, saw its fiscal third-quarter loss widen to $975.2m, much worse than analysts had feared. The shares fell 7.9 per cent to $26.70. Pulte Homes, down 2.5 per cent at $14.47, was due with its earnings late yesterday.

Merck, 4.6 per cent weaker at $45.80, fell to a $1.63bn loss after it took a big charge to cover litigation costs. Also declaring a big charge was United Parcel Services, which took a $6.1bn pension-related hit. However, adjusted net income of $1.2bn came in line with expectations and its shares climbed 2.5 per cent to $72.66.

Boeing was the best performing Dow component after it increased fourth quarter earnings by 4 per cent and raised its 2008 profit outlook. Shares in Boeing climbed to $83.50.

Overview: Fed move sparks rally on Wall St

Further aggressive moves by the Federal Reserve to bolster the US economy drove Wall Street stocks higher and the dollar lower on Wednesday.

The Fed cut both the Fed funds and discount rates by 50 basis points, to 3 per cent and 3.5 per cent respectively. The moves follow last week's emergency 75bp reduction in the Fed funds.

In its accompanying statement, the US central bank said that financial markets remained under considerable stress and that recent information indicated a deepening of the housing contraction as well as some softening in labour markets.

"Downside risks to growth remain," it said.

Shortly after the moves were announced, the Dow Jones Industrial Average was up xxx per cent, the S&P 500 was xx per cent higher and the Nasdaq Composite was up xxxx per cent.

Short-dated Treasury bonds turned positive, with the two-year yield down 5bp at 2.24 per cent, although longer-dated maturities fell back. The yield on the 10-year bond was up 4bp at 3.72 per cent

The dollar weakened almost across the board, with the euro gaining 0.6 per cent to $1.4865.

The rate decisions followed a mixed bag of US economic releases earlier in the day.

A survey from ADP Employer Services showed that 130,000 private sector jobs were created in January, about three times the expected increase, heightening expectations that tomorrow's crucial non-farm payrolls report could turn out to be stronger than expected.

"ADP has proved itself horribly misleading several times over the past year but the fact remains that it is the best - or least bad, anyway - single advance indicator of payrolls," said Ian Shepherdson, chief US economist at High Frequency Economics.

However, US fourth-quarter gross domestic product growth came in much weaker than expected.

The economy expanded at an annualised rate of 0.6 per cent in the fourth quarter of last year - the slowest pace for five years and down sharply from 4.9 per cent in the third quarter.

Stephen Stanley, chief US economist at RBS Greenwich Capital, warned the fourth-quarter advance was "too close for comfort" given the normal scope of revisions to the initial estimate.

He suggested that assumptions made by the Commerce Department for December trade and inventories data were far too optimistic. "Depending on how the surprises elsewhere break, the fourth-quarter GDP number could easily end up slightly below zero."

Tony Crescenzi, chief bond strategist at Miller Tabak, took a more optimistic view, saying the GDP report showed that business inventories had been "extraordinarily well managed" during the economic slowdown, boding well for the future.

"Inventories are so lean that any increase in spending will almost immediately translate into an increase in industrial output, which, when it occurs, will boost incomes and lead to conditions consistent with sustained economic expansion," he said.

Equity markets in Europe and Asia saw relatively quiet trading as investors the US rate news.

In Asia, an early attempt to build on Tuesday's gains came to nought as uncertainty about the Fed set in. In Tokyo, the Nikkei 225 Average ended 1 per cent lower, while Hong Kong shed 2.6 per cent and Seoul fell 3 per cent to a nine-month low.

European stocks adopted a similarly cautious tone, with fresh writedowns at Swiss bank UBS further damping the mood.

The FTSE Eurofirst 300 index fell 0.7 per cent, although German stocks outperformed as the Xetra Dax shed 0.3 per cent.

European government bonds edged back in quiet trading ahead of the Fed's decision. with the 10-year Bund yield up 3bp at 4.01 per cent. The 10-year Japanese government bond yield fell 4 bp to 1.43 per cent following the slide in Japanese equities.

In commodities, oil prices edged higher after a choppy session as investors reacted to news of a bigger than forecast increase in US crude inventories last week.

March West Texas Intermediate rose 69 cents to $92.33 a barrel.

Gold briefly spiked to within striking distance of Tuesday's record high of $933.10 after the Fed move, but then eased back.

Banking woes weigh on Europe

European stocks lost ground on Wednesday as merger speculation surrounding Société Générale failed to offset more subprime writedowns by two leading European banks and nervousness ahead of a US interest rate decision.

Talk that SocGen was open to a friendly bid sent shares in the French bank up 4.3 per cent to EU81.80 in defiance of the wider market and in spite of a denial by the bank later in the session.

Fox-Pitt Kelton, the broker, upgraded SocGen from "in line" to "outperform" on takeover hopes.

"The market has now priced in SocGen problems so you get the M&A option on the cheap," said Mark Sartori, head of European equities at Fox-Pitt Kelton.

In the wider market, the FTSE Eurofirst 300 slid 0.7 per cent to 1,329.43, with many investors sitting on their hands ahead of the US Federal Reserve interest rate decision due on Wednesday evening and more US economic data later in the week.

"Everyone is waiting for the Fed and no one is going to stick their heads above the parapet in case it gets blown off," said Edmund Shing, equity strategist for BNP Paribas, adding that volumes were quite thin.

It was a mixed picture for the banking sector, with UBS (NYSE:UBS) falling 1.6 per cent to SFr46.06 after the Swiss wealth manager unveiled a $4bn writedown.

The surprise announcement, coming ahead of the Swiss bank's annual results on February 14, comes after a $10bn writedown on its troubled subprime mortgage portfolio last month.

Meanwhile, BNP Paribas fell 1.2 per cent to EU66.83, after announcing a 42 per cent slump in fourth-quarter profit and EU589m of writedowns due to monoline exposure.

However, money is beginning to flow back into the banking sector despite expectations of more writedowns as fourth-quarter results are announced in coming weeks, traders said.

"The problems are not over yet, but they no longer come as a surprise," said Mr Sartori.

Belgo-Dutch bankFortis climbed 2.3 per cent to EU15.28, Credit Agricolegained 2.4 per cent to EU21.41 and in Switzerland Credit Suisse (NYSE:CS) added 0.3 per cent to SFr61.35.

The automobiles sector took a battering after Goldman Sachs painted a gloomy outlook for carmakers this year. Goldman slashed estimates for net operating profits after tax by 25 per cent saying global car sales would be flat in 2008, after record 5 per cent growth in 2007.

France's Renault was the biggest faller of the day, tumbling 6 per cent to EU75.14 while Peugeot fell 3.1 per cent to EU49.71 and Germany's Porsche fell 3.5 per cent to EU1222.01.

German components manufacturer Continental slid 4.2 per cent to EU71.19 while French tyremakerMichelin lost 3.9 per cent to EU66.43.

Dutch brewer Heineken fell 3.9 per cent after a downgrade from "overweight" to "equal-weight" by Morgan Stanley.

There was also talk that British peer SABMiller was facing declining margins in its South African market.

The energy sector was in the spotlight with Iberdrola rising 3.6 per cent to EU9.56 after a Financial Times report that France's EDF and ACS, Spain's biggest construction company, were in bid talks for the Spanish energy giant.

EDF fell 2.2 per cent to EU69.50 while ACS gained 0.9 per cent to 35.18.

ACS said it had not reached an agreement with EDF on making a takeover bid for Iberdrola.

Galp Energia tumbled 4 per cent to EU15.15 after Iberdrola said it will sell its entire 3.8 per cent stake in the Portuguese oil and gas group at EU15.05 per share.

US stocks stage modest rally after rate cut

Wall Street enjoyed a modest rally on Wednesday after the Federeal Reserve Open Committee cut the interest rates by 50 basis point to 3 per cent as traders widely expected.

Stocks traded in the negative territory for the most of the morning after economic growth rose far less than expected at the end of last year, renewing fears the US economy is entering a recession.

Equities drifted earlier after a report showed the economy slowed sharply to a 0.6 per cent growth rate in the last three months of 2007, only half the rate forecast by economists and down from 4.9 per cent in the previous quarter. For all of 2007, the economy expanded at its slowest pace since 2002, growing just 2.2 per cent.

The news was a blow for those equity investors who have tentatively become more optimistic in recent days about growth prospects for US companies.

However, a snapshot of private sector employment painted a contrasting picture, as a projection of hiring in January by ADP showed a rise of 130,000 jobs.

Although ADP numbers can be volatile, economists now expect the closely watched January employment report, due on Friday, to show a gain of 65,000, up from 18,000 in December.

"There are two possible interpretations of the job situation," said Mr Marta. "Either we are going to experience a 'joblessness' stall in growth, just as we experienced a jobless recovery, or the economy remains somewhat insulated from the continuing credit crisis - at least for now."

Financial stocks came under pressure after UBS, the Swiss bank, took $14bn in writedowns for the fourth quarter, $4bn more than previously advised. The writedown included a $2bn hit which analysts speculated was linked to troubled monoline bond insurers.

Oppenheimer analyst Meredith Whitney said banks may have to write down up to $70bn if bond insurers lose their AAA credit ratings, with losses concentrated at Citigroup (NYSE:C), Merrill Lynch and UBS.

"This is significant, as many investors are of the belief that the fourth quarter was a 'kitchen sink' for all outstanding capital hits this credit cycle," Ms Whitney said. "When it becomes clear [as we think it will] that more charges are on the horizon, we believe the market will take another turn for the worse."

Citi fell 2 per cent to $27.35 while Merrill gave up only 1.1 per cent to $56.86 after its chief executive, John Thain, said the bank's net exposure to monoline insurers was $3.5bn.

Earnings news was led by Yahoo, which reported a 23 per cent decline in fourth quarter profit and gave a cautious outlook for 2008. The shares slumped 8.6 per per cent to $19.03 after several analysts downgraded the stock.

The recent rebound in US homebuilder stocks came to an end after Centex (NYSE:CTX), the number four US firm, saw its fiscal third-quarter loss widen to $975.2m, much worse than analysts had feared. The shares fell 6.6 per cent to $27.10. Pulte Homes (NYSE:PHM), down 6.3 per cent at $13.91, was due with its earnings late on Wednesday.

Merck, 4.6 per cent weaker at $45.80, fell to a $1.63bn loss after it took a big charge to cover litigation costs.

Also declaring a big charge was United Parcel Service (NYSE:UPS)s, which took a $6.1bn pension-related hit. However, adjusted net income of $1.2bn came in line with expectations and the shares climbed 0.9 per cent to $71.58.

Boeing (NYSE:BA) was the best performing Dow component after it increased fourth quarter earnings by 4 per cent and raised its 2008 profit outlook, helping the shares to gain 3.1 per cent to $83.50.

In the energy sector Hess, up 1.1 per cent at $92.15, increased fourth quarter earnings 42 per cent to $510m while revenues rose 32 per cent to $9.5bn.

Kellogg (NYSE:K)'s saw quarterly earnings slip from $182m to $176m, in part due to higher energy and materials costs. The breakfast cereal maker's results were in line with expectations and the shares rose 0.3 per cent to $49.75.

US stocks retreat as US growth slows

Wall Street stocks retreated on Wednesday after economic growth rose far less than expected at the end of last year, renewing fears the US economy is entering a recession.

While there was some good news from the US private sector jobs market, stocks lacked real momentum ahead of the Federal Reserve Open Market Committee's decision on interest rates, due later in the afternoon.

At midday the S&P 500 was down 0.3 per cent at 1,358.07, the Nasdaq Composite fell 0.2 per cent to 2,352.57 while the Dow Jones Industrial Average slipped 0.3 per cent to 12,447.30.

Equities drifted after a report showed the economy slowed sharply to a 0.6 per cent growth rate in the last three months of 2007, only half the rate forecast by economists and down from 4.9 per cent in the previous quarter. For all of 2007, the economy expanded at its slowest pace since 2002, growing just 2.2 per cent.

The news was a blow for those equity investors who have tentatively become more optimistic in recent days about growth prospects for US companies.

"The new leg down in housing, along with the continuation of the retrenching trend by the US consumer, is weighing on growth," said TJ Marta, strategist at RBC Capital Markets. "The Fed has a growth problem and a financial crisis to deal with."

However, a snapshot of private sector employment painted a contrasting picture, as a projection of hiring in January by ADP showed a rise of 130,000 jobs.

Although ADP numbers can be volatile, economists now expect the closely watched January employment report, due on Friday, to show a gain of 65,000, up from 18,000 in December.

"There are two possible interpretations of the job situation," said Mr Marta. "Either we are going to experience a 'joblessness' stall in growth, just as we experienced a jobless recovery, or the economy remains somewhat insulated from the continuing credit crisis - at least for now."

Financial stocks came under pressure after UBS, the Swiss bank, took $14bn in writedowns for the fourth quarter, $4bn more than previously advised. The writedown included a $2bn hit which analysts speculated was linked to troubled monoline bond insurers.

Oppenheimer analyst Meredith Whitney said banks may have to write down up to $70bn if bond insurers lose their AAA credit ratings, with losses concentrated at Citigroup, Merrill Lynch and UBS.

"This is significant, as many investors are of the belief that the fourth quarter was a 'kitchen sink' for all outstanding capital hits this credit cycle," Ms Whitney said. "When it becomes clear [as we think it will] that more charges are on the horizon, we believe the market will take another turn for the worse."

Citi fell 2 per cent to $27.35 while Merrill gave up only 1.1 per cent to $56.86 after its chief executive, John Thain, said the bank's net exposure to monoline insurers was $3.5bn.

Earnings news was led by Yahoo, which reported a 23 per cent decline in fourth quarter profit and gave a cautious outlook for 2008. The shares slumped 8.6 per per cent to $19.03 after several analysts downgraded the stock.

The recent rebound in US homebuilder stocks came to an end after Centex, the number four US firm, saw its fiscal third-quarter loss widen to $975.2m, much worse than analysts had feared. The shares fell 6.6 per cent to $27.10. Pulte Homes, down 6.3 per cent at $13.91, was due with its earnings late on Wednesday.

Merck, 4.6 per cent weaker at $45.80, fell to a $1.63bn loss after it took a big charge to cover litigation costs.

Also declaring a big charge was United Parcel Services, which took a $6.1bn pension-related hit. However, adjusted net income of $1.2bn came in line with expectations and the shares climbed 0.9 per cent to $71.58.

Boeing was the best performing Dow component after it increased fourth quarter earnings by 4 per cent and raised its 2008 profit outlook, helping the shares to gain 3.1 per cent to $83.50.

Kellogg's saw quarterly earnings slip from $182m to $176m, in part due to higher energy and materials costs. The breakfast cereal maker's results were in line with expectations and the shares rose 0.3 per cent to $49.75.

Banking woes weigh on Europe's shares

European stocks lost steam on Wednesday ahead of a US interest rate decision with banks and oil stocks leading the slide after Swiss investment banking giant UBS (NYSE:UBS) shocked investors with a $4bn writedown.

The surprise announcement, coming ahead of the Swiss bank's annual results on February 14, comes after a $10bn writedown on its troubled subprime mortgage portfolio last month. Its shares lost 1.6 per cent to SFr46.06

The news weighed heavily on troubled financial stocks with BNP Paribas down 1.1 per cent to EU66.83 and France's Natixis down 0.6 per cent to EU11.66.

The FTSE Eurofirst 300 closed 0.7 per cent lower at 1,329.30, while in Frankfurt the Xetra Dax shed 0.3 per cent to 6,875.35 and in Paris the CAC 40 fell 1.4 per cent to 4,873.57.

Many investors remained on the sidelines ahead of the US Federal Reserve's interest rate decision expected late in the day, with the market already pricing a 50 basis point cut.

The energy sector was in the spotlight with Iberdrola surging 3.6 per cent to EU9.56 after the FT reported that France's EDF and ACS, Spain's biggest construction company were in bid talks for the Spanish energy giant.

Galp Energia tumbled 4 per cent to EU15.15 after Iberdrola said it will sell its entire 4 per cent stake in the Portuguese oil and gas group. The placement is expected to be made at EU15 to EU15.40 per share, traders said.

Also in Portugal EDP Energias de Portugal (NYSE:EDP)failed to extend Tuesday's gains, closing 0.4 per cent lower at EU4.28. Its shares make headway earlier in the day ahead of the announcement of expected details for a listing of its renewables division and renewed hope for more M&A in the energy sector.

FTSE lower as financial stocks fall

The FTSE 100 gave up some of the previous day's gains as dealers looked ahead to the US interest rate decision later on Wednesday.

Banks came under selling pressure on news of a further $4bn in subprime-related writedowns at UBS (NYSE:UBS) and negative comments from Citigroup (NYSE:C) weighed on Royal Bank of Scotland and Barclays (NYSE:BCS).

After closing almost 100 points higher on Tuesday, the main index ended Wednesday's session 45.6 points, or 0.8 per cent, lower at 5,837.3.

The US Federal Reserve is set to deliver its rate decision after the close of trade in London. While most strategists expect a further 50 basis points cut in rates - which would take the Federal funds rate down to 3 per cent - anything less would come as a blow to equity markets.

In opening New York trade, the Dow Jones Industrial average lost 0.3 per cent to 12,438.4, a fall of 37 points.

US investors were mulling over news of weaker than expected US economic growth in the fourth quarter of 2007. Gross domestic product rose 0.6 per cent, down from a 4.9 per cent rate in the third quarter. Economists had expected a 1.2 per cent rise in growth during the fourth quarter.

UK banks were lower as Citigroup reiterated its "sell" recommendation on RBS and Barclays. Citi warned both looked vulnerable to a recession and warned their levels of leverage were significantly higher than in the late 1980s.

Tom Ratyner, analyst, cut his target on RBS (down 3.6 per cent to 387½p) from 400p to 350p and on Barclays (down 2.6 per cent to 482½p) from 450p to 400p.

He wrote: "Barclays and RBS appear more vulnerable than in the last cycle. The key difference is the increased leverage, which arguably leaves balance sheets less able to withstand a sharp increase in impairment charges. Dividends also appear less secure, with free cash flow under pressure and payouts representing a significant part of each bank's capital base."

News that Alistair Darling, UK chancellor, is drawing up plans to require banks to put billions of pounds into a revamped scheme to compensate savers in the event of the collapse of a major lender added to the downside.

As uncertainty continued to surround the future of stricken lender Northern Rock, its shares were 2.5 per cent lower at 109¼p.

Standard Life lost 1.8 per cent to 224p as better-than-expected new business figures from the life assurer was overshadowed by a warning of challenging trading conditions ahead and the resignation of Trevor Matthews, head of its UK retail division.

Mr Matthews is joining Friends Provident, which lost 4.4 per cent to 155.2p, reflecting the view that the appointment would bolster Friends' attempts to remain independent.

Shire, the drugs group, continued its recent weakness, down 3.9 per cent to 899p, after a downgrade from Goldman Sachs.

Of the risers, Rio Tinto was up 3.2 per cent to £48.19 amid reports that BHP Billiton (NYSE:BHP) was considering significantly increasing its offer for its rival. BHP slipped 0.2 per cent to £14.46.

Next fell 1.3 per cent to £13.56 after rising earlier in the session when Citigroup upgraded its rating on the retailer from "hold" to "buy". The bank said Next was able to repurchase a further £300m of stock as part of its share buy-back programme without risk to its BBB credit rating.

Cost cuts push Lenovo profit up 198 pct.

BEIJING - Lenovo Group, the world's No. 4 personal computer maker, said Thursday that profit in its third fiscal quarter rose 198 percent and forecast strong sales this year despite a possible U.S. economic slowdown.

Driven by strong sales and aggressive cost-cutting, profit for the three months that ended Dec. 31 was $172 million, or $1.93 per share, on revenue of $4.6 billion, Beijing-based Lenovo said. That was below the average $253.5 million expected by analysts polled by Dow Jones Newswires.

In 2008, Lenovo expects double-digit sales growth despite a possible U.S. slowdown, due to its bigger presence in faster-growing markets such as China and India, Chief Executive William J. Amelio said.

"We have such a good base in other geographies, we have a great way to insulate ourselves from some of the downturn that may occur in the United States," Amelio said in a conference call with analysts.

Also this year, Lenovo will stop using the IBM name as it tries to establish itself as a global brand, Amelio said. Lenovo has had rights to the name since acquiring IBM Corp.'s PC unit in 2006 but has been selling a growing number of products under its own brand.

Lenovo's home China market was its biggest revenue source for the quarter, but sales in the U.S., Europe and elsewhere in Asia also grew.

Sales in China rose 16 percent to $1.8 billion, or 40 percent of the total, the company said.

Lenovo is facing growing competition in its home market from industry leader Dell Inc., which is marketing a low-cost PC designed specifically for China's huge but poor rural market.

Revenue in the United States and the rest of the Americas rose 15 percent to $1.2 billion, the company said. Sales to Europe, Africa and the Middle East rose 24 percent to $1.1 billion.

Notebooks were the strongest part of Lenovo's portfolio, with quarterly sales up 38 percent to $2.6 billion, or 56 percent of total sales, the company said.

Lenovo achieved "aggressive cost savings," slashing production expenses per unit by 13 percent in the third quarter as part of a long-term effort to streamline production, Amelio said.

The IBM PC unit was a premium, high-cost manufacturer, but Lenovo has been pushing to bring expenses in line with more efficient rivals such as Dell. Lenovo has moved U.S.-based engineering jobs to China and made other cuts.

Starbucks axes sandwiches as part of fix

SEATTLE - The scent of ham, eggs, cheese and bacon will soon stop competing with the aroma of coffee in Starbucks stores as hot breakfast sandwiches become the first casualty of the company's battle to win back customers.

The sandwiches, which will disappear by this fall, boost a typical store's annual revenue by $35,000, so pulling them off the menu will cost at first. Chairman and Chief Executive Howard Schultz said that proves the company isn't letting the soft economy distract it from committing to big changes that will pay off over the long haul.

"The decision and the courage it takes to remove something when there's pressure on the business — like the sandwiches — is emblematic that we're going to build for the long-term and get back to the roots and the core of our heritage, which is the leading roaster of specialty coffee in the world," Schultz told The Associated Press on Wednesday after the company released its financial results for the first fiscal quarter.

Starbucks Corp.'s profit rose by less than 2 percent, as U.S. customers grappling with a soft economy lined up in smaller numbers for a second quarter in a row.

Sales at stores open at least 13 months, a key measure of a retailer's health, fell 1 percent in the U.S. as traffic declined 3 percent — the second consecutive quarter. Stronger growth overseas helped boost global comparable-store sales a modest 1 percent, compared with 6 percent in first quarter 2007.

For the 13 weeks ended Dec. 30, Starbucks posted net earnings of $208.1 million, or 28 cents per share, up from $205 million, or 26 cents a share, during the same period a year ago.

Analysts polled by Thomson Financial were expecting a profit of 27 cents per share.

Revenue for the quarter was $2.77 billion, in line with analysts' estimate and up from $2.36 billion a year ago.

Starbucks shares fell 75 cents, or 3.8 percent, to close at $19.22 Wednesday, then fell another 28 cents in extended trading after the results were released. The company's stock is down about 50 percent since late 2006, when it was trading close to $40 a share.

Sharon Zackfia, an analyst with investment firm William Blair & Co., said the lackluster quarter came as no surprise. "I think an investor would have had to be living in a cave not to know that the December quarter was bad for the majority of retailers," she said.

As part of a broad push to revitalize its business, the company said it plans to open about 425 fewer domestic stores and 75 more overseas than previously planned, for a global total of 2,150 new stores. Starbucks has more than 15,700 worldwide.

Schultz said the slowdown in U.S. growth will allow the company to make better use of its time, money and staff and could reduce "cannibalization" — easing pressure some stores experience when a new one opens nearby.

Analysts have been eager for specifics on Schultz's turnaround plan for Starbucks, which has struggled with its own rapid growth, high dairy costs, declining traffic in U.S. stores and competition from cheaper rivals.

But Schultz said the company won't release details, including "five bold innovations," until its annual shareholders meeting in Seattle on March 19.

Starbucks has been testing $1 extra-small cups of drip coffee with free refills in some Seattle stores, which Schultz said it's doing to respond to the economic pressures many of its customers are facing. Some analysts say it could draw in new customers and drive up sales if they decide to upgrade to a $4 mocha or other high-margin espresso-based drinks.

By 2009, Starbucks said it aims to open more stores overseas than domestically for the first time — more than 1,000 stores in its international markets, where Schultz has said he sees enormous potential for growth, and fewer than 1,000 in the U.S.

The company said it expects low double-digit earnings-per-share growth this fiscal year because of the company's efforts to improve operations and "continued macroeconomic weakness."

That could drag earnings below the company's previous target of $1.02 to $1.08 per share. The company earned 87 cents a share last year, and it did not release an updated target for fiscal 2008.

Amazon expects sales to rise in 2008

SEATTLE - This year isn't looking quite as sweet for Amazon.com shareholders as 2007. Despite a possible recession in the U.S. economy, the Web retailer said it expects sales to rise briskly again in 2008. But the gains won't translate as readily to bottom-line growth.

"A lot of old Amazon bears are going to be growling," said Tim Boyd, an analyst at American Technology Research.

And growl they are. Shares of Amazon.com Inc. plunged $8.92, or 12 percent, to $65.29 in extended trading Wednesday.

Amazon had revealed after the closing bell that its holiday-quarter profit more than doubled on revenue that jumped 42 percent. But while it forecast stellar sales growth in the coming year and executives shrugged off concerns about the economy, its operating income guidance fell short of what Wall Street was expecting.

Boyd said international spending could carry Amazon through a slowdown in U.S. consumer spending. However, based on the company's lackluster profit guidance, the analyst said Amazon appears poised to spend more and pocket less as it expands and fights off competition.

Some of the retailer's cash may be spent fending off eBay Inc., a competitor for Amazon's third-party seller business, Boyd said.

He also said Amazon's digital music business may be losing money in this early phase. Amazon would not say how its MP3 store performed financially.

In 2005 and 2006, investors and analysts were similarly unhappy with near-term results as Amazon spent heavily on technology and content. When spending slowed and margins rose last year, the dot-com returned to favor and shares climbed. Now, said Boyd, it seems Amazon has returned to investment mode.

Amazon matched Wall Street's expectations Wednesday when it reported its fourth-quarter profit more than doubled to $207 million, or 48 cents per share, from $98 million, or 23 cents per share, in the same period last year.

Strong domestic and international sales in all categories drove revenue up 42 percent to $5.67 billion, topping analysts' average prediction of $5.37 billion in revenue, according to a Thomson Financial poll.

Changes in foreign exchange rates lifted sales by $195 million.

"This company has just done an unbelievable job," Boyd said. "They're obviously just eating eBay's lunch. They're eating every one of their competitors' lunches."

Amazon's gross margin was lower than in the year-ago quarter. In a conference call, Chief Financial Officer Tom Szkutak said the company's entrance into new product categories eats into profits. That's because Amazon sells at competitive prices even before it has amassed the sales volume and business relationships necessary to command lower wholesale prices.

The retailer's margins also take a hit as the number of people who pay up front for a year of free express shipping rises, as it did in 2007, and as the mix of products sold on the site shifts.

For all of 2007, Amazon said it earned $476 million, or $1.12 per share, a 150 percent increase over the previous year. Annual sales grew 39 percent to $14.84 billion.

The midpoint of Amazon's operating profit outlook for the quarter and the year fell short of what Wall Street is currently looking for, even as sales forecasts topped analysts' view.

For the current quarter, Amazon forecast between $3.95 billion and $4.15 billion in sales. For the full year, it predicted revenue of $18.75 billion to $19.75 billion.

KCom admits earnings weakness

KCom has admitted it is coming under increasing pressure from investors to crystalise value in its struggling managed IT services division after the group guided market expectations for the underperforming unit to the low end of its range.

The telecommunications group, formerly known as Kingston Communications, said continued depressed spending in the financial services market had forced it to guide earnings before interest, tax, depreciation and amortisation (ebitda) margin forecasts for the full year for its Integration and Managed Services businesses (I&MS) to the low end of its 3 to 5 per cent range.

Malcolm Fallen, chief executive, said he was aware that KCom "has got to deliver more from the investment made" in I&MS.

"Taking our numbers to 1 per cent implies a circa 10 per cent cut in our group forecasts," Dan Gardiner, analyst at Landsbanki Securities, said. "We believe there is a story here but believe ... that a break-up is increasingly the most realistic way of delivering shareholder value," he added.

The shares fell 2½p to 44p as Investec, the group's broker, cut full-year earnings per share forecasts by 11.5 per cent to 4.5p and moved its rating to "hold".

Mr Fallen responded that I&MS "looks right for the market as we see fit. But as a business we will keep a sharp eye to create value".

KCom remained confident that its target earnings margins of 5 to 8 per cent in 2008-09 for the unit was achievable. It said group trading was in line with market expectations, underpinned by its telecoms and internet business, which accounts for 80 per cent of ebitda.

FT Comment

* With the shares close to a five-year low, management might come under further pressure from shareholders to deliver value through a sale. The frustration is evident from the valuation, which at 9.1 times earnings is relatively cheap. Investors still have two-thirds of the full dividend payment to come. With the market currently ascribing virtually no value to I&MS, investors are getting any upside virtually for free.

Pulte Homes 4Q loss widens amid slowdown

DETROIT - Pulte Homes Inc. on Wednesday said its fourth-quarter loss widened dramatically as the housing market worsened.

In the three months ended Dec. 31, the home builders net loss expanded to $874.7 million, or $3.46 per share, from a loss of $8.4 million, or 3 cents per share, during the same period a year earlier. The report came after the close of trading Wednesday, when shares fell $1.28, or 8.6 percent, to $13.57.

The most recent quarter included $543.3 million of charges for inventory, land and goodwill impairment.

Analysts, on average, expected the company to report a loss of 50 cents per share according to Thomson Financial, although the range of estimates was broad because some estimates included expected charges while others did not.

Revenue for the Bloomfield Hills, Mich.-based company fell to $2.9 billion from $4.39 billion.

The earnings report comes two days after the Commerce Department reported that sales of new homes dropped by 26.4 percent last year to 774,000. That marked the worst sales year on record, surpassing the old mark of a 23.1 percent plunge in 1980.

"The challenging market conditions that plagued the homebuilding industry for the first nine months of 2007 worsened in the fourth quarter," Pulte's president and chief executive, Richard J. Dugas Jr., said in a statement. "Levels of new and existing home inventory remain elevated, buyer demand for new homes continues to be weak, and mortgage availability is still a problem for many prospective homebuyers."

For the full year, the company posted a loss of $2.26 billion, or $8.94 per share, compared with a gain of $687.5 million, or $2.66 per share, in 2006. Revenue sank to $9.26 billion from $14.27 billion.

The company projected it will lose 15 cents to 30 cents per share in the first quarter, and said it expects to end 2008 with $2 billion to $2.2 billion in cash. Analysts expect a first-quarter loss of 41 cents per share.

Analyst Daniel Oppenheim of Banc of America Securities said in a research note that he expects the new homes sales rate to drop even more during parts of 2008. But he said a turnaround could be ahead.

"Better affordability, driven by lower home prices and mortgage rates, will likely help spur sales activity in coming months," Oppenheim wrote.

However, an analyst for The Motley Fool said it could be too early for investors to jump back into housing stocks.

"Homebuilders like Pulte Homes have seen renewed interest in their beaten-down stocks lately," Dave Mock wrote Wednesday. "But there's still an extensive supply of new homes that won't be picked up by consumer demand anytime soon. The purchasing power of the average American is expected to go into a prolonged decline."

The Federal Reserve issued a warning for the housing sector Wednesday as it made a half-point cut in its key interest rate to 3 percent.

"Credit has tightened further for some businesses and households," the Fed said. "Moreover, recent information indicates a deepening of the housing contraction as well as some softening in labor markets."

Digital revenue drives Kodak profit up

ROCHESTER, N.Y. - The final cost of Eastman Kodak Co.'s four-year overhaul is in: $3.4 billion to close aged factories and eliminate 29,000 jobs as it raced to convert the bulk of its century-old business from silver-halide film to digital photography.

Kodak said Wednesday it finished 2007 with a surge in its fourth-quarter profit, propelled chiefly by a bump in sales of digital cameras, retail kiosks and patented technology as well as a promising launch in the lucrative inkjet printer market.

Earnings climbed to $215 million, or 71 cents a share, in the October-December quarter, up from $16 million, or 6 cents a share, a year earlier.

Sales rose 4 percent to $3.22 billion from $3.11 billion a year earlier.

Excluding one-time items of $28 million, or 9 cents a share, operating profits came to $120 million, or 40 cents a share. That was below the 52 cents a share forecast by analysts polled by Thomson Financial. But the sales topped analysts' consensus estimate of $3.1 billion.

Kodak shares, which had skidded to a 30-year low of $16.66 in mid-January, lost 70 cents, or 3.4 percent, to $19.75 Wednesday.

"The large, expensive and difficult corporate restructuring is over," Chief Executive Antonio Perez said in a conference call with analysts. "We have now established a sustainable business model for the decline in (our) traditional business and our digital businesses are growing profitably."

Digital sales rose $288 million, or 15 percent, to $2.26 billion in the quarter, while revenue from film, paper and other traditional, chemical-based products also fell by 15 percent to $951 million from $1.12 billion.

Digital profits edged up to $146 million from $141 million while earnings from film products slumped 52 percent to $40 million from $83 million.

After accumulating more than $2 billion in net losses over three years, Kodak posted net profits in four of the last five quarters.

Shifting from a shrinking film business into the highly competitive digital arena has proved costly. Kodak chopped its work force from 64,000 to 26,900, a level not reached since the 1930s Depression era. Its payroll peaked at 145,300 in 1988.

Among the 37,100 jobs that vanished in the last four years were 8,100 tied to a health-imaging unit that Kodak sold to Canadian investment firm Onex Corp. for $2.35 billion last April.

The transformation, Kodak said in a final accounting Wednesday, resulted in $3.4 billion in charges for layoffs, factory shutdowns, asset impairments and other costs.

Citigroup analyst Matthew Troy now anticipates a hiatus of six to nine months "where the dust settles a bit" before Kodak begins to trim even more jobs and slim down its manufacturing operations further.

"Nothing like the magnitude we have seen to date, but they're still faced with a very ugly, aggressively difficult uphill climb," Troy said.

Kodak has high hopes that its inkjet printers will help replace film as a high-margin earner and said it sold 520,000 home printers in 2007 — exceeding its target of a half-million unit sales. It is aiming for $1 billion in sales by 2010 in a $16 billion market dominated by Hewlett-Packard Co.

"I will be very surprised if they don't sell well over 2 million this year," said Ulysses Yannas, a broker with Buckman, Buckman & Reid in New York.

While "there were pluses and minuses in the quarter ... there are more than enough promising signs" that Kodak is finding its way in the digital arena, Yannas said. "They'll be around for a while!" he said.

Revenues from consumer digital imaging products rose 8 percent in the quarter to $1.73 billion. Graphic communications revenues rose 7 percent to $998 million, propelled by improved sales of digital plates and color printing presses.

But film products revenue dipped 17 percent to $463 million, dragged down by a 29 percent plunge in sales of rolls of film and both reloadable and one-time-use cameras. Motion-picture film sales, partly hurt by a 3-month-old writers strike in Hollywood, fell 7 percent.

In all of 2007, Kodak earned $676 million, or $2.35 a share, compared with a loss of $601 million, or $2.09 a share, in 2006. Sales fell to $10.3 billion from $10.57 billion.

Boeing rides plane sales to higher net

CHICAGO - Boeing Co. posted better-than-expected fourth-quarter earnings Wednesday on the strength of still-booming commercial airplane sales and improved productivity, easing investor concerns for now about the possibility of another setback for its thrice-delayed 787 Dreamliner.

The No. 2 commercial jet maker maintained the status quo on the much-awaited 787, affirming the revised schedule it announced Jan. 16 month which calls for the plane's first flight in June and first customer delivery in early 2009 but providing no more specifics.

What it delivered instead was evidence of strong momentum in the commercial airplane business and optimism that the surge of orders will continue, regardless of a potential U.S. recession that could hurt its domestic airline customers.

The company's 4 percent profit rise and prediction of "strong" earnings growth next year satisfied Wall Street despite a slight reduction in its estimates for 2008 revenue and airplane deliveries due to the 787 glitches. Boeing shares climbed $1.91, or 2.4 percent, to close at $82.87, having slid about 23 percent since early October.

"It was a strong quarter," said JSA Research analyst Paul Nisbet. "They've been just knocking the cover off the ball as far as orders, with 520 for the quarter, and with a (companywide) backlog of $327 billion. Those are just unheard-of numbers."

But Boeing's fortunes will largely rise or fall on the success of the 787, the world's first large commercial airplane made mostly of carbon-fiber composites. That program's status won't be clear until after the company succeeds in "powering up" or turning on the first aircraft and its 92 electronic systems, an event now expected in April.

Oppenheimer & Co. analyst Myles Walton said the absence of a 787 production forecast Wednesday "does nothing to help alleviate the overhang currently hanging over the stock like a gloomy cloud."

Boeing said it continues to address problems in assembling the first 787s, consisting of its suppliers' failure to complete parts on time and slow progress on the assembly line.

Despite those problems and the threat of a U.S. recession that could hurt its airline customers, CEO Jim McNerney was bullish about Boeing's near-term future and noted that U.S. carriers account for only 11 percent of its airplane backlog.

"Notwithstanding some recent events and market volatility, we continue to forecast an extended commercial aerospace cycle driven by strong economic growth and solid traffic demand in much of the world," he said on a conference call. "Even if we encounter a more significant economic downturn in the future, I believe the industry is better positioned than in past cycles and Boeing is even better positioned within the industry to weather any storms."

Boeing's net income for the last three months of 2007 was $1.03 billion, or $1.36 per share, up from $989 million, or $1.29 per share, in the fourth quarter of 2006. That was 4 cents per share better than the consensus estimate of analysts polled by Thomson Financial.

Revenue was virtually unchanged at $17.5 billion.

The company increased its guidance for 2008 earnings per share to between $5.70 and $5.85 from an earlier range of $5.55 to $5.75, still short of the Wall Street consensus estimate of $5.95. It also lowered its estimate of 2008 revenue by $500 million, to a range of $67 billion to $68 billion, due to the 787 delay.

Boeing's continued resurgence was led by its Seattle-based commercial airplane manufacturing business, where operating earnings increased 46 percent to $973 million and revenue jumped 17 percent to $8.9 billion. Deliveries rose 9 percent to 112 and the record backlog grew 46 percent to $255 billion, reflecting strong demand for the 787 and other planes.

The Chicago-based company closed the gap on Airbus in aircraft deliveries but still ended the year trailing its European rival for a fifth straight year, 453 to 441, while outpacing it in orders. It scaled back its estimate of 2008 deliveries by about five airplanes to between 475 and 480 to reflect the rescheduling of initial 787 deliveries into 2009.

The St. Louis-based defense and space business saw earnings from operations decline 5 percent to $978 million and revenue fall 14 percent to $8.6 billion. The revenue drop was largely because results from a year earlier included two months of revenue from its Delta IV family of rockets, now part of the United Launch Alliance joint venture with Lockheed Martin Corp.

Full-year earnings were $4.1 billion, or $5.28 per share, up 84 percent from $2.2 billion, or $2.85 per share, in 2006. Revenue climbed 8 percent to $66.4 billion, with the commercial airplane business overtaking the defense unit in providing 50.3 percent of the total.

Merck posts loss on Vioxx charges, shares fall

NEW YORK (Reuters) - Merck and Co (MRK.N) reported a fourth-quarter loss on Wednesday after legal settlement costs and sales that disappointed investors, sending shares down almost 3 percent.

Although the earnings before the charges beat Wall Street forecasts, analysts said cost cuts and lower taxes were more responsible for the better-than-expected results. Of particular concern was the performance of Gardasil, its vaccine to prevent cervical cancer.

Merck's sales rose 3 percent to $6.24 billion, compared with the Reuters Estimates forecast of $6.28 billion, but would have fallen 1 percent if not favorable foreign exchange factors.

"It looks to me that the (earnings) beat is more a cost-containment issue than a top-line beat," said Damien Conover, an analyst at Morningstar.

Analysts said the most favorable aspect of Merck's earnings report was that Merck did not cut its 2008 profit forecast despite mixed trial results announced earlier this month for cholesterol fighter Vytorin. Merck co-markets the drug with Schering-Plough Corp (SGP.N).

The so-called Enhance trial showed Vytorin did not reduce fatty plaque in arteries, even though it sharply reduced levels of "bad" LDL cholesterol. The results sparked questions about whether the cost of Vytorin and its sister drug Zetia were justified.

Combined quarterly sales of Vytorin and Zetia grew 34 percent to $1.5 billion, and reached $5.2 billion for the full year.

Merck shares have declined some 20 percent since results of the Vytorin trial became public, after having been delayed since the trial concluded in April 2006. Vytorin combines Zetia with simvastatin, a relatively inexpensive generic cholesterol drug.

Merck said it has become aware of or has been served with about 50 civil class-action lawsuits since mid-January alleging consumer fraud in connection with the promotion of Vytorin and Zetia.

Vytorin and Zetia prescriptions have fallen since the Enhance trial results, even as Merck girds for U.S. generic competition beginning next week for its blockbuster osteoporosis drug Fosamax.

Deutsche Bank analyst Barbara Ryan said Vytorin sales could fall 10 percent this year from what she termed overly negative interpretations of the trial data, but Ryan predicted surprisingly high sales of other Merck products would offset any Vytorin declines.

Merck said it lost $1.63 billion, or 75 cents per share, compared with a profit of $474 million, or 22 cents per share, in the year-earlier period when Merck took two special charges.

Excluding special items, Merck said it earned 80 cents per share. Analysts, on average, expected 73 cents per share, according to Reuters Estimates.

Special items included a $4.85 billion charge related to a legal settlement for its withdrawn Vioxx arthritis drug and combined charges of $945 million related to restructuring and government civil investigations.

The Vioxx settlement offer, announced in November, calls for $4 billion to be divided among former users of Vioxx who said the drug caused them to have heart attacks, and $850 million for those who suffered strokes. More than 57,000 plaintiffs have registered to participate in the settlement.

Gardasil posted $339 million in sales and helped drive Merck's total revenue from vaccines to $1.1 billion.

But Gardasil sales were well below predictions, including the $451 million forecast of Morgan Stanley analyst Jami Rubin. She said "seasonality issues" had crimped the product's sales growth and maintained her "overweight" rating on the drugmaker.

Merck shares closed down $1.32, or 2.75 percent, at $46.69 on the New York Stock Exchange. The American Stock Exchange Pharmaceutical Index (.DRG) declined 1.5 percent.

Also on Wednesday, Swiss drugmaker Roche Holding AG (ROG.VX) on Wednesday beat forecasts with a 25 percent rise in 2007 net profit but gave a cautious outlook, saying it would spend more on research this year as it accelerates drug development.

Starbucks cautious on 2008, cuts store openings

LOS ANGELES (Reuters) - Starbucks Corp (SBUX.O) on Wednesday said it is slowing store openings in the U.S. as returning Chief Executive Howard Schultz warned that the American consumer is likely facing a recession, and its shares fell 2.5 percent.

The coffee chain has been battered in recent months by slower consumer spending, higher milk prices and concerns it may have saturated the U.S. market.

"There's a macroeconomic headwind that we're all facing that strongly suggests that the consumer is in a recession," Schultz said in a telephone interview.

Starbucks cut its forecast for new U.S. store openings to 1,175 for fiscal 2008, from 1,600. This would include the closing of 100 underperforming stores in the U.S. Meanwhile, it plans to increase international store openings by 75 outlets to 975.

The coffee seller said it now expects earnings per share in fiscal 2008 to grow in the low double-digits by percentage. Starbucks' previous forecast was for earnings per share of between $1.02 and $1.05 in fiscal 2008, which would mark a 17 to 21 percent increase in earnings per share.

"The guidance looks conservative. That doesn't run counter to expectations. The expectation was that the guidance would come down a bit," said Dan Geiman, analyst at McAdams Wright Ragen.

Starbucks had fiscal first-quarter net income of $208.1 million, or 28 cents per share, compared with net income of $205.0 million, or 26 cents per share, in the year-ago quarter ended December. Consolidated net revenue rose 17 percent to $2.8 billion.

The result topped analysts' average call for a net profit of 27 cents per share and revenue of $2.76 billion, according to Reuters Estimates. It landed as Seattle-based Starbucks faces new competition from fast-food giant McDonald's Corp (MCD.N), which is expanding its selection of coffee-based drinks.

The Seattle-based company said total quarterly same-store sales grew 1 percent, while U.S. same-store sales fell 1 percent, hurt by a decline in traffic. International same store sales were up 5 percent.

"By reducing the number of openings, we expect to optimize our resources and potentially reduce cannibalization of our existing stores," said Schultz said in a statement.

"They're focusing on international operations, which is what we really want to see with them. Their growth opportunity is really overseas," said James Walsh, analyst, Coldstream Capital Management in Bellevue, Washington.

The company brought back founder and Chairman Howard Schultz as chief executive earlier this month and said it would pare aggressive domestic expansion plans, close underperforming U.S. outlets, improve performance at existing stores and speed up international growth.

Schultz, who was chief executive from 1987 to 2000, bought Starbucks Coffee Company in 1987 and transformed the small Seattle outfit into one of the world's most recognized brands. It now has more than 15,000 locations, including more than 10,000 in the United States.

Shares in Starbucks have fallen more than 40 percent over the last 12 months, wiping out roughly $13 billion in market value. In after-hours trade, Starbucks shares fell to $18.75 after closing Nasdaq trade at $19.22.

Vioxx charge leads to huge Q4 Merck loss

TRENTON, N.J. - Merck & Co. posted a $1.63 billion fourth-quarter loss Wednesday as a whopping charge for its Vioxx litigation settlement dragged down results.

The maker of allergy and asthma pill Singulair and osteoporosis treatment Fosamax said the net loss amounted to 75 cents per share, compared with a year-ago profit of 22 cents, or $473.9 million.

Merck's fourth-quarter revenues were below analysts' expectations and the drug maker's shares closed Wedneday down $1.32, or 2.75 percent, to $46.69.

The fourth-quarter results included charges totaling $5.8 billion. Those were partly offset by a $1.9 billion reduction in taxes and a $455 million gain from insurance arbitration over coverage for Vioxx litigation.

The charges included $4.85 billion for Merck's pending settlement to end the bulk of lawsuits over Vioxx, the painkiller it pulled from the market in September 2004 due to increased risk of heart attack and stroke.

Merck said as of Jan. 17, more than 57,000 plaintiffs — out of about 60,500 — had registered for, but not yet committed to, the settlement.

Other charges included $274 million for ongoing restructuring and $671 million for the anticipated resolution of federal and state civil probes into past marketing practices.

Excluding the one-time charges, net income would have been 80 cents per share, 6 cents more than forecast by analysts surveyed by Thomson Financial.

But analysts had forecast revenues of $6.3 billion. Merck delivered only $6.24 billion, with revenues up 3 percent from $6.04 billion a year ago.

"The upside was primarily driven by lower costs and a lower tax rate," analyst James Kelly of Goldman Sachs & Co. wrote in a research report.

Merck said sales of cholesterol drugs Vytorin and Zetia, sold under a joint venture with Schering-Plough Corp., totaled $1.5 billion in the fourth quarter, up 34 percent from a year earlier, and $5.2 billion in 2007. Merck recorded $538 million as fourth-quarter equity income.

Merck said it is monitoring the "potential financial impact" of recent publicity about a study showing Vytorin was no more effective at limiting plaque buildup than one of its components, Zocor, now available as an inexpensive generic drug, although Vytorin did lower bad cholesterol levels a bit more.

The Whitehouse Station-based company said it knows of about 50 potential class action suits alleging consumer fraud in the marketing of Vytorin and Zetia.

Since Merck and Schering-Plough Corp. disclosed partial results of the Vytorin study on Jan. 14, sales reps have visited about 95 percent of top specialists and 90 percent of primary care doctors to discuss Vytorin and Zetia, Chief Executive Officer Richard Clark told analysts during a conference call. He said the company has not yet decided whether it will resume TV ads for the two drugs.

"These guys are going to defend Vytorin just as hard as they defended Vioxx," predicted analyst Steve Brozak of WBB Securities.

Chief Financial Officer Peter Kellogg noted patent expirations in 2006 — for former blockbuster Zocor and enlarged prostate gland treatment Proscar — cut revenues by $2 billion last year.

"Despite having that, we still delivered 10 percent revenue growth" in 2007, counting the joint venture income, he said in an interview.

However, revenue growth in the fourth quarter all came from favorable currency exchange rates and price hikes. Brozak said there wasn't the predictable growth in U.S. sales, so first-quarter revenues should be closely watched.

Merck reiterated it expects full-year 2008 earnings per share of $3.28 to $3.38, excluding one-time items. Those items include an expected gain of about $2.2 billion as AstraZeneca PLC begins to buy out Merck's share in their long-running joint venture.

For the full year, net income totaled $3.28 billion, or $1.49 per share, down 26 percent from $4.43 billion, or $2.03 per share, in 2006. Revenues totaled $24.2 billion, up 7 percent from $22.6 billion in 2006.

Altria sets Philip Morris spinoff date

CHICAGO (Reuters) - Altria Group Inc posted lower quarterly profit on Wednesday due to the spinoff last year of Kraft Foods Inc, and set March 28 as the date for its planned spinoff of Philip Morris International.

Altria also said the U.S. and international companies combined would buy back $20.5 billion of stock. That figure is on the low end of analysts' expectations but could allow the companies to save cash for acquisitions.

"I think they need to keep their powder dry a little bit, especially on the U.S. side, because there's some potential deals down the road," said Gregg Warren, analyst at Morningstar.

Altria Chairman and Chief Executive Louis Camilleri said the two companies plan to pay a combined $33 billion to shareholders in the next two years through share repurchases and dividends, an amount he called "generous" when analysts suggested the payout could have been higher.

"I think we need to retain financial flexibility because there are opportunities out there and we do see opportunities," Camilleri said during a conference call with analysts. He did not elaborate.

The long-anticipated spinoff of Philip Morris International will allow investors a direct play in the faster growing international business. The remaining Altria business generates a large amount of cash but is tied to the declining U.S. cigarette market.

"I absolutely cannot wait to be a shareholder in Philip Morris International directly," said Charles Norton, portfolio manager of the Vice Fund, which held 213,000 Altria shares at the end of 2007. "I think that that's the crown jewel."

Aside from Philip Morris USA, Altria will also retain its 28.6 percent stake in beer maker SABMiller Plc.

Altria plans to repurchase $7.5 billion of its stock over two years, beginning in April, and have an initial annual dividend rate of $1.16 a share. Philip Morris International will have a $13.0 billion share buyback program, expected to begin in early May, and will pay an initial dividend rate of $1.84 a share.

Combined, the dividends are the same as the current Altria rate.

Altria also said it will commence a tender offer and consent solicitation shortly to purchase all its outstanding notes, including $2.6 billion of U.S. dollar-denominated notes and 1.0 billion in euro-denominated notes.

PROFIT DOWN1

Fourth-quarter net profit for Altria was $2.19 billion, or $1.03 per share, down from $2.96 billion, or $1.40 a share, a year earlier.

Excluding one-time items, earnings were $1.00, 2 cents better that analysts' average forecast, according to Reuters Estimates.

Quarterly net revenue rose to $18.23 billion from $16.03 billion a year ago.

Excluding excise taxes, revenue rose 7.4 percent to $9.3 billion, besting the average analyst estimate of $9.19 billion.

Altria has been able to increase prices to help boost its U.S. business, while the weak dollar has helped lift sales in its international operations.

Altria forecast that 2008 earnings from continuing operations would grow 9 percent to 11 percent, excluding Philip Morris International, which will be accounted for as a discontinued operation.

On its own, Philip Morris International sees 2008 earnings from continuing operations growing 12 percent to 14 percent at current exchange rates.

Altria shares were up $1.00 at $77.12 in afternoon trade on the New York Stock Exchange. The stock is up 2 percent this year, compared with a 5.6 percent drop by the Dow Jones industrial average.