February 7, 2008

How to Let the Headhunter Do the Job

Say you've been informed of your status as the leading candidate or you've received an official offer of employment. Your courtship as a potential candidate for the headhunter's client has indeed been a journey.

Finishing this journey depends on trust and faith. You have to trust the headhunter can communicate with the client and reinforce why you are the best candidate for this job. You have to have faith in the headhunter's ability to fulfill your expectations about compensation and other benefits -- and to negotiate in earnest. And yes, you have to have faith you are up to a new assignment.

If you haven't already, you will probably be asked to provide references who can confirm your fitness for the job. Make sure the references you provide know you well and will say good things about your work experience, professionalism, and capacity to tackle a new senior-management role.

Pitfalls of the Counteroffer

If you're in line to become a C-level officer, don't be surprised if the hiring company wants to run a background check and perhaps even asks you to get a medical exam. Given the investment the company is contemplating, these are reasonable requests. You should also brace yourself for what could appear to be a too-good-to-turn-down counteroffer from your current employer, with a fatter salary and a loftier title. But it rarely makes sense to forsake a promising new position under such circumstances.

Accepting a counteroffer, after all, will only buy you and your employer a little extra time to attempt to find common ground about how you can live up to your true potential. Your current employer may also wrongly perceive that you're motivated purely by financial gain, which could change the way it treats you in the future. And should you accept a counteroffer, you can kiss goodbye the relationship you've developed with the headhunter who has taken you this far in the process.

Beware of Family Ties

Much in the same way the headhunter must orchestrate mutual commitment between you and the client hiring organization, you must inform and manage communications with those closest to you about your potential transition. If you've told the headhunter and the client you're willing to relocate, you should really mean it. If you have a trailing spouse, partner, and children, you owe it to those currently pursuing your candidacy for this new leadership role to make sure those family members are on board with the change and are willing to disrupt life as they know it.

More than a few executive headhunters have seen their otherwise flawlessly orchestrated search assignments go by the boards because the candidate never fully won the support of loved ones for relocation during the recruitment process.

It's this potential search-busting dynamic that leads many consultants to simply steer clear of any high-performing executives with a child who is a junior in high school. To the list of relocation nonstarters one might increasingly consider adding an executive's inability to sell the family's home for something near what they paid for it (in which case the executive's net worth could take a real beating if the new employer doesn't cover the loss) or a family's commitment to serve as caretakers for aging (perhaps also ailing) parents or other relatives.

Creating a Win-Win Scenario

As the executive search approaches a successful conclusion, you should plan to be in close and almost constant communication as the headhunter negotiates and otherwise advises the client about the true market value of someone with your credentials.

Often, these discussions lead to the hiring organization agreeing to pay you more than it had anticipated when it first launched the search. That may be because someone of your caliber was deemed unattainable at the outset or because the hiring organization has received advice from a compensation consultant.

You can trust the headhunter to go to bat for you and, in the interest of closing the search to the client's satisfaction, try to create a win-win scenario. After all, he wants to work for the company again, and if your new role requires you to recruit new external talent, the headhunter might also view you as a future client.

Onboarding Feedback

As you prepare to sign an offer of employment, you should press the headhunter and your new employer to include a provision for performance feedback, or what is often referred to as "onboarding" feedback. You will want the employer to commit to gathering feedback from key stakeholders about your performance 90 to 120 days after you start the new job. Such feedback is intended to reveal how your entry into your new employer organization has been perceived, how peers, boss, and subordinates would rate your performance to date, and whether you truly mesh with the organization's culture and internal politics.

That kind of environmental intelligence is critical. It can help you course-correct if need be. Otherwise, it should make you confident others believe you're firing on all cylinders.

After you start work, you can expect tan occasional call from the headhunter to make sure things are going well and to see how you feel about the new job. Take these calls and maintain your relationship with the headhunter. Staying on the headhunters' radar -- and continuing to build your own professional network, for that matter -- is one of the best ways to position yourself for the career and lifestyle you want.

Beefs About Poultry Inspections

Public interest in food inspection spikes whenever illness or death highlights the danger of bacterial contamination. In 2007, major recalls affected ground beef, frozen chicken, and turkey potpies. E. coli and salmonella were identified as culprits. Now, a new flap over inspection protocols is bubbling in Washington.

The Agriculture Dept. wants to reduce the number of federal inspectors in poultry slaughterhouses, moving to a "risk-based" inspection system. The new method aims to shift the inspection focus toward microbial testing from the physical examination of actual chicken carcasses. The agency maintains the effort will modernize the process, helping to allocate resources closer to the threats of food-borne contaminants.

Food safety groups and workers' unions allege such moves -- which could later transfer to beef inspections -- could jeopardize public safety and endanger meat processors. The changes would represent a fundamental shift in how meat is inspected in the U.S., and critics say the risks to consumers could be grave. "The change would produce chaos in the poultry inspection system," says Felicia Nestor, senior policy analyst for Food & Water Watch, an advocacy group based in Washington. "The nation's plant inspectors will have to watch diseased, infected birds going out to the public."

The dispute over the proposed changes -- called the "Public Health Based Slaughter Inspection System" -- is the subject of a two-day meeting in Arlington, Va., that concludes Feb. 6. Food safety groups, the United Food & Commercial Workers (UFCW) union, and the American Federation of Government Employees, which represents federal inspectors, are voicing their concerns about the effects of the proposals.

Representatives from the National Turkey Federation and companies including Pennsylvania-based Keystone Foods are also submitting opinions on the issue, which comes at a time when Americans' appetite for chicken is near an all-time high. Consumption stands at about 87 pounds per person each year, according to the National Chicken Council, a trade association for the chicken industry. If regulators give their approval, the new methods could take effect as early as the fall.

Recalls Fuel Proposed Shift

Currently, the USDA requires that federal inspectors visually examine each bird carcass at the slaughterhouse before the carcass is sent for further processing. This system requires inspectors to examine all sides of the bird as well as its inner cavity, identifying diseases, sores, and contaminants such as fecal matter. The USDA's Food Safety & Inspection Service's proposed change would eliminate that requirement and instead channel more resources into microbial testing while the carcass is being processed.

The proposed changes follow the recall of nearly 22 million lb. of ground beef by Topps Meat in September, 2007, for possible E. coli O157:H7 contamination, which sparked widespread concern about consumer safety and led to Topps' decision to shut down the next month. In October, 2002, Pilgrim's Pride (NYSE:PPC - News) recalled more than 27 million lb. of poultry products believed to be tainted by listeria. Hudson Foods recalled 25 million lb. of frozen beef patties in August, 1997, fearing E. coli contamination. The next year, it was acquired by a subsidiary of meat processor Tyson Foods (NYSE:TSN - News).

The proposed plan, which is currently being tested at a handful of plants, would be implemented first for young chickens in the poultry industry and could potentially be applied to the entire U.S. meat industry. More than 8 million young chickens are slaughtered annually in the U.S., according to the National Agricultural Statistics Service.

Potential Impact of Fewer Inspectors

A Jan. 25 report from the USDA, "Poultry Slaughter Technical Report," argues that a more effective system would reallocate inspection resources from visual examinations at slaughterhouses to microbial testing at the processing level. The new system "will likely focus on establishments and points within the poultry slaughter process at which microbial contamination is likely to occur," according to the report.

The USDA's office of Food Safety & Inspection Service declined to say how many food inspector jobs would be cut if the Public Health Based Slaughter Inspection System were put into effect. When the USDA originally proposed the changes, it estimated annual cost savings of $14 million. A USDA representative was unavailable for comment Feb. 4 and Feb. 5, according to USDA spokeswoman Amanda Eamich.

Critics say reducing the number of federal inspectors at slaughterhouses -- and allowing companies to employ their own inspectors -- would weaken food safety standards. "A company employee could be pressured to skip and destroy birds that visibly look sick as opposed to testing them," says Jackie Nowell, a spokeswoman for UFCW, which represents 170,000 meat and poultry processing workers. Removing federal inspectors from slaughterhouses would also remove maximum line-speed regulations on slaughterhouses. Currently, poultry slaughterhouses process up to 30 birds per minute, but the new regulations could allow them to process up to 200 birds per minute, Nestor says.

Performance Issues

Nowell says change would put consumers at risk and endanger workers: "Higher line speeds would increase many of the injuries workers experience, especially musculoskeletal disorders." During the first day of the public meeting on the Public Health Based Slaughter Inspection System, some industry representatives said the plan needs to be tested further before it is rolled out nationwide.

The poultry industry, on the whole, supports changing the current system. "The government is trying to improve overall performance, and to lessen the number of federal inspectors (in slaughterhouses)," says Richard Lobb, spokesman for the National Chicken Council. "You can have all the federal employees you want looking at a chicken, but they won't be able to see microbiological material."

The Economy: Good News for Dems, Right?

With fears of recession on the rise and voters in state after state now citing the economy as the most important issue in the election, it's hardly an auspicious time to strike out as the Republican Party's new Presidential nominee.

That's because elections that take place when the economy has turned sour historically have not gone well for the candidate representing the incumbent party. Think of Ronald Reagan's crushing victory over Jimmy Carter in 1980 or Bill Clinton's ouster of George H.W. Bush following the early 1990s recession.

Rightly or wrongly, "voters tend to assign culpability for the economy's poor performance to the outgoing President, even if there's a split government," says Goldman Sachs (NYSE:GS - News) senior economist Ed McKelvey. That makes it tough for a potential successor to get a leg up.

Will that pattern continue this year for John McCain, who appeared headed for the nomination Feb. 5 as Republicans in 21 states took to the polls? Certainly, the models created by political scientists and economists to predict electoral winners based on economic conditions suggest problems ahead for the Republican nominee, be it McCain or Mitt Romney, should he manage a surprise turnaround.

The Economy Calls It

The best-known among them, devised by Yale professor Ray Fair, has reliably picked the winner of the popular vote. This year, Fair's model forecasts that even if the economy shows modest growth of 1.8% for the first three quarters of 2008, the Democratic nominee will win 52% of the popular vote vs. 48% for the Republican nominee. And if the economy does stumble into recession, things will get worse: Assume the economy contracts by 1%, and the Republican share of the vote could fall to around 46%.

So does that mean this year's race for the White House is over before it has even begun? Not so fast. In a year in which few past patterns or political predictions have proven correct, an increasing number of analysts and strategists say the view that a bad economy could doom the Republican candidate also may no longer be so clear-cut.

"Historically, a poor economy helps the challenging party, which in this case is the Democrats," says Jon Delano, a political scientist at Carnegie Mellon University. "But given that the 2008 cycle is turning all other political assumptions upside down, that could be the case here as well."

Delano and others point out that renewed problems in Iraq or some other foreign-policy crisis could easily return national security to front and center. And there's no easy way to anticipate the impact of the fact that the Democratic nominee is likely to be either a woman or an African American.

Wriggle Room

But even if the electoral debate remains focused on the economy, some analysts and strategists argue that the Republican nominee could wriggle free of the bad-economy curse -- particularly if McCain does emerge as the nominee.

Daniel Clifton, a Washington policy analyst at investment-research firm Strategas Research Partners, argues that even as many Democrats assume a general-election campaign waged over the economy would play to their strengths, it still might play more to McCain's than many believe. "If the war is neutralized as an issue, we will have a debate focused more squarely on the economy and the upcoming proposals for tax increases that would be put forth by the Democratic candidate," Clifton argues.

By spotlighting the question of whether it's a good idea to allow the Bush tax cuts to expire or otherwise hike taxes for some taxpayers on capital gains, dividends, or other income at a time when the economy is weak, as both Hillary Clinton and Barack Obama have suggested, he adds, McCain has a potential opening to turn the economic debate to his benefit. "The core message from the Republicans will be that if you go after capital gains or dividends, the stock market and the economy will do even more poorly -- that Democratic policies could make things even worse."

Republican pollster Frank Luntz also points out that McCain's anti-Washington image also may offer him more than the usual ability to distance himself from the Bush Administration's current economic record. "He's been so hostile to the Washington system that he has an opportunity most Republicans wouldn't have," says Luntz, who isn't aligned with any of the campaigns. If McCain can emphasize his record of fighting excessive government spending and out-of-control earmarks instead, that could allow him to build enough credibility on the economy to effectively change the debate from its recent poor performance for the GOP.

Looking for a Leader

Moreover, even as voters' economic worries are growing, Luntz argues that in that arena, as elsewhere, voters are looking less at specific issues and more at the candidates' leadership abilities in deciding whom to back. "They're not looking for a 10-point plan to fix the economy; they're looking for the leader who can best demonstrate the ability to resolve our economic anxieties," he says.

McCain also could simply get lucky: Washington is moving much faster than it typically has in the past to pump fresh cash into the economy in hopes of forestalling a recession. Thanks to the combination of the Federal Reserve's sharp interest rate cuts and the $150 billion tax rebate package now under negotiation in Congress, enormous amounts of liquidity could soon be sloshing through the economy and helping it to move out of the worst of the crunch by late summer or early fall. "Voters may appreciate and see those efforts by the time they get to the polls," says Goldman's McKelvey.

While he still believes the economy could be a tough hurdle for McCain to overcome, McKelvey offers a caveat: "It's hazardous to assume that because things aren't looking good now, they will look the same by the fall."

Rate-cut doubts sink Wall Street

NEW YORK (Reuters) - Stock indexes dropped for a third straight session on Wednesday after Federal Reserve officials cast doubt on the outlook for more interest rate cuts, driving the Nasdaq into bear market territory.

The Nasdaq's woes worsened after the bell, with network equipment maker Cisco Systems (CSCO.O) dropping more than 7 percent after the tech bellwether forecast disappointing third-quarter revenue growth, citing economic concerns. Cisco's chief executive John Chambers also said CEOs in the United States and Europe are as cautious as he had seen in many years.

That news spurred an after-hours sell-off in other big technology companies, including Apple (AAPL.O) and Intel (INTC.O), and drove stock index futures lower.

"Cisco helps further the notion that the economy is weak at the very best. It's worrisome and the market is not going to like it," said Chip Hanlon, president Delta Global Advisors, Inc. in Huntington Beach, California.

During the regular session, an early market rally faded after two Federal Reserve Bank presidents said policy-makers need to remain vigilant against quickening inflation pressures this year, even as the economy slows sharply.

Adding to the pessimism, Macy's Inc (M.N) released dismal sales figures, stoking anxiety about Thursday's wave of sales results due from an array of retailers.

That punctured the market's earlier attempt at a rebound from Tuesday's steep drop, which had been fueled by strong financial results from Walt Disney Co (DIS.N) and Time Warner Inc (TWX.N).

The two media conglomerates fed some optimism that corporate profits outside the financial sector were holding up.

The Dow Jones industrial average (.DJI) ended down 65.03 points, or 0.53 percent, at 12,200.10. The Standard & Poor's 500 Index (.SPX) was down 10.19 points, or 0.76 percent, at 1,326.45. The Nasdaq Composite Index (.IXIC) was down 30.82 points, or 1.33 percent, at 2,278.75.

The comments from the Fed officials undermined speculation that the Fed would need to make another emergency rate cut following reports on job creation and service-sector growth that suggested the economy was slipping into recession.

"I think they're just trying to temper the comments that you've been seeing in the last few days that the Fed needs another intermeeting cut," said Subodh Kumar, chief investment strategist, Subodh Kumar & Associates in Toronto. "The market is responding to this uncertainty."

The Nasdaq is now down 20.3 percent from its October peak, signaling that a bull market run that had begun in October 2002 is officially over.

After the bell, Cisco shares fell 7.2 percent to $21.42, while Apple dropped 1.7 percent to $119. Adding to the gloom, Electronic Data Systems Corp (EDS.N), the second-largest technology outsourcing company, posted a lower-than-expected profit and weak earnings outlook, sending its shares down 5.1 percent to $18.60.

In the regular session, shares of CME Group Inc (CME.N) and NYMEX Holdings Inc (NMX.N) both tumbled 17.6 percent as investors feared a Department of Justice call for a shake-up in financial-futures exchanges may thwart a proposed merger of the two exchange operators.

CME shares fell to $485.25 and NYMEX ended at $87.88.

Macy's shares were down 4.6 percent at $23.94 after the department store chain said sales at stores open at least one year fell 7.1 percent last month.

A $147.4-billion takeover offer for Anglo-Australian miner Rio Tinto (RIO.AX) (RIO.L) by rival BHP Billiton (BHP.AX) (BHP.L) failed to stir enthusiasm in the U.S. equity market.

Shares of Disney jumped 4.8 percent to $31.50 on earnings that topped Wall Street estimates, while Time Warner shares rose 2 percent to $15.71 after it said it expects profit growth to match or beat Wall Street expectations.

IBD's Top 10 - Wednesday

Stocks Sell Off On Fed Warning

1 A Fed official's inflation warning turned a mildly positive day into another negative one. The Nasdaq fell 1.3%, the S&P 500 0.8% and the Dow 0.5%. Trading declined, but picked up as stocks fell. CME (NYSE:CME - News) and Nymex (NYSE:NYX - News) both dived 18% as the Justice Dept.'s call for a futures exchange shake-up threatened their planned merger. Apple (NasdaqGS:AAPL - News) and Baidu (NasdaqGS:BIDU - News) were among the big losers.

Cisco Falls On Q3 Sales Warning

2 Citing a weak economy, the networking giant sees 10% revenue growth vs. views for 15%. Orders weakened in Jan., and may stay soft for the next few months, Cisco (NasdaqGS:CSCO - News) said. It met Q2 views for a 15% profit rise to 38 cents a share ex items. Sales rose 16.5% to $9.8 bil. Cisco shares fell 7% late, with many other techs down as well.

McCain Seeks Common Ground

3 Buoyed by Super Tuesday wins that gave him a commanding lead for the GOP presidential nomination, John McCain urged conservative critics to "calm down" and focus on where they agree. He'll speak before a key conservative gathering Thu. Mitt Romney was reassessing his campaign. Dem Hillary Clinton won the 3 biggest states, but held just a slight delegate edge over Barack Obama.

Fed Reaffirms Inflation Concern

4 Cooling hopes for more aggressive rate cuts, the hawkish Philly Fed President Charles Plosser said the central bank can't take a "damn the torpedoes" approach that ignores inflation. Recession risks have risen, he said, but still sees 1% GDP growth in the first half. Futures traders still expect a half or 3/4-point cut by the Fed's March meeting.

Time Warner May Shed Cable

5 New CEO Jeff Bewkes said the media conglomerate may spin off Time Warner Cable. Time Warner (NYSE:TWX - News) is cutting 100 jobs at its corporate offices and splitting AOL's dial-up business from its ad business. Q4 EPS met views for a 32% rise to 29 cents a share ex items. Revenue grew 2% to $12.64 bil, a hair below views. Shares rose 2%. Time Warner Cable fell 3%, hitting a record low intraday.

Productivity Growth Tops Views

6 Nonfarm output per hour rose at a 1.8% annual rate in Q4, well below Q3's blistering 6% pace, but triple what Wall Street had expected. Output edged up just 0.4% -- but hours worked fell at a 1.5% rate, the 2nd straight decline and the worst since Q1 '03. Unit labor costs grew 2.1% in Q4, much less than feared.

Senate's Stimulus Bill Stalled

7 Senate Republicans blocked a move by Dems to add over $40 bil in checks for the elderly, disabled veterans and the unemployed to a bill to stimulate the economy. The $205 bil measure fell just short of the 60 votes needed to move to a final vote. Republicans want the Senate to adopt the $161 bil House bill backed by President Bush, to get checks and other aid out quickly.

Oil Slumps As Stockpiles Soar

8 March crude oil fell $1.27 to $87.14 a barrel after the Energy Dept. reported a stocks buildup of 7.05 mil barrels last week. It was far more than expected, and the biggest such rise since March '04. The combo of bigger imports and weaker demand could be a symptom of a slowing economy, some traders said. Heating oil and gasoline lodged less-dramatic losses. On Tue., oil fell $1.61.

Macy's Cuts Jobs After Sales Fall

9 The department store operator will ax 2,300 management jobs as it consolidates and decentralizes to cut costs. Macy's (NYSE:AEO - News) cut Q4 profit targets after saying Jan. same-store sales fell 7.1% year-on-year. Shares fell 5%. American Eagle's Jan. comps fell more than expected, but the youth apparel chain backed EPS views. Most retailers report Jan. sales Thu. Analysts expect grim results.

Mortgage Applications Hit Highs

10 Activity rose 3% in the Feb. 1 week, doubling over 5 weeks to the most since March '04, said the Mortgage Bankers Assoc. Applications for buying a home shot up 12% after falling hard in the prior 2 weeks. Refi activity eased 1% after skyrocketing in the prior 4 weeks. Mortgage rates edged up for a 2nd week from multiyear lows.

Disney releases Leibovitz campaign

In this photo illustration released by Disney Parks, supermodel Gisele Bundchen, left, is portrayed as Wendy Darling, beckoned by dancer Mikhail Baryshnikov as Peter Pan and actress Tina Fey as Tinker Bell, in a scene entitled 'Where You Never Have to Grow Up,' created by photographer Annie Leibovitz. This Leibovitz image unveiled Thursday, Jan. 24, 2008, was created for the 'Disney Dream Portrait Series' to celebrate Disney Parks' 'Year of a Million Dreams.' Disneyland Resort in California and Walt Disney World Resort in Florida commissioned Leibovitz to create images featuring international celebrities in fairy tale settings.

Cisco shares fall on gloomy outlook

SAN JOSE, Calif. - Cisco Systems Inc. CEO John Chambers' troubling assessment of the health of U.S. technology spending late last year triggered a stock sell-off that chopped Cisco's market value by one-third.

The plunge continued Wednesday on signs in Cisco's second-quarter financial report that economic uncertainty will continue to hurt sales growth at the world's largest Internet networking supplier.

Cisco shares fell $1.84, or 8 percent, to $21.24 in after-hours trading after the company posted second-quarter results that matched Wall Street's subdued expectations but gave disappointing guidance. The stock had slipped 18 cents to close at $23.08 in regular trading.

The San Jose-based company's forecast of 10 percent sales growth in the third fiscal quarter fell below the 15 percent projection of Wall Street analysts.

The forecast spooked investors, who viewed it as a sign technology spending will continue to weaken as companies gird for a possible recession in the U.S.

Cisco executives acknowledged many companies are being cautious about investing in new Internet equipment, but they predicted growth will soon pick up again, helped by surging demand in emerging markets.

"It's important to keep in perspective that even in these economic times, we're seeing solid growth on a year-over-year basis," said Dennis Powell, Cisco's chief financial officer.

Powell said Cisco experienced sudden slowdowns in January in several markets in the U.S. and Europe. Uncertainty about how long the slump will continue prompted the company to be "prudently conservative" with its guidance, he said.

Investors have punished Cisco's stock severely in recent months on fears the company isn't as insulated from U.S. economic pressures as previously thought.

The stock price has fallen by more than 30 percent since Chambers warned in November that weakening demand among major customers would probably slow Cisco's growth. He made the comments while discussing the first-quarter report.

In most of 2006 and 2007, investors flocked to Cisco's stock, doubling its price to top $34 and sending the company's market value above $200 billion.

Cisco is in the sweet spot of providing the networking gear companies need to handle a deepening flood of bandwidth-intensive Internet traffic. But economic jitters have caused many corporations and Internet service providers to tighten their pursestrings.

Cisco's second-quarter report showed the company continues to profit from heavy Internet investment, however.

Its net income was $2.06 billion, or 33 cents per share, during the three months ended Jan. 26, up 7 percent from $1.92 billion, or 31 cents per share, in the same period a year earlier. Cisco's profit in the first half of the fiscal year was 21 percent higher than a year earlier.

Excluding one-time charges, Cisco made a profit of 38 cents per share, matching the figure predicted by analysts polled by Thomson Financial.

Sales climbed more than 16 percent during the latest period, rising from $8.44 billion to $9.83 billion. Analysts were expecting $9.8 billion.

Napster posts smaller 3Q deficit

LOS ANGELES - With a 15 percent jump in revenue from subscriptions, online music retailer Napster Inc. said Wednesday it spent less and lost much less in its third quarter than a year earlier.

For the three months ended Dec. 31, the company posted a net loss of $2.8 million, or 6 cents per share, compared with a net loss of $9.5 million, or 22 cents per share, in the same period a year earlier.

The results were better than analysts surveyed by Thomson Financial expected: Analysts predicted a loss of 12 cents per share on revenue of $33.07 million.

Los Angeles-based Napster's core business is selling access to a monthly music subscription service that lets users download copy-protected tracks and transfer them to certain portable devices, including mobile phones.

The company also runs a Web site where visitors can stream tracks on a limited basis and purchase downloads.

Last month, Napster said it would begin selling music downloads as unprotected MP3 files in the spring.

Revenue totaled $32.8 million, up 15 percent from $28.4 million in the year-ago quarter, with the rise driven primarily by growth in subscription and wireless music sales, the company said.

Excluding a nonrecurring benefit from prepaid download cards that expired without being redeemed, revenue for the latest quarter was $30 million, the company said.

Napster said it closed the quarter with about 743,000 subscribers, a decline of less than 1 percent from the second quarter.

During a call with Wall Street analysts, Napster chairman and chief executive Chris Gorog touted the company's record quarterly revenue and its focus on holding back expenses.

Total operating expenses fell more than 26 percent to $13.2 million from a little more than $18 million a year earlier. Napster also reduced its marketing costs during the quarter by 85 percent.

It closed the quarter with $69.3 million in cash and equivalents, and it forecast revenue in the fourth quarter in the range of $29 million to $31 million, while analysts expect revenue of $35.2 million.

Gorog said Napster is finalizing licensing agreements with record companies and plans to debut the MP3 downloads option in its fiscal first quarter.

"We predicted some time ago that by 2008 there would be a critical mass of top-tier content available as MP3s, and it's clear now that will happen," Gorog said. "We believe this shift will be a powerful growth driver for us."

Napster has been counting on the mobile music market to grow, but fewer than expected Napster-compatible handsets launched during the quarter, Gorog said.

"Our early traction in mobile has gotten off to a slower start than we would have liked, and this has affected our (fourth-quarter) estimates," he said.

The company expects its over-the-air mobile download service soon will be compatible with a substantial number of existing and new phones.

Earlier this week, Napster said it expanded its mobile music service into Chile through wireless carrier Entel PCS. Napster recently struck a similar deal with a wireless carrier in Italy.

For the nine months through December, Napster's net loss was $12.2 million, compared with a net loss of $28.3 million in the nine months ended Dec. 31, 2006.

Revenue in the same period rose to $96.7 million from $81.9 million in the prior-year period.

Napster shares fell 9 cents, or about 5 percent, to $1.73. After the financial results were released, shares climbed 3 cents in after-hours trading.

Cisco gives weak outlook; tech shares down

NEW YORK (Reuters) - Cisco Systems Inc (CSCO.O) gave a weaker-than-expected revenue growth forecast and said its U.S. and European customers were being increasingly cautious, sending its shares down 7 percent on Wednesday.

The technology bellwether, which makes network equipment for phone companies and other businesses, also said it would not provide a view for fiscal 2008 due to uncertainty.

Cisco forecast fiscal third-quarter revenue to rise 10 percent year-on-year, short of the 15 percent growth expected by Wall Street, according to Reuters Estimates.

The outlook overshadowed a 7.2 percent increase in Cisco's second-quarter profit, which was in line with expectations.

"We are seeing our U.S. and European customers being increasingly cautious," Chief Executive John Chambers said on a conference call.

His comments also dragged down other technology shares in extended trading. Hewlett-Packard Co (HPQ.N) shares fell 1.8 percent, IBM (IBM.N) fell 1.5 percent, Microsoft Corp (MSFT.O) fell 1.4 percent and Google Inc (GOOG.O) lost 1.3 percent.

Cisco is the world's top maker of the routers and switches that direct traffic on data networks. It earns much of its revenue from enterprises which buy its equipment to run office networks.

Its shares have fallen about 28 percent since Chambers said in November that the company was seeing dramatic decreases in orders from U.S. banks.

For the fiscal second quarter ended January 25, Cisco said the profit was $2.1 billion, or 33 cents per share, compared with $1.9 billion, or 31 cents a share, in the year-ago quarter.

Earnings per share before unusual items were 38 cents, matching the average analyst forecast according to Reuters Estimates.

Sales rose 16.5 percent to $9.8 billion, in line with expectations.

Cisco has been moving into new markets such as video conferences and high-end video conferences, and also owns television set top box maker Scientific Atlanta.

Moving into the second half of its fiscal year, Chambers said the San Jose, California-based company was in good shape with a product pipeline that is well developed, and it's seeing balanced momentum across its core and advanced technology groups.

Cisco shares initially rose after the results to $23.84, but then fell to $21.42 following Chambers' outlook. The stock earlier closed 0.8 percent lower on Nasdaq at $23.08.

IAC loses $369.9M on mortgage woes

NEW YORK - Barry Diller's IAC/InterActiveCorp lost $369.9 million in the fourth quarter, on a big writedown at its mortgage referral business, tax expenses and costs in anticipation of the proposed spinoff of four businesses.

The report Wednesday came as Diller and Liberty Media boss John Malone are battling for control of the Internet conglomerate whose assets include the HSN home shopping network, Ask.com, Ticketmaster, Citysearch, Evite and LendingTree.

Liberty, a major IAC shareholder, has sued to halt the spinoffs. Diller said the spinoffs, initially planned for the second or third quarter, could be delayed by a couple months or more. Some anlysts say the suits could derail the plan.

"At this point, we just don't know," Diller said about a possible delay. The court has scheduled the matter for March 10.

New York-based IAC said its net loss amounted to $1.31 a share for the October-December period versus profit of $15.3 million, or 5 cents per share, in the same period in 2006.

Revenues rose 8 percent to $1.86 billion from $1.72 billion a year ago.

Analysts polled by Thomson Financial had expected a profit of 55 cents per share on sales of $1.83 billion. Those predictions typically exclude one-time charges.

IAC shares fell $1.71, or 7 percent, to close at $22.84 after sinking to a 52-week low of $22.76 earlier in the session.

In November, Diller announced plans for IAC to spin off its HSN home shopping network, Ticketmaster ticketing service, Interval time-share business and LendingTree mortgage referral units.

Malone, the cable magnate, said the proposed spinoffs would dilute the voting power attached to his company's shares. Liberty has sued to force the removal of Diller from the board and stop the spinoffs.

"I do wish Liberty hadn't raised the roof on this in such an aggressive way," Diller said Wednesday.

IAC sued Liberty in Delaware courts last month and Liberty responded with two lawsuits, one of which sought to oust Diller as chairman and wrest away control of the company.

While Liberty owns about 30 percent of IAC's equity, it controls about 62 percent of the voting power because of a dual-share structure under which it holds all outstanding Class B common stock, which carries 10 votes per share.

Diller has controlled Liberty's votes for years, but Liberty sued to reclaim those rights. Its lawsuit charges that Diller gave up those rights when he went against Liberty's will in pushing forward with the spin-offs.

"We'll get through this," he said Wednesday. "I don't think it'll last very long. I think at most probably a couple of months. And we're plowing forward both to operate our businesses and to conceptualize, organize the companies when they do go out publicly and stand on their own."

Sanford Bernstein analyst Jeffrey Lindsay said the lawsuits raised many questions, including what would happen to IAC if Liberty won in court and whether Diller would stay on as CEO.

"If Liberty does prevail, either on one or the two separate pieces of litigation, that's gonna have consequences," Diller said.

Revenue at online mortgage referral unit LendingTree fell by 55 percent to $52.1 million as it dealt with a falling housing market. That unit swung to an operating loss of $508.1 million from a profit of $7.2 million in the same quarter of 2006. IAC spent $11.2 million on restructuring costs for LendingTree and wrote down the value of intangible assets by $475.7 million.

The company also said it spent $4.1 million in the quarter on transaction costs for the proposed spin-offs and paid $2.7 million more in payroll taxes tied to the exercise of options.

The company said its Ticketmaster ticketing business had a 27 percent jump in revenue in the quarter. Diller also said HSN, with a 3 percent revenue increase, had rebounded from earlier self-inflicted problems.

For the full year, the company reported a net loss of $144.1 million, or 50 cents per share, versus a profit in 2006 of $187.1 million, or 59 cents per share. Revenue in 2007 was up 8 percent to $6.37 billion from $5.91 billion a year ago. Analysts had expected full-year earnings per share of $1.55 on revenue of $6.41 billion.

Cigna 4Q profit up 13 percent

PHILADELPHIA - Health insurer Cigna Corp. on Wednesday said fourth-quarter profit rose 13 percent as double-digit gains in overseas business as well as group disability and life helped to offset a slight decline in health care earnings.

The company also raised its 2008 earnings in anticipation of strong growth in its international and group businesses. Shares of Cigna rose 97 cents, or 2 percent, to $48.78.

Cigna reported a net income of $263 million, or 93 cents per share, compared with $232 million, or 76 cents per share, a year ago. Excluding investments and special items, adjusted profit totaled 98 cents per share in the latest period.

Revenue climbed to $4.46 billion from $4.21 billion a year earlier, primarily due to higher premiums and fees from specialty insurance and Medicare Part D.

Profit matched the consensus estimate of analysts polled by Thomson Financial, who expected earnings of 98 cents per share on revenue of $4.44 billion.

For fiscal 2007, adjusted earnings came to $1.14 billion, or $3.96 per share — a penny shy of analysts' forecasts. Revenue rose 6.5 percent to $17.6 billion.

"The upside was driven entirely by the non-health care segments," Matt Perry, senior analyst at Wachovia Capital Markets, wrote in his research report.

He noted it's been a pattern at Cigna over the past several quarters.

Cigna's core health care business, which accounts for more than half of revenue, posted a 3.4 percent decline in adjusted earnings to $170 million. Premiums and fees rose 3 percent.

Medical membership rose by 8 percent in the quarter to 10.17 million from a year ago, but it was down from 10.22 million in the third quarter.

Earnings from the rest of Cigna's operations collectively pulled in net adjusted profits of $107 million, up by 19 percent from the prior year. They were led by group disability and life insurance, which had a 24 percent increase in profits while international posted a 32 percent gain.

Looking ahead, the company raised its fiscal 2008 adjusted income to between $1.165 billion and $1.225 billion, or $4.05 to $4.25 per share. Health care earnings are expected to come in between $740 million and $780 million.

"We expect good earnings and revenue growth in group and international business," Ed Hanway, Cigna's chief executive, said in a conference call with analysts.

Cigna also said 2008 medical membership is expected to grow by 2 percent to 5 percent, excluding membership growth related to the pending acquisition of Great-West Healthcare.

Wall Street is forecasting higher 2008 profit of $4.27 per share on revenue of $18.8 billion.

Perry said Cigna's higher forecast for 2008 is entirely due to growth in its non-health care businesses. He cut his 2008 earnings estimate, saying "without meaningful size in either Medicare or Medicaid, we don't believe Cigna can generate much upside in its health care business in 2008."

Earlier this week, rival Humana Inc. said fourth-quarter earnings rose 57 percent due to a growing Medicare Advantage business, lower tax rate and the sale of a venture capital investment.

California, Florida weigh on McClatchy

NEW YORK - McClatchy Co. swung to a fourth-quarter profit from a loss a year ago, but the newspaper publisher continued to be buffeted by a severe housing slump in California and Florida.

The company said it would take an accounting charge to reflect further declines in its stock price.

McClatchy, which is the third-largest U.S. newspaper publisher by circulation, said the advertising outlook for 2008 wasn't any better, and now expects first-quarter advertising to decline in the low double-digit percentage range.

McClatchy reported preliminary net income of $30.1 million for the final three months of the year, compared with a loss of $279.3 million in the same period a year earlier. That included losses from the Minneapolis Star Tribune, which McClatchy has since sold.

The latest figures did not include the expected non-cash impairment charge, which McClatchy said it would announce later when it submits its annual regulatory filing.

CEO Gary Pruitt told investors on a conference call that the write-down was coming because of accounting rules that require companies to adjust the carrying value of their assets, a formula that is heavily affected by a company's stock price.

McClatchy had already taken a previous impairment charge of $1.4 billion for its third quarter to reflect its falling share price and poor conditions in the industry, but its share price has continued to slide since then, losing about half its value from the end of the third quarter.

Like many other newspaper publishers, McClatchy's shares have been badly beaten down in recent months over investor concerns about vulnerability to a slowing economy and more advertising losses to online rivals.

However, after a long streak of declines, McClatchy's shares ended slightly higher Wednesday, closing up 19 cents, or 1.8 percent, to $10.54.

Pruitt said the company's businesses were seeing a pronounced cyclical impact from the downturns in California and Florida, and its papers there accounted for two-thirds of the company's revenue loss for 2007.

McClatchy's earnings were equivalent to 40 cents per share on a continuing operations basis, which included an additional tax expense of 9 cents per share. Accounting for that item, the earnings were a penny ahead of analysts estimates of 48 cents per share, as compiled by Thomson Financial.

In the same period a year ago, the company's net loss was $3.40 per share. Without the one-time losses, earnings from continuing operations were 94 cents per share.

Revenues fell 15 percent to $573.4 million. The year-ago period included one more week than the most recent quarter. Without that effect, revenues fell 9 percent, the company said.

Pruitt also said that Yahoo Inc. offered reassurances that an arrangement it has with McClatchy and other newspaper publishers to cooperate on online advertising would survive even if Microsoft Corp. succeeds in its $31 per share bid for the Internet company.

On a full-year basis, McClatchy reported a net loss of $1.27 billion or $15.52 per share, which included the earlier write-down of $1.4 billion, versus a loss of $155.6 million for 2006.

Full-year revenues rose to $2.26 billion from $1.68 billion, reflecting the addition of 20 newspapers the company bought from the former Knight Ridder Inc. Assuming the company owned the same set of papers in both years and adjusting for the extra week in 2006, revenues would have been down 7.9 percent, with advertising revenues down 8.6 percent.

Future unclear as AOL ad growth at low

NEW YORK - AOL had its slowest quarter of advertising growth since beginning its ambitious transformation into an ad-focused Internet business, increasing uncertainty about AOL's future especially as Microsoft Corp. boosts its ambitions in the same arena.

AOL's $620 million in fourth-quarter ad revenue, reported Wednesday by its parent, Time Warner Inc., represents a year-over-year increase of less than 10 percent. By contrast, AOL's ad revenue grew nearly 50 percent a year earlier.

Ad revenue growth has been slowing down industrywide, but not as drastically.

"It's somewhat disappointing," said David Hallerman, a senior analyst with the research group eMarketer. "It's less than our internal estimates based on their track record earlier (in the) year."

The outlook could get bleaker if the company loses a major, unnamed ad customer this year, according to Time Warner's regulatory reports. Time Warner said earlier that it was anticipating "a significant decline" in revenue from the customer beginning Jan. 1.

Nonetheless, Time Warner executives continued to pin AOL's future on advertising.

Chief Executive Jeff Bewkes said Time Warner aims to separate AOL's ad operations from its dial-up access business, which continued plummeting in the fourth quarter as more people shifted to high-speed Internet service from cable TV and phone companies.

AOL had 9.3 million paying subscribers as of Dec. 31, a third of its peak of nearly 27 million in 2002.

Selling off the dial-up business in the U.S. — as it already has done in Europe — could make AOL more attractive to potential bidders, including Google Inc., which already owns 5 percent of AOL and has a right to trigger an initial public offering of that stake in July.

Roger Kay, who heads the market research firm Endpoint Technologies Associates, called AOL's access business "lead weight," while its ad business is "undernourished (but) has value."

"If it's a clear, clean operation and its metrics start looking better, it becomes an attractive property," Kay said.

But AOL's prospects became murkier last week when Microsoft bid about $40 billion for Yahoo Inc. based on Tuesday's closing prices. A Microsoft-Yahoo combination would not only eliminate two likely bidders for AOL but also create an online advertising powerhouse.

AOL began moving away from its roots as a "walled garden" emphasizing exclusive content in 2004, making most of its news, music videos and other features available for free on its ad-supported sites. It accelerated the transformation in mid-2006 when it started giving away AOL.com e-mail accounts and software as well.

AOL also has been buying other companies to extend its reach and portfolio of technologies.

For four consecutive quarters, the strategy seemed to be working as AOL's year-over-year ad growth exceeded 40 percent. But growth dropped to 16 percent in the second quarter of 2007 and 13 percent in the third before dipping below 10 percent in the latest quarter.

Full-year growth was 18 percent in 2007, compared with 41 percent the year before.

By contrast, Google's ad revenue grew by 50 percent in the quarter ending Dec. 31 and 56 percent in the full year, while Microsoft's increased 38 percent and 32 percent, respectively.

Only Yahoo performed worse than AOL, with ad revenue increasing 6.7 percent year-over-year in the fourth quarter and 8.2 percent in the full year.

Yahoo remains, however, second only to Google in terms of total ad revenue.

Hallerman said he wasn't writing off AOL yet because it still has important assets, including an ad-targeting company it bought last year and video deals through which it can sell higher-priced video ads.

AOL has been consolidating its advertising operations and is moving its headquarters from Dulles, Va., to New York, the heart of the media-advertising industry.

"It's still spring training," Hallerman said.

Time Warner will split AOL

NEW YORK - Time Warner Inc.'s new CEO Jeff Bewkes laid out his vision for changes at the media conglomerate Wednesday, including dividing AOL's online access and advertising businesses and possibly spinning off the rest of the company's cable division.

Investors have looked to Bewkes, who took over in January, to dramatically restructure the company in hopes of reviving shares that have slumped 29 percent over the past 12 months.

Investors liked what they heard. Shares rose 31 cents, or 2 percent, to $15.71.

Bewkes was speaking with analysts about the company's fourth-quarter earnings, which fell 41 percent following a big gain last year from the sale of AOL's European online access business.

Without the year-ago gains and other one-time effects, adjusted profits rose 17 percent on stronger results for cable TV and movies. Time Warner said it expected that growth to slow this year to a range of 7 percent to 9 percent.

Time Warner owns 84 percent of Time Warner Cable and may now have more options for spinning off the division tax free. However it's not clear that a complete spinoff will happen, particularly given a recent sell-off that has hurt the value of all cable stocks.

Bewkes said the company was working to separate AOL's growing online advertising-based business from the dial-up access business, which is in rapid decline as people shift to high-speed Internet service from cable TV and phone companies.

That could make AOL more attractive to potential bidders. However, those prospects became murkier last week when Microsoft Corp. made an unsolicited bid for Yahoo Inc. That would not only eliminate two likely bidders for AOL, but create a major online advertising power.

Google Inc. owns 5 percent of AOL and has a right to trigger an IPO of its stake in July. Google paid $1 billion in late 2005, valuing all of AOL at $20 billion. AOL's value today is far less certain.

A spinoff or sale of AOL, should it occur, would mark a sea change from 2000, when Time Warner agreed to be purchased by the Internet company then known as America Online at the top of the dot-com bubble. The deal turned out to be disastrous, leading to massive write-downs and settlements with shareholders and regulators over accounting improprieties.

Time Warner's cable division is the largest part of Time Warner, where many of the other assets are focused on video entertainment, including Warner Bros., New Line Cinema and a group of cable networks including HBO, CNN and TBS. Time Warner also owns Time Inc.

Bewkes noted that Time Warner Cable has different financial needs than Time Warner's other businesses, and may be better off on its own. Cable companies tend to be able to support far larger amounts of debt than other companies, given their consistent cash flows, and they also have needs for significant investments to build infrastructure.

Time Warner reported net income of $1.03 billion or 28 cents per share, versus $1.75 billion or 44 cents per share in the same period a year ago.

Without one-time items, the earnings were 29 cents per share, in line with estimates of analysts polled by Thomson Financial. Profits were 23 cents per share a year ago.

Revenues rose 2 percent to $12.64 billion, close to the $12.65 billion expected by analysts.

Earnings from Time Warner Cable rose 19 percent on a 12 percent gain in revenues, as the company continued to digest cable systems from Adelphia Communications Corp.

Despite growth in premium cable services like digital phone and high-speed Internet access, investors are worried about competition from phone companies offering video services. Time Warner's cable unit reported a decline of 50,000 basic video subscribers in the fourth quarter.

Time Warner's movie and TV production business had a strong quarter, with earnings up 46 percent on a 13 percent gain in revenue. Will Smith's movie "I Am Legend" set a record for a December film opening.

AOL posted an earnings increase of 29 percent despite a 32 percent decline in revenues, as the company shed another 740,000 dial-up access subscribers. The current total of 9.3 million subscribers is down 3.8 million from last year. AOL sold its Internet access businesses in the United Kingdom and France for a pretax gain of $769 million last year.

Time Warner expects to report full-year earnings for 2008 in the range of $1.07 per share to $1.11 per share. Analysts polled by Thomson had been expecting $1.11 per share.

For all of 2007, Time Warner reported income of $4.39 billion or $1.17 per share, versus $6.55 billion or $1.55 per share in 2006. Revenues rose 6 percent to $46.48 billion.

Biogen Idec profit beats expectations

BOSTON - After Biogen Idec Inc. reported a sharp increase in its fourth-quarter profit, the biotechnology company's top executive said he remains wary of spending more time searching for a big pharmaceutical firm willing to buy his company.

Carl Icahn continues to press for a buyout after Biogen Idec's recent efforts to find a buyer failed to yield any bids, and the activist investor is trying to elect supporters to Biogen's board.

Chief Executive Jim Mullen said that resuming the two-month search that was halted in December would distract Biogen Idec from focusing on its growth.

Biogen "will continue to remain open to all the opportunities to maximize shareholder value," Mullen told analysts on a conference call Wednesday. "But I don't think the right way to run the business ... is to have a permanent 'for sale' sign out on the front lawn."

Biogen Idec's fourth-quarter profit jumped 84 percent, exceeding Wall Street's expectations. Biogen shares were unchanged from Tuesday, closing at $60.52.

The Cambridge-based company reported net income of $201.2 million, or 67 cents per share, compared with $108.6 million, or 32 cents, in the same period a year earlier. Revenue rose 26 percent to $893.3 million, beating the consensus estimate of analysts surveyed by Thomson Financial, who expected $836.2 million.

Excluding one-time items in both quarters, Biogen Idec's profit rose 45 percent to $266 million, or 89 cents per share, up from $184 million, or 53 cents, in the year-ago period. The latest quarter's result beat analysts' expectations for a profit of 80 cents per share.

Biogen Idec's rising revenue was led by a 17 percent increase in sales of Rituxan, a treatment for non-Hodgkins lymphoma and rheumatoid arthritis, and a 15 percent increase for the multiple sclerosis treatment Avonex.

The newer MS treatment Tysabri generated revenue of $90 million, up from $18 million in the year-ago quarter.

Tysabri had been seen as a potential blockbuster before it was withdrawn three years ago after two clinical trial patients died of a rare brain disorder. Regulators approved Tysabri's reintroduction in June 2006.

Although no new cases of the brain disorder have turned up since Tysabri's return, Mullen told analysts Wednesday that lingering concerns about the drug's safety scared off potential buyers who had been expected to make bids of more than $20 billion.

Icahn on Jan. 28 accused Biogen Idec of rigging its search so that it was doomed to fail, but the company defends the process as fair and thorough.

Icahn helped trigger Biogen Idec's search for a buyer after snapping up millions of Biogen shares last summer. Last month, he submitted names of three supporters he hopes will be elected to Biogen's board, and he holds about 4 percent of Biogen's shares.

Scania posts strong 2007 earnings, sees smooth ride ahead

STOCKHOLM (AFP) - Swedish truckmaker Scania announced Wednesday robust earnings for the fourth quarter and full-year 2007 boosted by strong demand in most markets, and forecast a smooth ride for 2008 and 2009.

In the fourth quarter, net profit soared by 48 percent to 2.7 billion kronor (286 million euros, 419 million dollars) while sales increased by 29 percent to 24.5 billion, the company said.

For the full-year, net profit rose by 44 percent to 8.55 billion kronor, while sales jumped by 19 percent to 84.48 billion from a year earlier.

Scania delivered a total of 75,878 trucks in 2007, a rise of 16 percent from 2006, and 22,005 in the fourth quarter alone.

Meanwhile, order bookings grew by 26 percent for the full-year but only two percent in the final quarter.

"The demand for Scania's vehicles and services is high in most markets where Scania operate," the group said in a statement.

While growth in orders had levelled off, "there are currently few signs that the recent credit market turmoil has affected our customers' businesses," the company said.

Scania raised its forecasts for 2008 and 2009.

Until now it had predicted annual sales growth of 10 percent, but said it now expected growth of more than 10 percent. Operating margins were seen unchanged at between 12 and 15 percent.

Following the news, the Scania share price rose by 2.67 percent on the Stockholm stock exchange to 134.50 kronor, in an overall market that was down by 0.23 percent.

Scania has been the target of an unwanted takeover attempt by German conglomerate MAN, and has reacted by mulling its own counteroffer.

Volkswagen, which is the biggest shareholder in both companies, reportedly favours a three-way tie-up that would include VW's Brazilian lorry activities.

Better margins boost France Telecom 2007

PARIS - France Telecom SA said Wednesday that 2007 net profit rose 52 percent on better margins and lower taxes, with its mobile phone businesses fueling sales.

Net profit increased to 6.3 billion euros ($9.25 billion) from 4.14 billion euros a year earlier, above an average forecast of 5.53 billion euros from eight analysts polled by Dow Jones Newswires.

The 2006 figure was dented by a 2.8 billion euros goodwill write-down, but the rise in profit was attributed also to lower taxes and financial charges and improving margins.

France Telecom confirmed its guidance for 2008 and said it would pay a dividend of 1.30 euros ($1.91) per share for 2007, subject to approval at its annual shareholders meeting.

Shares fell 1.8 percent to close at 22.60 euros ($33.33) Wednesday.

France's dominant telecommunications operator, through its Orange mobile arm, is the country's sole vendor of the Apple iPhone, which has registered higher than expected sales since its release in November. The company did not mention iPhone revenue in its 2007 earnings statement.

Revenue rose to 52.96 billion euros ($77.79 billion) from 51.7 billion euros in 2006, helped by growth in France Telecom's mobile phone operations across Europe, Africa and the Middle East. The figure was in line with analysts' expectations. Fourth-quarter sales were up 2.1 percent at 13.5 billion euros ($19.8 billion).

France Telecom did not give a breakdown of earnings on a quarterly or half-yearly basis.

Revenue at France Telecom's mobile operations rose 5 percent to 29.12 billion euros ($42.77 billion), the strongest growth coming from Poland and other markets outside of Western Europe. The mobile phone business saw earnings before interest and other financial items rise 3 percent to 9.98 billion euros ($14.66 billion).

The company's fixed line and Internet operations posted a 0.8 percent rise in revenue to 22.67 billion euros ($33.3 billion). France Telecom continued to enjoy strong growth in broadband, while fixed-line customer losses slowed during 2007, Chief Financial Officer Gervais Pellissier.

Pellissier told a conference call that the company still expects its main markets to grow by 2 percent to 3 percent per year over the coming years even though the macroeconomic outlook "isn't as favorable as we might have imagined."

Analyst Mark James of Collins Stewart said the results, along with those of Britain's Vodafone Group PLC and Royal KPN NV of the Netherlands, demonstrate the economic resilience of the telecommunications sector.

"We don't expect telcos to be immune, but so far other sectors have been hit far harder," James said.

Toll Brothers revenue slips again

HORSHAM, Pa. - Toll Brothers Inc. said Wednesday that revenues are expected to slide 22 percent during the first quarter, and the luxury-home builder is not "seeing much light at the end of the tunnel."

Home contracts sank 38 percent, to 904 homes, and signed contracts fell 46 percent, to $573 million, compared with $1.07 billion during the first quarter last year, the homebuilder said in a preliminary report.

The average price per home fell more than 12 percent, to $634,000.

Toll Brothers said the price decline resulted from its focus on multifamily buildings, which fetch lower prices than single family homes.

"The housing market remains very weak in most areas. Based on current traffic and deposits, we are not yet seeing much light at the end of the tunnel," said Robert Toll, chairman and chief executive officer.

It would be the seventh consecutive decline in sales for the homebuilder, which, along with rivals, is struggling with turmoil in the mortgage market.

U.S. home prices plunged by a record 8.4 percent in November, marking two years of slowing returns.

"We expect to continue to face challenging times ahead," said Joel Rassman, chief financial officer. "We are still in the midst of finalizing our first-quarter impairment analysis; however, we currently estimate that pretax write-downs in FY 2008's first quarter will be between $150 million and $300 million."

Complete first-quarter results are expected on Feb. 27.

Shares fell more than 2 percent, or 45 cents, to $21.42 at the open of trade Wednesday.

Overseas sales help Sara Lee post profit

CHICAGO - Food maker Sara Lee Corp. said Wednesday it swung to a second-quarter profit, boosted by strong international beverage and bakery sales.

Net income for the quarter that ended Dec. 29 totaled $182 million, or 25 cents per share. That compares with a loss of $62 million, or 8 cents per share, during the same period last year.

Revenue climbed nearly 10 percent to $3.49 billion from $3.18 billion, helped by the benefit of a weaker dollar.

Excluding 2 cents per share in charges from exit activities and information technology costs and a 5 cent per share tax benefit, net income for the Downers Grove-based company was 22 cents per share. The year-ago quarter included a number of items that lowered earnings by 29 cents.

Analysts polled by Thomson Financial predicted a profit of 24 cents per share on revenue of $3.43 billion. The earnings estimates typically exclude one-time items.

Sales of household and body care products and North American retail bakery sales were also strong, Sara Lee said, helping it weather record-high commodities prices that have plagued many competitors.

"Our strategic approach to pricing, combined with the impact of procurement and continuous improvement savings, helped offset significantly increased input costs," Chief Executive Brenda Barnes said in a statement.

The company expects fiscal 2008 earnings to be between $1.03 and $1.09, including 18 cents per share of proceeds from the sale of its tobacco business in 1999. Analysts expect a profit of 96 cents per share, but those estimates typically exclude such one-time items.

Sara Lee predicted 2008 revenue of $13.4 billion, while analysts said they expect revenue of $13.22 billion.

Shares of the Sara Lee slipped a penny to $13.96 in morning trading.

Warner Music Group falls to 1Q loss

NEW YORK - Warner Music Group Corp., whose artists include Led Zeppelin and Josh Groban, posted a first-quarter loss Wednesday, hurt by higher expenses and an impairment charge.

The recording company reported a loss of $16 million, or 11 cents per share, compared with a profit of $18 million, or 12 cents per share, in the previous year.

The results included an $18 million goodwill impairment charge, which reflects the reduced current value of an asset, as well as increased selling, general and administrative expenses.

Analysts polled by Thomson Financial expected net income of 10 cents per share. Those estimates typically exclude one-time items.

Revenue grew 7 percent to $989 million from $928 million a year earlier.

Analysts expected sales of $948.9 million, according to Thomson.

Recorded music sales climbed to $950 million from $800 million, while music publishing revenue increased to $144 million from $133 million. Digital sales surged 41 percent to $141 million.

The company said its revenue results continue to be pressured by the ongoing shift to new forms of digital music.

Thermo Fisher 4Q profit jumps on deal

BOSTON - Thermo Fisher Scientific Inc. on Wednesday reported its fourth-quarter profit soared, a result that was boosted by a November 2006 acquisition that more than doubled the size of the maker of scientific instruments and laboratory supplies.

Thermo Fisher Scientific's profit and revenue performances both beat Wall Street expectations, and the company offered financial guidance for 2008 that is above analysts' forecast.

The Waltham-based company said its net income for the October-December period was $239.8 million, or 54 cents per share, compared with $25.3 million, or 8 cents per share, in the same quarter a year ago, when the company's profit was hurt by a $125 million charge tied to the company's $10.6 billion acquisition of Hampton, N.H.-based Fisher Scientific in 2006.

The acquisition helped boost revenue 57 percent to $2.62 billion from $1.67 billion, beating the consensus estimate of analysts surveyed by Thomson Financial, who expected revenue of $2.51 billion.

Had the former Thermo Electron and Fisher Scientific been combined for the entire fourth quarter of 2006, the revenue gain was a more modest 12 percent.

On that basis, and excluding one-time expenses and gains in both comparison quarters, Thermo Fisher Scientific's profit in the latest quarter grew to 76 cents per share, up from 57 cents per share in the year-ago period. Analysts surveyed by Thomson expected earnings excluding items of 69 cents per share, on average.

Revenue in the company's biggest business segment, laboratory products and services, grew 10 percent in the latest quarter to $1.55 billion, while revenue in the smaller analytical technologies segment rose 14 percent to $1.17 billion.

The company said it expects 2008 earnings of $3.05 to $3.15 per share excluding one-time expenses and gains, above analysts' forecast for $3.04 per share. The company expects full-year revenue of $10.5 to $10.6 billion, exceeding analysts' expectations for $10.34 billion.

For the full year, the company earned $761 million, or $1.72 a share, up from $168.9 million, or 84 cents a share. Revenue rose to $9.75 billion from $3.79 billion.

The 11,000-employee Thermo Electron acquired Fisher Scientific, which had 19,500 workers. The company's customers include pharmaceutical companies, government research labs, hospitals and universities.

Products are branded under the names Fisher Scientific and Thermo Scientific, competing against rivals such as Agilent Technologies Inc., Beckman Coulter Inc. and Becton, Dickinson & Co.

Tyco Electronics quarterly earnings rise

NEW YORK (Reuters) - Tyco Electronics Ltd (TEL.N), a maker of connectors and other components used in cars, airplanes and industry, reported a higher quarterly profit on Wednesday, boosted by a tax benefit and strong demand from telecommunications customers.

December 28 rose to $949 million, or $1.90 a share, from $281 million, or 57 cents per share, a year earlier.

Excluding items, earnings from continuing operations increased to 63 cents a share from 50 cents.

Republicans join to block stimulus bill

WASHINGTON - The fate of $600-$1,200 rebate checks for more than 100 million Americans is in limbo after Senate Republicans blocked a bid by Democrats to add $44 billion in help for the elderly, disabled veterans, the unemployed and businesses to the House-passed economic aid package.

GOP senators banded together Wednesday to thwart the $205 billion plan, leaving Democrats with a difficult choice either to quickly accept a House bill they have said is inadequate or risk being blamed for delaying a measure designed as a swift shot in the arm for the lagging economy.

The tally was 58-41 to end debate on the Senate measure, just short of the 60 votes Democrats would have needed to scale procedural hurdles and move the bill to a final vote. In a suspenseful showdown vote that capped days of partisan infighting and procedural jockeying, eight Republicans — four of them up for re-election this year — joined Democrats to back the plan, bucking GOP leaders and President Bush, who objected to the costly add-ons.

Democrats choreographed the vote for maximum political advantage, presenting their aid proposal as a take-it-or-leave-it proposition for Republicans and calling back their presidential candidates to make a show of party unity behind their stimulus plan. They calculated that Republicans would pay a steep price for opposing rebates for older Americans and disabled veterans, as well as heating aid for the poor, unemployment benefits and a much larger collection of business tax breaks than the House approved.

Even after their effort fell short Wednesday, Democrats seemed determined to keep the pressure on Republicans to accept the measure, threatening to hold more votes on it in the coming days.

Majority Leader Harry Reid, D-Nev., is "going to give Republicans a chance to reconsider their vote against efforts to strengthen the economy by helping those who need it most," his spokesman, Jim Manley, said Wednesday night.

Republicans said they were ready to accept rebates for seniors and disabled veterans and accused Democrats of delaying the stimulus plan for political gain and loading it down with special-interest extras.

"Our constituents will look at us as the folks that slowed it down (and) added a bunch of spending to it," said Sen. Jon Kyl of Arizona, the Republican whip, who called the measure "a Christmas tree package."

The White House, which has carefully avoided issuing threats about the package despite Bush's opposition to the add-ons, urged the Senate to move fast to approve a stimulus plan.

"To be effective, this economic growth package must be timely, so it is crucial that the Senate now move quickly to pass a bill that will deliver relief to our economy," press secretary Dana Perino said in a statement after the vote.

Democratic presidential candidates Hillary Clinton of New York and Barack Obama of Illinois flew to Washington for the vote. GOP front-runner John McCain of Arizona did not vote.

Supporters actually had 59 votes in favor of the Democratic proposal, but Reid switched his vote to 'no' at the last moment, a parliamentary move that allows him to bring the measure up for a revote.

Republican leaders objected to add-ons such as a $14.5 billion unemployment extension for those whose benefits have run out, $1 billion in heating aid for the poor and tax breaks for renewable energy producers and coal companies.

The measure builds upon a $161 billion House-passed bill providing $600-$1,200 checks to most taxpayers and tax breaks to businesses investing in new plants and equipment.

The Senate version would provide checks of $500-$1,000 to a broader group that includes 20 million elderly people, 250,000 disabled veterans and taxpayers making up to $150,000 for singles — or $300,000 for couples.

It would extend unemployment benefits for an additional 13 weeks for those whose benefits have run out, with 13 more weeks available in states with the highest jobless rates. The bill also includes $10 billion in tax-free mortgage revenue bonds to help homeowners refinance subprime loans.

Reid denied Republicans an opportunity to offer changes to the measure, provoking the filibuster. The calculus was that enough Republicans would relent in the face of political pressure to support unemployment insurance and heating aid to join Democrats and force the measure through.

GOP leader Mitch McConnell, R-Ky., said he wants to amend the measure to add rebates for disabled veterans and their widows and the elderly, and language — also included in the Democrats' package — making clear that illegal immigrants can't get rebate checks.

"We didn't block the proposal," McConnell said. "We just said there's a better way to go and there's an alternative."

Reid rejected the offer — at least for the time being — but Republicans seemed confident he would eventually agree to comparable changes since the alternative would be to approve the House bill and leave retirees living on Social Security and disabled veterans without rebate checks.

House Speaker Nancy Pelosi, D-Calif., who backs a stimulus bill with Treasury Secretary Henry Paulson and Minority John Boehner, R-Ohio, said House lawmakers are "very receptive to additions to our bill which ensure that disabled veterans and additional seniors are eligible" for rebate checks and want to make sure illegal immigrants are denied them.

A Pelosi spokesman said her statement did not represent a break with Reid, even though she seemed to praise McConnell's approach and was silent on Democratic add-ons such the provision benefiting coal companies. Pelosi prefers to try to extend unemployment benefits in a later bill.

The climactic Senate vote came after an intense lobbying effort by Democrats to convert wavering Republicans, including those facing tough re-election fights. Their efforts got a boost from outside groups leaning on senators to back the package, including home builders, manufacturers and the powerful seniors lobby.

Republicans were under enormous pressure from their own leaders not to support the Democrats' plan. Working to stem defections, GOP leaders assured their rank and file that they would have another chance to support adding senior citizens and disabled veterans to the aid plan even if they opposed the Democrats' bill.

That wasn't enough for Sen. Pete Domenici, R-N.M. who threw his support behind the measure.

"I'm hopeful that I have chosen the right path," he said just before the vote. "I made my decision on what was best for New Mexico and what's best for America."

Productivity slowed in 4th quarter

WASHINGTON - Worker productivity, the key factor in rising living standards, slowed sharply in the final three months of the year as overall economic activity weakened considerably while labor pressures increased.

The Labor Department reported Wednesday that productivity, the amount of output per hour of work, increased at an annual rate of 1.8 percent in the October-December quarter, down from a 6 percent performance in the July-September period. The slowdown reflected the fact that overall economic activity skidded to a near standstill in the final three months of the year, with the gross domestic product rising at a barely perceptible rate of 0.6 percent.

Labor costs rose by 2.1 percent in the final three months of the year, after having fallen by 1.9 percent in the third quarter and 1.1 percent in the second quarter.

The increase in productivity in the fourth quarter was nearly double what economists had been expecting, while the rise in labor costs was slightly lower than expected. However, analysts cautioned that much of the strength in productivity reflected a sharp drop in the number of hours being worked by the self-employed, while the huge jump in the third quarter reflected the big increase in economic output in that period.

"The productivity revival over the past few quarters will not last," said Ian Shepherdson, chief U.S. economist at High Frequency Economics, a private consulting firm.

Shepherdson said he looked for the growth rate of productivity to slow in 2008, reflecting an extremely weak economy in the first half of the year.

On Wall Street, stocks pulled back for a third day as investors continued to worry about the threat that the current economic slowdown could turn into a full-blow recession. The Dow Jones industrial average fell by 65.03 points to close at 12,200.10.

For the year, productivity rose by 1.6 percent, a slight rebound from a 1 percent gain in 2006 but both years were well below the average annual increases of 3.2 percent turned in from 2000 through 2004.

Productivity determines whether living standards can rise because it allows businesses to pay their workers more because of their increased output without having to raise the cost of their products, which increases inflation.

The country went through a two-decade period of stagnant increases in productivity following the oil shocks of the early 1970s. However, starting in 1995, productivity began showing bigger improvements, reflecting all of the investments that had been made in computers and other efficiency-enhancing equipment.

Economists are currently debating whether that substantial gain in productivity is now waning or whether the slowdown is just a temporary reflection of the deterioration of the overall economy.

The Federal Reserve closely monitors changes in productivity and labor costs for clues on underlying inflation pressures.

Analysts do not believe the fourth-quarter slump in productivity and rise in labor costs will alarm Fed policymakers who are focused at the moment on fighting the sharp slowdown in overall economic activity rather than worrying about inflation.

The Fed cut a key interest rate by a half-point last week, a reduction which followed a rare three-quarter-point cut delivered following an emergency meeting eight days earlier. The two cuts represented the most aggressive easing on the part of the Fed in more than two decades.

The central bank hopes the rate cuts will bolster sagging consumer and business confidence and keep a prolonged housing downturn and severe credit squeeze from pushing the country into a recession.

Congress and President Bush are also working to keep the current six-year-old expansion from faltering. The president included in the $3.1 trillion budget he unveiled on Monday a $145 billion economic stimulus plan. The House has passed a version of the measure and it is currently being debated in the Senate.

The 1.6 percent rise in productivity for all of last year was a slight improvement from a 1 percent increase in 2006 but was still well below the gains of 4.1 percent in 2002 and 3.7 percent in 2003.

For all of 2007, labor costs rose by 3.1 percent, a slight increase from a 2.9 percent rise in 2006.

Republicans block Senate economic stimulus plan

WASHINGTON (Reuters) - Senate Republicans on Wednesday narrowly blocked a Democratic-backed economic stimulus plan that was costlier than a House of Representatives-passed measure by extending cash rebates to retirees and disabled veterans and stretching out unemployment benefits.

The Senate legislation, valued at about $158 billion, and aimed at averting a U.S. recession, was offered as an alternative to the bill backed by President George W. Bush that overwhelmingly passed the House last week. The $146 billion House measure would give individuals a one-time $600 payment and couples $1,200, plus $300 per child.

The Senate Democratic version would have provided payments of $500 to individuals and $1,000 for couples, plus $300 per child, but with higher income caps. The goal is to give consumers money so they can spend it quickly and give the ailing U.S. economy a lift.

The bill further broadened the benefits by allowing cash payments to an estimated 250,000 disabled veterans and 20 million senior citizens who get government benefit checks but have little or no earned income.

It was not immediately clear what the sharply divided Senate would do next.

"Senator (Harry) Reid is going to give Republicans a chance to reconsider their vote against efforts to strengthen the economy by helping those who need it most," said Jim Manley, a spokesman for the Senate majority leader.

Backers fell one vote short of the 60 needed in the 100-member chamber to limit debate, although the final count was 58-41 when Reid switched to no in a procedural move that allows him to bring up the bill again.

Sens. Hillary Clinton of New York and Barack Obama of Illinois, who are battling for the Democratic presidential nomination, interrupted their campaigns and returned to Washington to cast votes in favor of the measure.

Republican Sen. John McCain of Arizona, his party's front-runner for the presidential nomination, did not vote or return to the Senate for the showdown.


Before the vote, Reid, a Nevada Democrat, said the stimulus package was "smart, it's targeted and it's effective" and it had "lots of support from lots of different organizations."

Senate Republican leader Mitch McConnell of Kentucky, favoring a smaller alternative, countered, "There is a better way to go."

Treasury Secretary Henry Paulson, testifying before the Senate Budget Committee, urged senators to keep the stimulus bill focused on simple tax rebates. In remarks that angered Reid, Paulson also complained he was concerned that "special interests are coming to the trough."

Most Senate Republicans opposed the expansion of jobless benefits, although many favor adding to the House package cash payments to senior citizens and disabled veterans.

Senate Finance Committee Chairman Max Baucus, a Montana Democrat, said he was "quite confident we'll get this resolved quickly."

Senate Democrats were pushing a package with an estimated cost of $158.1 billion this year. That includes $157 billion in tax rebates, business incentives and other provisions approved by the Senate Finance Committee, plus about $1 billion to help low-income families pay their heating bills.

Lawmakers aim to finish work on the election-year plan to boost the economy by mid-February. Proposals being discussed would give businesses more incentives to invest and expand.

The final bill also might allow the Federal Housing Administration, as well as housing finance giants Fannie Mae and Freddie Mac, to back larger loans.

U.S. bank woes are "poetic justice": Buffett

TORONTO (Reuters) - The woes in the U.S. financial sector are "poetic justice" for bankers who designed and sold complex investments that have since gone sour, billionaire investor Warren Buffett said on Wednesday.

The head of the Berkshire Hathaway Inc (BRKa.N) (BRKb.N) group of companies also played down worries about a credit crunch by saying that recent interest rate cuts mean low-cost funds are readily available.

But he warned that the U.S. dollar will continue to slide unless the country can rein in its yawning trade deficit -- the "biggest factor" behind the decline. Still, he said, the U.S. economy will "do very well over time."

Buffett, one of the world's wealthiest people, appeared to see irony in the fact that many of the banks who marketed complex investments which have now crashed are bearing much of the fallout.

"It's sort of a little poetic justice, in that the people that brewed this toxic Kool-Aid found themselves drinking a lot of it in the end," he said.

Buffett, a legendary investor who has amassed a huge fortune through plays in a wide range of industries, has bet against the U.S. dollar in the past.

In 2005, Berkshire had made a $21.8 billion bet that the U.S. dollar would fall. It later unwound that successful position as it found other non-U.S. investments.

Buffett said on Wednesday in Toronto that the turmoil that has rocked the U.S. economy in recent months has imbued the markets with a healthy degree of caution, while the rate-cutting response from central bankers has ensured that cheap money remains available for borrowing.

"I wouldn't quite call it a credit crunch. Funds are available," Buffett said during a question and answer session at a business event. "Money is available, and it's really quite cheap because of the lowering of rates that has taken place."

He added: "What has happened is a repricing of risk and an unavailability of what I might call 'dumb money,' of which there was plenty around a year ago."

Buffet was in Toronto for the Canadian launch of corporate-news firm Business Wire, which Berkshire bought in 2006.

Buffett tends to favor companies with relatively simple businesses, strong management, consistent earnings, good returns on equity, and little debt.

As of late last year, Berkshire's businesses employed about 220,000 people and the number is growing as the group continues to expand its portfolio of companies. The units generated a $10.27 billion profit on revenue of $90.2 billion from January to September.

($1=1.01 Canadian)

Treasurys drop on productivity data

NEW YORK - Treasury prices fell Wednesday after a report showed workers producing at a stronger-than-forecast pace and labor costs in check at the end of 2007.

The Labor Department said productivity grew by an annual rate of 1.8 percent in the fourth quarter. The result was down significantly from the 6 percent advance seen in the third quarter, but well above the 0.5 percent gain projected in a Thomson/IFR analysts poll.

Unit labor costs, a key inflation gauge monitored by the Federal Reserve, advanced 2.1 percent in the final quarter, below the 3 percent rise projected by Thomson/IFR.

Productivity usually drops off when the economy slows down because companies are left with too many workers for the amount of work on hand. Some economists will use the news to support a case that the economy has entered a recession.

Although Wall Street suffered a case of fright due to recession fears on Tuesday that caused a massive stock sell-off, the latest report did not deter investors sending stocks initally higher Wednesday. They later fell on comments from Federal Reserve Bank of Philadelphia President Charles Plosser, who warned that the Fed is still concerned about fighting inflation even as it tries to support the flagging economy.

The benchmark 10-year Treasury note fell 15/32 to 105 5/32 with a yield of 3.62 percent, up from 3.56 percent late Tuesday, according to BGCantor Market Data. Prices and yields move in opposite directions.

The 30-year long bond declined 28/32 to 110 8/32 with a 4.37 percent yield, up from 4.33 percent late Tuesday.

The 2-year note lost 4/32 to 100 10/32 with a yield of 1.96 percent, up from 1.92 percent late Tuesday.

Yields fell in after hours trade as prices improved. At 5:30 p.m. Eastern time, the 10-year yield was 3.60 percent, the 30-year yield was 4.36 percent and the 2-year yield was 1.93 percent.

The yield on the 3-month note fell to 2.10 percent from 2.23 percent late Tuesday as the discount rate declined to 2.05 percent from 2.18 percent.

A Treasury Department auction of $13 billion in new 10-year Treasury notes attracted solid demand from both foreign and domestic investors. Investors bid for 2.34 times the amount of notes that were offered, matching the demand level seen at the previous 10-year sale in November.

A full 38.2 percent of the bids were from the group known as "indirect bidders," which has a large representation of foreign central banks. These investors have bids submitted on their behalf by third parties. The latest figure was reassuring to investors concerned that foreign central banks are diversifying away from dollar-denominated assets into higher-yielding currencies like the euro due to the U.S. dollar's weakness.

The Federal Reserve will hold its next regular monetary policy meeting on March 18, but many investors expect the central bank to order another rate cut before then.

The Fed in January cut rates by an unusually large 1.25 percentage points, but many investors think additional easing is needed and the bank has indicated it is willing to reduce the fed funds target down further.

Trading of fed funds futures contracts Wednesday indicated investors think there is a 50 percent chance for a 0.25 percentage point reduction in February.

Productivity rises as labor costs growth muted

WASHINGTON (Reuters) - U.S. productivity rose at a solid clip in the fourth quarter as employers sharply cut the number of hours worked, restraining growth in labor costs, according to a report on Wednesday that may ease lingering concerns on inflation at the Federal Reserve.

U.S. non-farm productivity, or hourly output per worker, rose at a stronger-than-expected 1.8 percent annual rate, keeping the rise in unit labor costs at a smaller-than-expected 2.1 percent, the Labor Department report showed.

Economists had expected worker productivity to rise just 0.4 percent, with unit labor costs -- a gauge of inflation and profit pressures scrutinized by the Fed -- up 3.5 percent.

"By lessening inflation risks, this report may soothe opposition to (interest) rate cuts within the Federal Reserve," said Roger Kubarych, chief economist for UniCredit/Bayerische Hypo-und Vereinsbank in New York.

Financial markets largely ignored the data. Bond prices, which normally would gain support from benign inflation news, fell as investors moved money into the stock markets, where prices rose on upbeat corporate announcements.


The Fed has slashed benchmark interest rates to 3 percent from 5.25 percent in five steps dating to mid-September as credit spigots threatened to run dry and signs emerged that weakness in the housing sector was spreading.

A report on Friday that showed the economy shed jobs last month for the first time in 4-1/2 years and data on Tuesday showing a contraction in the services sector have convinced financial markets that further rate cuts are on the way.

While the central bank has said it expects inflation to moderate, gauges of core prices, which strip out food and energy costs, have marched higher recently and some officials continue to express concern.

Dallas Federal Reserve Bank President Richard Fisher voted against the last rate cut a week ago and Philadelphia Fed chief Charles Plosser said on Wednesday he was skeptical slower growth would help ease core price pressures.

By cutting back on the total number of hours worked, employers should be able to keep better control of their costs as growth slows, alleviating any pinch on their bottom line and lessening any need to raise selling prices.

The number of hours worked in the fourth quarter shrank 1.5 percent, the largest decline since a 2.1 percent drop in the first quarter of 2003. Even with that decline, non-farm businesses were able to expand production by 0.4 percent.

"It is remarkable that U.S. companies were able to maintain productivity growth under the circumstances, but that was only because of their flexibility in trimming labor input," Kubarych said.


Even though productivity held up better-than-expected in the final three months of last year, it slowed sharply when compared to the third quarter. The department said productivity rose at a revised annual rate of 6 percent in the third quarter, the strongest gain in four years.

Similarly, the fourth quarter rise in unit labor costs marked a reversal from the third quarter, when they fell at revised 1.9 percent pace.

Year-on-year productivity grew 2.6 percent in the fourth quarter, matching the third quarter's gain as the largest increase since the period ended in second quarter of 2004.

Still, the data underscored a longer-term slowing in productivity growth, which had averaged 3.5 percent a year from 2002-2004. Over the past three years, it has grown an average of only 1.5 percent a year.

"Advances in information technology boosted the productivity numbers earlier this decade," wrote Patrick Newport, U.S. economist at Global Insight in Lexington, Massachusetts. "This boost, clearly, has gone away."

Long-term productivity trends shape the economy's growth potential, which policy-makers estimate for a sense of how fast the economy can grow without sparking price pressures.

Paulson worried "bazaar open" on Senate stimulus bill

WASHINGTON (Reuters) - U.S. Treasury Secretary Henry Paulson said on Wednesday he was concerned special-interest groups were lining up for handouts in an economic stimulus bill and urged senators to keep it focused on simple tax rebates.

Paulson, testifying before the Senate Budget Committee, said he did not want to spend money "that really isn't stimulus" as part of the approximately $150 billion spending package now under consideration in the Senate.

"I am increasingly concerned that in the Senate, the bazaar is open, the special interests are coming to the trough and that when I'm reading about and hearing about things like tax rebates for coal companies, the benefits for oil well drilling and things like this, I'm concerned that it's going to get bogged down," Paulson said.

"I'm concerned if we see things that aren't stimulus and aren't going to get money to the American people quickly, we'll get bogged down." he added.

Paulson said he would prefer to see the Senate pass the House of Representatives' $146 billion stimulus bill, which relies mainly on tax rebate checks and faster expensing of business equipment purchased this year.

He reiterated that extending unemployment benefits, a provision backed by many Democratic senators, was unnecessary given the current 4.9 percent unemployment rate, which is low by historical standards. Further actions could be discussed with Congress if economic conditions worsen, Paulson said.

However, he said he thought an agreement could be reached on Senate requests to have the stimulus cover veterans and senior citizens who would not receive rebate checks under the House plan.

Paulson's comments drew the ire of Senate Majority Leader Harry Reid, who said he was "offended" by suggestions that the Senate was opening government coffers to special interests.

Reid, a Nevada Democrat, said Paulson would have to explain his remark to those who have been unemployed for an extended period and disabled veterans who would get expanded benefits under the Senate Finance Committee bill, as well as struggling home builders, who have been lobbying for help.

"I think Mr. Paulson's been hanging around the White House too long," Reid said. "He's not that kind of a man."

Paulson also cautioned senators against passing legislation aimed at forcing China to raise the value of its yuan currency, saying such an effort was "bordering on the silly."

"I have engaged very actively with China. Engaged -- and I think with some results -- when you look the currency," Paulson told the Senate Budget Committee. "Don't be confused by the fact that I say I'd like them to move quicker, because I would like them to move quicker but their rate of appreciation of the currency roughly doubled last year to 6.7 percent."

Paulson also said the U.S. corporate tax system was inefficient and was putting American firms at a competitive disadvantage in the global economy.

He told the Senate Budget Committee that many countries now have lower nominal corporate tax rates than the United States and that other nations were not emulating the form of U.S. corporate taxes.

"I think in many ways the most expensive tax dollars we raise in terms of inhibiting competitiveness and jobs and growth are the way we tax our businesses that compete globally," Paulson said.