February 8, 2008

Japan stocks fall on option-led selling

TOKYO - Japanese stocks fell Friday as investors sold stocks to settle futures options, with many buyers remaining on the sidelines ahead of talks among the finance chiefs of the Group of Seven industrialized countries.

The benchmark Nikkei 225 stock index fell 189.91 points, or 1.44 percent, to close at 13,017.24 on the Tokyo Stock Exchange. It rose 0.82 percent Thursday.

Traders said investors seemed cautious about making big moves ahead of the three-day weekend and G-7 finance minister talks set for Saturday in Tokyo. The G-7 is made up of the U.S., Japan, Germany, Britain, France, Italy and Canada.

Machinery manufacturers fell after the government said core machinery orders fell 3.2 percent in December from the previous month, worse than the 0.8 percent drop forecast by economists surveyed by Dow Jones and the Nikkei. Okuma Corp. plunged 10.57 percent to 820 yen and Makino Milling Machine Co. fell 7.45 percent to 621 yen.

Among other decliners, Nippon Steel Corp. shed 5.90 percent to 542 yen, Sumitomo Mitsui Financial Group lost 3.48 percent to 776,000 yen and Sony Corp. fell 1.49 percent to 4,620 yen,

Japan Airlines rose 2.72 percent to 264 yen after the company reported solid earnings for the latest quarter, reversing the loss it posted for the same period the previous year.

Strong earnings results posted the day before also helped lift mobile carrier Softbank Corp. 1.40 percent to 2,160 yen.

The broader Topix index, which includes all shares on the exchange's first section, shed 17.94 points, or 1.37 percent, to 1,287.14.

The TSE halted trading for Topix March futures contracts midday due to a system problem, but traders said the stoppage had little impact on stocks.

In currency trading, the U.S. dollar was trading at 107.39 yen at 2:50 p.m. Thursday, down from 107.42 yen late Thursday in New York. The euro rose to $1.4480 from $1.4459.

Japanese financial markets will be closed Monday for National Foundation Day, a national holiday.

Stocks finish higher after fitful day

NEW YORK - Wall Street finished moderately higher in fitful trading Thursday as investors, still nervous about the economy, decided to buy back into a stock market pummeled by three straight days of losses.

With the market having largely priced in the possibility of a recession, many believe there are plenty of valuable stocks at cheap prices. Before Thursday, the Dow Jones industrial average had fallen this week by 543 points, or 4.26 percent, giving up all of last week's sharp gains.

Though the market ended up rising Thursday, trading was extremely fickle due to a batch of gloomy data that included declining January sales at major retailers, a drop in December sales of pending homes, and a disappointing outlook from Internet networking supplier Cisco Systems Inc. The major indexes seesawed throughout the day.

"We're kind of trying to create a silk purse out of a sow's ear here," said Hugh Johnson, chief investment officer of Johnson Illington Advisors. "The earnings are lousy, the economic numbers are lousy."

The Dow rose 46.90, or 0.38 percent, to 12,247.00 after trading down about 80 points and up about 130. The index remains more than 13 percent below its record close on Oct. 9, 2007 of 14,164.53.

Broader stock indicators also recovered some ground. The Standard & Poor's 500 index rose 10.46, or 0.79 percent, to 1,336.91. The technology-heavy Nasdaq composite index rose 14.28, or 0.63 percent, to 2,293.03.

Government bonds fell. The 10-year Treasury note's yield, which moves opposite its price, rose to 3.76 percent from 3.60 percent late Wednesday.

Investors may have been encouraged to buy back into stocks due to a rise in the dollar, whose decline over the past several months has contributed to worries about inflation and a possible drop in foreign interest in U.S. investments.

Peter Cardillo, chief market economist at Avalon Partners, said the dollar's advance followed remarks by European Central Bank chief Jean-Claude Trichet that the United States and Europe remain economically intertwined. This suggested to investors that strength in other countries can help stabilize the United States during its rough patch. Fears of a global economic slowdown have been weighing on stocks around the world.

As expected on Thursday, the Bank of England lowered its key interest rate by a quarter percentage point to 5.25 percent, its second cut in three months, while the European Central Bank left its key rate unchanged at 4 percent.

Another argument for bargain hunting Thursday was that the recent spate of negative economic data raises the likelihood of the Federal Reserve lowering interest rates again to spur growth. Atlanta Fed President Dennis Lockhart said Thursday the Fed's "focus, religiously, is on the general economy, the real economy."

Moreover, the stock market often portends economic declines, rather than the other way around.

"Stocks do worse during times of slow growth than they do during recession," said Brian Gendreau, investment strategist for ING Investment Management. "If we're in a shallow and short recession, for all anyone knows, we might be halfway through."

The market's indecisive movements throughout the day show, however, that it has not moved past the many worries swirling about personal spending, the crumpling housing market and deteriorating conditions in consumer credit.

Late Wednesday, Internet networking supplier Cisco Systems Inc. issued a 10 percent sales growth forecast for its current quarter that fell well below the 15 percent Wall Street projected. But Cisco finished up 30 cents at $23.38, after some investors saw the stock was undervalued.

And in a counterintuitive move, retail stocks — also regarded as cheap right now — rose even after the nation's retailers logged their worst January in about 40 years. Wal-Mart Stores Inc. reported a 0.5 percent rise in January same-store sales, or sales at stores open for at least a year, while Target Corp., Gap Inc., Limited Brands Inc. and AnnTaylor Stores Corp. each said their sales fell.

Not all news about retailing was bad — J.C. Penney Co. raised its earnings forecast for the last three months of 2007. Its stock jumped $3.72, or 8.5 percent, to $47.44.

But on top of the mostly weak retail reports, the Labor Department reported that jobless claims fell last week by 22,000, a smaller decline than many economists predicted, and the National Association of Realtors said pending sales of existing homes fell 1.5 percent in December.

Light, sweet crude oil rose 97 cents to settle at $88.11 a barrel on the New York Mercantile Exchange. Gold prices also climbed.

Oil prices had been gradually declining, so it's possible a slower economy is keeping inflation from accelerating. Still, many market participants are anxious about how much longer the Fed can continue to lower interest rates given relatively high food and energy costs.

The Russell 2000 index of smaller companies rose 10.29, or 1.49 percent, to 702.78.

Advancing issues outnumbered declining shares by nearly 2 to 1 on the New York Stock Exchange, where consolidated volume came to 4.44 billion shares, down from 3.89 billion on Wednesday.

Overseas, many Asian markets were closed for a holiday, but Japan's stock market was open and its Nikkei average rose 0.82 percent. In Europe, Britain's FTSE 100 fell 2.58 percent, Germany's DAX index fell 1.66 percent, and France's CAC-40 fell 1.92 percent.

Wall Street rises as valuations lure bargain-hunters

NEW YORK (Reuters) - Stocks rose on Thursday, as relatively cheap valuations tempted investors back to Wall Street after a three-day losing streak that had pushed Nasdaq into an official bear market.

Gains in shares of retailers and financial companies, two sectors that have suffered the most from the housing crisis and recession fears, helped the market rebound. Among the biggest gainers were department store chain Sears Holdings Corp (SHLD.O) and bank JPMorgan Chase & Co (JPM.N).

Trading was volatile, with indexes gyrating between positive and negative territory repeatedly. Wall Street opened lower on troubling jobless claims data and as a weak outlook from Cisco Systems (CSCO.O), a technology bellwether, added to fears of a looming recession.

But falling share prices and merger and acquisitions talk drew buyers, helping the Nasdaq, Dow and S&P all gain more than 1 percent at one point in the session.

"The economic numbers indicate we're seeing a slower economy," but current valuation on the S&P 500 is well below historic norms, offering "real value" to bargain-hungry investors, said Anthony Conroy, head trader for BNY ConvergEx, an affiliate of the Bank of New York in New York,

The Dow Jones industrial average (.DJI) was up 46.90 points, or 0.38 percent, at 12,247.00. The Standard & Poor's 500 Index (.SPX) was up 10.46 points, or 0.79 percent, at 1,336.91. The Nasdaq Composite Index (.IXIC) was up 14.28 points, or 0.63 percent, at 2,293.03.

Cisco shares rose 1.3 percent to $23.38, after earlier falling to a more than one-year low of $21.77 after the network equipment maker gave a weak outlook and warned of a rapid slowdown in U.S. and European orders.

Wal-Mart Stores (WMT.N) and Target Corp (TGT.N) were among a slew of retailers reporting disappointing January sales, but the shares of both big-box chains rose.

Wal-Mart shares rose 2.1 percent to $49.84 and Target stock climbed 6.1 percent to $54.10. Sears shares gained 5.1 percent to $102.68.

Shares of Children's Place Retail Stores Inc (PLCE.O) shot higher after the former chief executive of the kids apparel chain said he was confident he could make a bid to buy the company.

Children's Place shares were up nearly 20 percent to $21.28.

The airline sector also buzzed with merger-and-acquisition talk. The Wall Street Journal reported a merger of Delta (DAL.N) and Northwest (NWA.N) could be announced as early as next week. In addition, preliminary talks between United Airlines' parent, UAL Corp (UAUA.O), and Continental (CAL.N) have grown more serious, a source familiar with the matter said.

Delta rose 3 percent to $18.49 and UAL was up 5 percent to $39.55. Continental gained 5.8 percent to $30.45 while Northwest rose 0.2 percent to $18.50.

Wall St rebounds in volatile trading

US stocks rebounded on Thursday as bargain-hunters rushed to buy into market weakness and called a halt on a three-day losing run.

Consumer stocks surged in volatile trading after reassuring earnings guidance from JC Penney and Gap helped offset earlier disappointment with Wal-Mart (NYSE:WMT)'s January sales figures.

The sharp upswing bore some of the hallmarks of an over-sold bounce and was led by beaten-down financial, energy and telecoms stocks. The rally stemmed a slide of almost 5 per cent on the S&P 500 this week.

In spite of a broad-based rally a weak sales outlook from Cisco (NASDAQ:CSCO) continued to weigh on some large-cap technology companies. Utilities stocks also lagged.

The S&P 500 closed up 0.8 per cent at 1,336.91, having fallen 0.7 per cent before rebounding as much as 1.6 per cent. The Dow Jones Industrial Average rose 0.4 per cent to 12,247 and the Nasdaq Composite gained 0.6 per cent to 2,293.30.

"I think the most likely scenario is that we reached a low in January and we are now in the base-building process," Marc Pado, chief market strategist at Cantor Fitzgerald, said.

A broad range of retailers rallied after JC Penney, up 8.5 per cent at $47.44, said same-store sales declined less than forecast and fourth-quarter earnings would be at the high end of its forecast range. Gap's shares also rebounded, up 7.2 per cent at $19.65 after its earnings outlook also pleased investors.

Elsewhere retail sales figures were generally disappointing, as consumers faced with falling house prices reined in their discretionary spending. However, the S&P retail index climbed 3.7 per cent to 403.51 as analysts said weaker consumer spending was already priced in to many retail shares,

Wal-Mart's same-store sales rose only 0.5 per cent in January, much less than the 2 per cent increase Wall Street had expected, and its February sales forecast also offered little cause for excitement. The shares fell in early trading but later closed up 2.1 per cent at $49.84.

Upmarket retailer Nordstrom (NYSE:JWN) rose 3.7 per cent to $37.67 in spite of reporting a 6.6 per cent decline in same-store sales. Macy's, up 4.9 per cent at $25.11 had reported a 7.1 per cent sales drop on Wednesday.

Technology stocks also pared early losses caused by a cautious sales outlook from Cisco. The networking company said quarterly profit rose 7.2 per cent to $2.06bn, in line with analysts' estimates, and projected 10 per cent sales growth for the fiscal third quarter, below expectations. The shares rose 1.3 per cent to $23.38.

Many investors consider Cisco a bellwether for the sector and its cautious outlook kept shares in a some of large-cap tech companies under pressure. IBM fell 1.2 per cent to $102.34 and Hewlett Packard gave up 3.9 per cent to $40.50.

There was mixed news on the employment front. Weekly jobless claims fell 22,000 to 356,000, but the reading was still far higher than many analysts had predicted. Jobless claims had surged the previous week to the highest reading in more than two years, but this time the market was expecting a figure of about 340,000. The four-week moving average of first time claims rose 8,500 to 335,000.

"On balance, initial jobless claims have drifted higher, although at this point they remain below levels typically associated with outright recession," economists at Bear Stearns said.

Pending home sales fell a weaker-than-expected 1.5 per cent in December, according to the National Association of Realtors, and were down 24.2 per cent from the previous year. Homebuilder DR Horton rose 1.6 per cent to $15.04 after it posted a narrower-than-expected $128.8m quarterly loss.

Consumer products group PepsiCo (NYSE:PEP) said fourth-quarter profit fell 30 per cent to $1.26bn from a year ago, when results were improved by a tax benefit. However, revenues rose 17 per cent to $12.35bn and the shares put on 5.5 per cent to $70.41.

Rating agency Moody's said fourth-quarter earnings fell 54 per cent to $127.3m as revenues from structured finance slumped. However, the result was slightly better than analysts had forecast and the stock surged 10.4 per cent to $37.

Financial companies closed broadly higher after Jamie Dimon,chief executive of JP Morgan, said a possible downgrade of a key bond insurer would not be "that big a deal" for the banking industry. JP Morgan's shares rose 3.2 per cent to $45.11

Exchange operators also enjoyed a bounce after an analyst said the market overreacted to a Department of Justice call for ownership for clearing houses to bebroken off from futures exchanges. CME Group rose 8.8 per cent to $528.01 after falling 17.6 per cent the previous day.

Rank escapes FTSE carnage

Rank Group emerged unscathed from another day of carnage in the London market.

The bingo and casino operator rose 5.5 per cent to 95¾p on bid speculation after Genting, the Malaysia-based gaming operator and owner of Stanley Leisure, declared an increased holding of 11 per cent.

The FTSE 100 closed 151.3 points, or 2.6 per cent, lower at 5,724.1.

It was dragged down by poorly received results from groups including Yell, down 15.2 per cent at 279¾p, and BT Group, off 9.8 per cent to 237p.

There was a profits warning from GlaxoSmithKline, which lost 7.6 per cent to £10.78.

The FTSE 250 fell 140.3 points, or 1.4 per cent, to 9,764.2.

Alliance & Leicester was another of the big fallers. Its shares dropped10 per cent to 588p as takeover hopes faded. Santander of Spain said that it had no acquisition plans in general and was not considering a bid for the UK mortgage lender in particular.

Carphone Warehouserose 1.1 per cent to 309¼p amid rumours that its broadband division could be a takeover target for BSkyB, 3.3 per cent lower at 558p.

Centrica, the owner of British Gas, slipped 2.4 per cent to 326¾p.

Of mid caps, Aegis, the media buying group, was in demand on reports its biggest shareholder, the French financier Vincent Bolloré, had been marshalling his forces ahead of a possible bid. Aegis shares advanced 5.9 per cent higher to 116p.

Spirent, the telecoms testing equipment maker, and Dimension Data, the IT company, were marked 6.5 per cent lower at 50p and 5.6 per cent lower at 50¾p respectively.

Inmarsat, the satellite communications group, added 4.5 per cent to 515p on talk that institutions were recalling stock they had lent to short sellers.

Telecity, the data warehouse operator, fell below its 220p float price, closing 4.4 per cent lower at 215p.

Wall Street volatile on tech worries

US stocks were volatile on Thursday after Cisco (NASDAQ:CSCO)'s downbeat outlook added to concerns about the prospects for corporate tech spending.

Wal-Mart (NYSE:WMT)'s January sales also proved a big disappointment but the retail sector shrugged off a batch of anaemic figures, helped by upbeat earnings guidance from JC Penney, the department store chain.

A slew of economic data provided little incentive for stocks to rally as weekly jobless claims fell less than expected, while pending home sales showed no sign of improvement.

At midday the S&P 500 was trading a fraction lower at 1,325.96 having fallen 0.7 per cent in early trading. The Dow Jones Industrial Average was down 0.2 per cent at 12,171.81 and the Nasdaq Composite fell 0.3 per cent to 2,171.81.

Marc Pado chief market strategist at Cantor Fitzgerald said short covering and technical trading had pushed stocks up "too fast and too far" last week but he was upbeat on the outlook for US equities. "I think the most likely scenario is that we reached a low in January and we are now in the base building process," he said.

Other investors were thin on optimism on Thursday as the Nasdaq slipped further into a bear market - a fall of more than 20 per cent from its recent peak - after Cisco's sales guidance unsettled investors.

Cisco said quarterly profit rose 7.2 per cent to $2.06bn, in line with analysts' estimates, but the shares sank 2.5 per cent to $22.51 after it projected 10 per cent sales growth for the fiscal third quarter, below expectations.

Many investors consider Cisco a bellwether for the sector and its cautious outlook prompted shares in a range of large-cap tech firms to drop. Hewlett Packard fell 3.6 per cent to $40.63 and Oracle (NASDAQ:ORCL) shed 2.3 per cent to $19.22.

Sluggish retail sales figures also weighed on the market but the sector rallied as investors were reassured by earnings guidance.

Wal-Mart's same-store sales rose only 0.5 per cent in January, much less than the 2 per cent increase Wall Street had expected and its February sales forecast offered little cause for excitement. The shares fell in early trading but later climbed 0.5 per cent to $49.05.

JC Penney, up 9.5 per cent at $47.86, helped sentiment improve after same-store sales declined less than forecast and it said fourth quarter earnings would be at the high end of its forecast range. Gap's shares also rebounded, up 4.8 per cent at $19.21 after its fourth quarter earnings outlook pleased investors. The S&P retail index gained 2 per cent to 396.95.

Elsewhere, upmarket retailer Nordstrom (NYSE:JWN) rose 1 per cent to $36.70 in spite of reporting a 6.6 per cent decline in same-store sales. Macy's, up 2.1 per cent at $24.45, helped reverse a rally on Wednesday when it said January same-store sales fell 7.1 per cent.

There was mixed news on the employment front as weekly jobless claims fell 22,000 to 356,000 but the reading was still far higher than many analysts had predicted. Jobless claims had surged the previous week to the highest reading in more than two years, but this time the market had expected a figure of around 340,000. The four-week moving average of first time claims rose 8,500 to 335,000.

"On balance, initial jobless claims have drifted higher, although at this point they remain below levels typically associated with outright recession," economists at Bear Stearns, said.

Pending home sales fell a weaker-than-expected 1.5 per cent in December according to the National Association of Realtors, and were down 24.2 per cent from the previous year. Homebuilder DR Horton, down 0.8 per cent at $14.69, posted a narrower-than-expected $128.8m quarterly loss.

In other earning news Pepsico said fourth quarter profit fell 30 per cent to $1.26bn from a year ago, when results were improved by a tax benefit. However, revenues rose 17 per cent to $12.35bn and the shares put on 5.4 per cent to $70.32.

Rating agency Moody's said fourth quarter earnings fell 54 per cent to $127.3m as revenues from structured finance and bond sale ratings slumped. However the result was slightly better than analysts had forecast and the stock surged 6.7 per cent to $35.75.

Exchange operators also enjoyed a bounce after an analyst said the market overreacted to a Department of Justice call for ownership for clearing houses to be broken off from futures exchanges. CME Group rose 8.6 per cent to $527.06 after falling 17.6 per cent the previous day.

FTSE 100 falls after weak earnings

The FTSE lost ground on Thursday as the Bank of England delivered the expected cut in UK interest rates but cautioned on rising inflation.

The move by the bank's monetary policy committee to cut the official bank rate by a quarter of a percentage point to 5.25 per cent amid growing signs of a weakening UK economy had been widely expected and already priced into the market, strategist said.

But with a few dealers hoping for a cut of 50 basis points, leading shares came off as the bank warned of an upside risk for inflation in coming months.

The bank said: "The prospects for output growth abroad have deteriorated and the disruption to global financial markets has continued. In the UK, credit conditions for households and businesses are tightening.

"Consumer price inflation, at 2.1 per cent in December, was close to the 2 per cent target, but higher energy and food prices are expected to raise inflation, possibly quite sharply, in the coming months."

Howard Archer, strategist at Global Insight, said: "Despite calls for a 50 basis point cut the bank was never really likely to cut by more than 25bp. While the bank clearly needed to take further action to try and limit the growing downside risks to the growth outlook, its scope to cut interest rates aggressively is limited by significant inflationary pressures."

Edward Menashy, chief economist at Charles Stanley, said: "Many will find the current reductions in interest rates as questionable given the pressure from inflation. Inevitably the choice is between two evils: no cuts and a possible recession; cuts and possible inflation."

Down 40 points prior to the rate announcement, the FTSE 100 extended its losses as a raft of weak earnings news added to the rate disappointment. At the close, the senior London index was down 151.3 points, or 2.6 per cent, to 5,724.1. The mid-cap FTSE 250 lost 140.3 points, or 1.4 per cent to 9,764.2.

GlaxoSmithKline fell 7.6 per cent to £10.77 after forecasting lower earnings this year due to competition from manufacturers of generic treatments and falling sales of blockbusters such as diabetes drug Avandia. Concerns over generic competition prompted Dresdner Kleinwort to lower its target price on AstraZeneca from £20.98 to £18.40.

Analyst Tim Franklin said: "Generic launches against Nexium and Seroquel would negatively impact our 2008 base forecast by 11 per cent and EBIT and EPS by 30 per cent." AstraZeneca shares fell 2.4 per cent to £20.20.

Yell Group was the FTSE 100's biggest faller after the directories group's chief executive said it was suffering as the UK economy weakened.

John Condron said the group was on track to meet full-year earnings targets but cut revenue forecasts because of "rising economic uncertainties". The shares fell 15.2 per cent to 276p.

British Telecom fell 9.8 per cent to 247¾p after third-quarter core earnings rose in line with forecasts, but revenues at the telecoms group missed expectations as lower growth in premium rate services offset strong growth from broadband and IT services.

Rolls Royce dropped 10.2 per cent to 436¼p as investors were left disappointed by the size of the aerospace engine group's share buybacks.

Announcing a 13 per cent rise in underlying full-year profit, Rolls Royce said it would continue to deliver profitable growth and positive cash flow in 2008 and increased its final dividend by 51 per cent to 8.96p a share.

BG Group rose 3.8 per cent to £11.16 after beating forecasts with a 25 per cent rise in fourth-quarter net profit. However, the company pared its medium-term growth targets and issued disappointing figures on reserves replacement, saying only half the oil and gas extracted last year was replaced by new reserves.

British Land fell 1.3 per cent to 949½p after reporting a 17 per cent fall in the net asset value of its portfolio as commercial property valuations continued to drop. The market had expected a fall of 20 per cent.

Techs lead European stocks lower

Infineon Technologies (NYSE:IFX), the German chipmaker, fell 13.6 per cent to EU5.79 after its weak first-quarter results prompted a target price downgrade from Commerzbank.

Infineon's 77 per cent stake in the loss-making Qimonda, which it spun off in 2006, and mounting losses at its Com phone chip unit led it to a first-quarter group net loss of EU396m.

"Finding a way to reduce its stake in Qimonda would be necessary for us to become more positive on this share, " Commerzbank said in a research note.

Franco-Italian chipmaker STMicroelectronics (NYSE:STM) fell 4.4 per cent to EU8.01, and ASML (NASDAQ:ASML), the Dutch maker of chip-manufacturing equipment, lost 3.6 per cent to EU16.98.

The FTSE Eurofirst 300 ended down 1.8 per cent to 1,297.72, while Frankfurt's Xetra Dax shed 1.7 per cent to 6,733.72, the CAC 40 in Paris lost 1.9 per cent to 4,723.8 and London's FTSE 100 slid 2.6 per cent to 5,724.1.

Carmakers were lower after the European Central Bank's decision on to keep the eurozone's main refinancing rate at 4 per cent.

France's Renault was down 4.2 per cent to EU68.45, while domestic rival Peugeot shed 3.2 per cent to EU47.06. Germany's Porsche fell 4.5 per cent to EU1,088.99.

Wednesday's warning from solar energy group Renewable Energy Corp about possible cost overruns and delays continued to have a negative impact on the sector.

REC lost a further 4.8 per cent to NKr120, while German rival Q-Cells shed 8.3 per cent to EU55.95. German silicon wafer-maker Wacker Chemie dropped 5 per cent to EU132.11.

German solar panel maker Conergy, which fell 23.9 per cent on Wednesday after much worse-than-expected results, fell a further 18.2 per cent to EU10.76. Deutsche Bank (NYSE:DB) cut its rating on the stock from "hold" to "sell" and slashed its price target from EU25 to EU10.

Swedish bank SEB gained 1.1 per cent to SKr142.50 after reporting a forecast-beating 11.2 per cent rise in fourth-quarter operating profit thanks to strong trading revenues.

Meanwhile, Germany's Deutsche Bank rose 0.4 per cent to EU75.27 after pleasing results and a bright outlook that contained no subprime or credit market-related shocks. "The bank must be complemented on 'dodging the bullets' in 2007," analysts at Bear Stearns wrote in a note. However, the broker reiterated its "underperform" stance on the stock, citing uncertainty about the outlook for Deutsche's investment banking unit in 2008.

Oil rises $1 on colder weather forecasts

NEW YORK (Reuters) - Oil rose $1 to over $88 a barrel on Thursday as forecasts for colder weather in the giant U.S. Northeast heating oil market overcame worries over the economic health of the world's top consumer.

U.S. crude for March delivery settled up 97 cents at $88.11 a barrel, rallying back from a loss of $2.88 over the last two sessions. London Brent crude gained 73 cents to settle at $88.51.

"I think the contract found some support just below $87 a barrel," said Eric Wittenauer, analyst at AG Edwards.

The gains came amid forecasts for colder weather in the U.S. Northeast starting next week, which gave heating oil prices a boost. Additional support came from production shutdowns in Nigeria and the North Sea.

Royal Dutch Shell (RDSa.L) said on Thursday it was halting 130,000 barrels per day of Nigerian output because of pipeline leaks. Total (TOTF.PA) has also shut around 280,000 barrels of oil equivalent in output from its North Sea oilfields.

Oil fell for the second straight day on Wednesday after a government report showed a large build in crude and gasoline stockpiles.

Analysts said the builds reflect weakening U.S. demand and was the latest in a steady stream of bad news on the U.S. economy despite aggressive interest rate cuts by the Federal Reserve.

"Instead, it seems that problems are getting worse ... We would not be surprised to see a much sharper break in crude oil prices over the next few weeks," said Edward Meir at MF Global.

Oil prices have tumbled from their January record above $100 on mounting concerns of a U.S. recession.

A Reuters poll showed world oil demand growth losing momentum in 2008 as high prices and a slowdown in the world's industrialized nations led by the United States hit consumption.

The poll of 20 analysts forecast average world oil demand growth this year at 1.43 million bpd, down from 1.56 million bpd in a similar poll last August and well short of International Energy Agency's forecast of 1.98 million bpd.

Wall St volatile on tech worries

US stocks were volatile on Thursday after Cisco's downbeat outlook added to concerns about the outlook for corporate tech spending and Wal-Mart's January sales proved a big disappointment. Jobless claims meanwhile declined less than expected.

Less than an hour after the opening bell, the S&P 500 was up 0.2 per cent at 1,328.48, having fallen 0.7 per cent as the market opened. The Dow Jones Industrial Average edged 0.1 per cent higher to 12,209.53 but the Nasdaq Composite fell 0.1 per cent to 2,276.60.

The Nasdaq slipped further into a bear market - a fall of more than 20 per cent from its October peak - after Cisco's sales guidance unsettled investors.

Reporting results after the closing-bell on Wednesday, Cisco said quarterly profit rose 7.2 per cent to $2.06bn, in line with analysts' estimates, but the shares sank 3 per cent to $22.35 on Thursday after it projected 10 per cent sales growth for the fiscal third quarter, below expectations. Several analysts downgraded the stock.

Cisco is considered a bellwether for the tech sector and prompted shares in a range of large-cap technology firms to drop. Last time the company announced results, cautious comments from chief executive John Chambers on the outlook for financial companies' tech spending caused tech shares to plummet.

Some sluggish retail sales figures also weighed on the market although the results were not as bad as some analysts had feared and the S&P retail index climbed 2.3 per cent.

Wal-Mart Stores' same-store sales rose only 0.5 per cent in January, much less than the 2 per cent increase forecast by analysts. In February, Wal-Mart said it expected same-store sales to grow a maximum of 2%. The shares slipped 0.2 per cent to $48.75.

However, department store operator JC Penney helped sentiment improve after same-store sales declined less than forecast and it said fourth quarter earnings would be at the high end of its forecast range. The shares surged 8.3 per cent to $47.40.

Elsewhere, Upmarket retailer Nordstrom, down 1.6 per cent to $35.70, reported a 6.6 per cent decline in same-store sales, while Gap said sales fell 2 per cent and Kohl's same-store sales declined 8.3 per cent. Macy's helped reverse earlier gains on Wednesday when it said January same-store sales fell 7.1 per cent.

In economic news, weekly jobless claims fell 22,000 to 356,000 but the reading was still far higher than many analysts had predicted. A sharp spike last week to 375,000, the highest reading in more than two years, had been dismissed by some economists as an anomaly. This time round the market expected a figure of around 340,000.

The four-week moving average of first time claims rose 8,500 to 335,000. Meanwhile, the number of people on long-term unemployment benefit hit a two-year high.

"On balance, initial jobless claims have drifted higher, although at this point they remain below levels typically associated with outright recession," economists at Bear Stearns, said.

Meanwhile, pending home sales fell a weaker-than-expected 1.5 per cent in December according to the National Association of Realtors, and were down 24.2 per cent from the previous year.

DR Horton, up 0.2 per cent at $14.85, posted a narrower-than-expected quarterly loss. Still, the company posted a loss of $128.8m compared with a profit of $109.7m last year.

In other earning news Pepsico said fourth quarter profit fell 30 per cent to $1.26bn from a year ago, when results were improved by a tax benefit. Revenues rose 17 per cent to $12.35bn. The shares rose 3.7 per cent at $69.26.

Rating agency Moody's said fourth quarter earnings fell 54 per cent to $127.3m as revenues from structured finance and bond sale ratings slumped. However the result was slightly better than expected and the stock surged 7.1 per cent to $35.90.

Also in the financial sector Wachovia, up 0.3 per cent to $34.71, sold $3.5bn of preferred stockbn as it seeks to repair its capital position.

Bond prices pared earlier losses as equities recovered. The yield on the two-year Treasury note was unchanged at 1.93 per cent and the 10-year Treasury note rose a fraction to to 3.62 per cent

European stocks also reversed some of their earlier falls triggered after the ECB kept interest rates on hold. The FTSE Eurofirst 300 index gave up 1.3 per cent while the FTSE 100 sank 1.9 per cent. Asian equity markets closed mainly lower, led by another big fall on the Hang Seng, which sank 5.4 per cent

The dollar rose 0.6 per cent to $1.4338 against the euro after ECB President Jean-Claude Trichet warned of risks to European growth, raising the prospect of future rate cuts. The US currency fell 0.8 per cent against the pound to $1.9464, after the Bank of England cut interest rates by a quarter point.

The price of gold retreated slighty, down 0.1 per cent to $903.90, while crude oil fell 50 cents to $86.65, on fears of weakening US demand.

FTSE losses deepen after rate cut

The FTSE lost ground on Thursday as the Bank of England delivered the expected cut in UK interest rates but cautioned on rising inflation.

The move by the bank's monetary policy committee to cut the official bank rate by a quarter of a percentage point to 5.25 per cent amid growing signs of a weakening UK economy had been widely expected and already priced into the market, strategist said.

But with a few dealers hoping for a cut of 50 basis points, leading shares came off as the bank warned of upside risk for inflation in coming months.

The bank said: "The prospects for output growth abroad have deteriorated and the disruption to global financial markets has continued. In the UK, credit conditions for households and businesses are tightening.

"Consumer price inflation, at 2.1 per cent in December, was close to the 2 per cent target, but higher energy and food prices are expected to raise inflation, possibly quite sharply, in the coming months."

Howard Archer, strategist at Global Insight, said: "Despite calls for a 50 basis point cut the bank was never really likely to cut by more than 25bp. While the bank clearly needed to take further action to try and limit the growing downside risks to the growth outlook, its scope to cut interest rates aggressively is limited by significant inflationary pressures."

Edward Menashy, chief economist at Charles Stanley, said: "Many will find the current reductions in interest rates as questionable given the pressure from inflation. Inevitably the choice is between two evils: no cuts and a possible recession; cuts and possible inflation."

Down 40 points prior to the rate announcement, the FTSE 100 extended its losses as a raft of weak earnings news added to the rate disappointment. By late afternoon, the senior London index was down 96.1 points, or 1.4 per cent, to 5,777.9, although off its lows for the session.

GlaxoSmithKline fell 7.3 per cent to £10.82 after forecasting lower earnings this year due to competition from manufacturers of generic treatments and falling sales of blockbusters such as diabetes drug Avandia. Concerns over generic competition prompted Dresdner Kleinwort to lower its target price on AstraZeneca from £20.98 to £18.40.

Analyst Tim Franklin said: "Generic launches against Nexium and Seroquel would negatively impact our 2008 base forecast by 11 per cent and EBIT and EPS by 30 per cent."

AstraZeneca shares fell 3.6 per cent to £19.55.

Yell Group was the FTSE 100's biggest faller after the chief executive of the directories company said it was suffering as the UK economy weakened.

John Condron said the group was on track to meet full-year earnings targets but cut revenue forecasts because of "rising economic uncertainties". The shares fell 16.1 per cent to 277¼p.

British Telecom fell 8.5 per cent to 240½p after third-quarter core earnings rose in line with forecasts, but revenues at the telecoms group missed expectations as lower growth in premium rate services offset strong growth from broadband and IT services.

Rolls Royce dropped 9.3 per cent to 435¼p as investors were left disappointed by the size of the aerospace engine group's share buybacks.

Announcing a 13 per cent rise in underlying full-year profit, Rolls Royce said it would continue to deliver profitable growth and positive cash flow in 2008 and increased its final dividend by 51 per cent to 8.96p a share.

BG Group rose 4.6 per cent to £11.27 after beating forecasts with a 25 per cent rise in fourth-quarter net profit. However, the company pared its medium-term growth targets and issued disappointing figures on reserves replacement, saying only half the oil and gas extracted last year was replaced by new reserves.

British Land fell 0.2 per cent to 960p after reporting a 17 per cent fall in the net asset value of its portfolio as commercial property valuations continued to drop. The market had expected a fall of 20 per cent.

Overnight in New York, the Nasdaq Composite index slipped into bear market territory. A fall of 1.3 per cent took its slide from its high in October to more than 20 per cent.

The Dow Jones Industrial Average closed down 0.5 per cent while the S&P 500 lost 0.8 per cent.

Cisco and Wal-Mart gloom set to hit stocks

US stocks were set to fall sharply on Thursday after Cisco's downbeat outlook added to concerns about the outlook for corporate tech spending and Wal-Mart's January sales proved a big disappointment. Jobless claims meanwhile declined less than expected.

Less than an hour before the opening bell, S&P 500 futures were down 14.1 points at 1315.90 and were trading above below a fair value of 1327.46. Nasdaq futures were down 32.75 points at 1715.50, below a fair value reading of 1746.04, and futures for the Dow Jones Industrial Average were down 124 points at 12,111.

The Nasdaq Composite slipped back into a bear market on Wednesday having fallen more than 20 per cent from its October peak amid skittishness ahead of Cisco's earnings.

Reporting results after the closing-bell on Wednesday, Cisco said quarterly profit rose 7.2 per cent to $2.06bn, in line with analysts' estimates, but the shares plunged 8.6 per cent in the pre-market after it projected 10 per cent sales growth for the fiscal third quarter, below expectations.

Cisco is considered a bellwether for the tech sector and its forecast may put tech stocks under pressure on Thursday. Last time the company announced results, cautious comments from chief executive John Chambers on the outlook for financial companies' tech spending caused tech shares to plummet.

Dismal retail sales figures also weighed heavily on sentiment ahead of the open. Wal-Mart Stores (NYSE:WMT)' same-store sales rose only 0.5 per cent in January, much less than the 2 per cent increase forecast by analysts. In February, Wal-Mart said it expected same-store sales to grow a maximum of 2%. The shares were trading down 3.8 per cent in the pre-market.

Upmarket retailer Nordstrom, down 6.1 per cent in pre-market trading, reported a 6.6 per cent decline in same-store sales, while Gap said sales fell 2 per cent and Kohl's same-store sales declined 8.3 per cent. Macy's helped reverse earlier gains on Wednesday when it said January same-store sales fell 7.1 per cent.

In economic news, weekly jobless claims fell 22,000 to 356,000 but the reading was still far higher than many analysts had predicted. A sharp spike last week to 375,000, the highest reading in more than two years, had been dismissed by some economists as an anomaly. This time round the market expected a figure of around 340,000.

The four-week moving average of first time claims rose 8,500 to 335,000. Meanwhile, the number of people on long-term unemployment benefit hit a two-year high.

There was better news for the homebuilder sector ahead of pending home sales data, due at 10am ET, as DR Horton posted a narrower-than-expected quarterly loss. Still, the company posted a loss of $128.8m compared with a profit of $109.7m last year.

Pepsico said fourth quarter earnings fell 30 per cent to $1.26bn from a year ago, when results were improved by a tax benefit. Revenues rose 17 per cent to $12.35bn. The shares were up 1.9 per cent in the pre-market.

Rating agency Moody's said fourth quarter earnings fell 54 per cent to $127.3m as revenues from structured finance and bond sale ratings slumped. However the result was slightly better than expected.

Also in the financial sector, Wachovia said it would raise $3.5bn through a preferred-share sale as it seeks to build its capital position.

Bond prices tracked higher after the jobless data and on expectations of a weak opening for stocks. The yield curve steepened as yield on the two-year Treasury note shed 4bp to 1.88 per cent and the 10-year Treasury note yield gave up 2bp to 3.57 per cent

European stocks fell sharply ahead of the open on Wall Street after the ECB kept interest rates on hold. The FTSE Eurofirst 300 index gave up 2 per cent while the FTSE 100 sank 2.2 per cent. Asian equity markets closed mainly lower, led by another big fall on the Hang Seng, which sank 5.4 per cent

The dollar rose 0.5 per cent to $1.4561 against the euro after ECB President Jean-Claude Trichet warned of risks to European growth, raising the prospect of future rate cuts. The US currency fell 0.9 per cent against the pound to $1.9435, after the Bank of England cut interest rates by a quarter point.

The price of gold ticked higher as risk aversion increased, adding 0.3 per cent to $907.50, while crude oil fell 40 cents to $86.74, on fears of weakening US demand.

London shares on the backfoot

LONDON (AFP) - The FTSE 100 index of top companies shed 0.76 percent to 5,828.30 points in early afternoon trade.

Rolls-Royce plunged 9.11 percent to 436.25 pence after the maker of plane engines said a weak dollar caused its 2007 net profit to slump by more than a third to 606 million pounds.

Dealers said investors were also disappointed that the group failed to announce a share-buyback plan.

FTSE down despite UK rate cut

The FTSE lost ground on Thursday as the Bank of England delivered the expected cut in UK interest rates but cautioned on rising inflation.

The move by the bank's monetary policy committee to cut the official bank rate by a quarter of a percentage point to 5.25 per cent amid growing signs of a weakening UK economy had been widely expected and already priced into the market, strategist said.

But with a few dealers hoping for a cut of 50 basis points, leading shares came off as the bank warned of upside risk for inflation in coming months.

The bank said: "The prospects for output growth abroad have deteriorated and the disruption to global financial markets has continued. In the UK, credit conditions for households and businesses are tightening.

"Consumer price inflation, at 2.1 per cent in December, was close to the 2 per cent target, but higher energy and food prices are expected to raise inflation, possibly quite sharply, in the coming months."

40 points lower prior to the announcement, the FTSE 100 was down 87.8 points, or 1.5 per cent, to 5,787.6 points just after mid-day.

Howard Archer, strategist at Global Insight, said: "Despite calls for a 50 basis point cut the bank was never really likely to cut by more than 25bp. While the bank clearly needed to take further action to try and limit the growing downside risks to the growth outlook, its scope to cut interest rates aggressively is limited by significant inflationary pressures."

Edward Menashy, chief economist at Charles Stanley, said: "Many will find the current reductions in interest rates as questionable given the pressure from inflation. Inevitably the choice is between two evils: no cuts and a possible recession; cuts and possible inflation."

The rate cut came after a busy morning for corporate news.

Yell Group was the FTSE 100's biggest faller after the chief executive of the directories company said it was suffering as the UK economy weakened.

John Condron said the group was on track to meet full-year earnings targets but cut revenue forecasts because of "rising economic uncertainties". The shares fell 14.7 per cent to 281½p.

British Telecom fell 7.8 per cent to 242p after third-quarter core earnings rose in line with forecasts, but revenues at the telecoms group missed expectations as lower growth in premium rate services offset strong growth from broadband and IT services.

Rolls Royce dropped 8.6 per cent to 438½p as investors were left disappointed by the size of the aerospace engine group's share buybacks.

Announcing a 13 per cent rise in underlying full-year profit, Rolls Royce said it would continue to deliver profitable growth and positive cash flow in 2008 and increased its final dividend by 51 per cent to 8.96p a share.

BG Group rose 4.6 per cent to £11.27 after beating forecasts with a 25 per cent rise in fourth-quarter net profit. However, the company pared its medium-term growth targets and issued disappointing figures on reserves replacement, saying only half the oil and gas extracted last year was replaced by new reserves.

British Land fell 0.2 per cent to 960p after reporting a 17 per cent fall in the net asset value of its portfolio as commercial property valuations continued to drop. The market had expected a fall of 20 per cent.

Overnight in New York, the Nasdaq Composite index slipped into bear market territory. A fall of 1.3 per cent took its slide from its high in October to more than 20 per cent.

The Dow Jones Industrial Average closed down 0.5 per cent while the S&P 500 lost 0.8 per cent.

Baghdad's Stock Market Goes Modern

Located behind a series of concrete and barbed wire barricades in a Christian enclave of Baghdad, two things distinguish the Iraq Stock Exchange, the ISX, from its counterparts in New York, Hong Kong, Tokyo and London: the trading is done manually, and two cordial plainclothes guards at the white plastic table in the courtyard are happy to check your guns for you.

Inside the fortified converted hotel about a hundred middle-aged men in dark jackets jostle and speculate between 10 a.m. and noon three days a week. Since 2004, trading has been done the old-fashioned way, with pen and paper. Buyers shout at or call into their brokers, who stand around a series of white dry-erase boards that list each company's share buy and sell price. A man in the back takes out a pair of opera classes to read the writing on the wall. Once a sale is final, buyers wait 15 to 20 days for the stock certificate to be issued.

But all of that is about to change. Intrepid investors will not have to brave car bombs, checkpoints or interminable traffic jams much longer. In the next two months, all investors - foreign and Iraqi - will be able to buy and sell in a matter of minutes, once the ISX's computers and servers are switched on. Servers, computers and electronic boards have arrived but are not yet operational. Three back-up generators will make sure the market will be running non-stop, despite widespread electrical brownouts across the Iraqi capital.

"You will be able to buy at 10:00 in the morning and sell at 10:05," says CEO Taha Abdul-Salam, a short man with a buzz cut and a pistol holster under his jacket. The ISX is a private venture regulated by the Iraqi Securities Commission. It opened in 2004 with 15 companies. I hope to have thousands by the end of the year," says Taha. Realistically he expects maybe 20 more companies to sign on.

Currently the ISX represents 94 companies and works with 49 licensed brokerages. The total trading volume for 2007 was $354 million, a 250% increase over 2006. The ISX has a helpful website, with regular updates; Taha says the ISX has received 17 billion Iraqi Dinars, or $14 million in the past five months from investors in the region. Banks are 80% of the volume, followed by services, manufacturing, hotels and agriculture.

He expects some growing pains and adjustments when the automated system comes online. "It is an Iraqi tradition to see everything - we will not have a physical [stock] certificate anymore," says Taha, who expects that market capitalization of the index will increase 25% to 50% in the next year.

Down on the trading floor, eight hands suddenly reach for the whiteboard to trade shares of the al-Basra Bank, and then a moment later pull back. A female trader has just walked along the front of the room in elegant black boots and gold necklaces, chatting into her cell phone, pausing momentarily to scribble numbers in black marker on the wall.

In spite of the impending modernization, there is a cloud of gloom over the crowd of investors and spectators anxiously watching the board. Iraq is still adjusting to a free market economy from one where state-run socialism reigned supreme. Today the government doesn't protect industry; furthermore, goods coming from abroad undercut local manufacturing. This all happened suddenly and swiftly. "To be honest, the war destroyed us," says one elderly gentleman in a yellow scarf and round spectacles.

"Business is no good - the security affects the Iraqi economy and there is no management in the Iraqi companies. They are all raising capital but not increasing production," says Mohammad Ismail, who comes to the ISX three times a week. He gives the example of an electronics company that manufactures television sets that might have been competitive in the 1980s but have long since gone out of fashion. "These companies in Iraq cannot compete with these goods coming from China because the costs are very low for them and for us very high," says Haitham N. Elias, a broker.

At the same time he points out that share prices of many companies are undervalued, citing examples like al-Hilal Company - which manufactures air conditioning units - the Bicycle and Tube Company and Baghdad Hotels. "The prices for the shares of these companies are very low," says Elias. However he cautions against buying into the ISX to make a quick buck. The Iraqi market, he says, is a long-term investment.

Japan Air notches profit, chairman quits

TOKYO - Japan Airlines' chairman announced his resignation Friday to make room for younger leadership, saying he had seen the carrier through a successful turnaround.

The company reported Friday a 13.1 billion yen ($122 million) profit in the October-December quarter, reversing a 10.8 billion yen loss from the same quarter the previous year. It was the second straight quarterly profit after more than two years of losses.

Japan's biggest airline, known as JAL, has worked hard to improve its fortunes, cutting staff, dropping unprofitable routes and shifting to fuel-efficient aircraft.

Toshiyuki Shinmachi, 65, told a board meeting he will quit March 31, having seen the company get on track to profit, according to JAL. The move is also an effort to rejuvenate managerial ranks, it said.

Shinmachi, who became president in 2004, took office as chairman in 2006, partly to take responsibility for the airlines' faltering finances and a spate of safety problems. The chairman's seat will be left vacant, JAL said.

JAL has been struggling in recent years, hurt by a rising fuel bill, costly early retirement packages and a tarnished image from a series of safety lapses. The airline has been trying to regain customer confidence after Japanese passengers have instead opted for rival All Nippon Airways.

Japan Airlines Corp. swung into the black in the July-September quarter of 2007 after losing money in the fiscal first quarter and the previous two straight fiscal years.

Sales for the quarter ended Dec. 31 declined 4.4 percent to 558.2 billion yen ($5.2 billion) partly because of the sale of a part of Japan Airlines' stakes in a trading company called JALUX.

JAL said international travel to China, Vietnam and India was strong in recent months, offsetting a gradual decline on previously popular routes such as Europe and Hawaii, which are now less popular because of the declining yen.

Adding to its bottom line in October-December were cuts in expenses, which decreased 65.8 billion yen ($613 million) from a year earlier. Quarterly revenue from international flights rose 5.7 percent while revenue from domestic passengers and cargo declined slightly.

JAL left its forecast for the fiscal year through March at 7 billion yen ($65.2 million) in profit on sales of 2.238 trillion yen ($20.9 billion). In fiscal 2006, JAL had posted a 16.2 billion yen loss.

The management reshuffle in 2006 followed safety problems that began in 2005, and tarnished JAL's image, including wheels falling off during a landing and an engine that burst into flames.

The airline was reprimanded repeatedly by the government, but the errors continued, including a takeoff with a faulty latch and other problems. No one was injured.

Since then, JAL has stopped unprofitable routes and reorganized flights to decrease empty seats on flights.

For the April-December period, JAL earned profit of 20.4 billion yen ($190.1 million), a marked improvement from the 9.3 billion yen loss the same period in 2006.

The airline said it reduced fuel costs by 13.3 billion yen ($123.9 million), or 4 percent, in the first three quarters of fiscal 2007 from the previous fiscal year, thanks to fleet renewal, downsizing and route changes.

JAL shares rose 2.7 percent to 264 yen ($2.46) on the positive earnings news.

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 Thursday 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 nearly 4 percent, or 91 cents, to $22.17 at the open of trading Thursday. Cisco released quarterly results after the market closed Wednesday that matched Wall Street's subdued expectations but gave disappointing guidance.

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.

AutoNation quarterly profit, sales fall

FORT LAUDERDALE, Fla. - AutoNation Inc., the nation's largest auto retailer, said Thursday its fourth-quarter earnings fell 31 percent, falling short of Wall Street expectations as drops in California and Florida vehicle sales persisted amid a slumping housing market.

AutoNation Chief Executive Mike Jackson said he expected U.S. new vehicle sales to decline to "mid-15 million" vehicles in 2008, compared with total industrywide sales of 16.1 million vehicles in 2007.

But recent interest rate cuts and a proposed economic stimulus package could begin helping the industry as early as late 2008, Jackson told The Associated Press in a telephone interview.

"The medicine to deal with these declines is just arriving now," Jackson said. "It can't take hold until later this year or early next year. Therefore, '08 will be the third year of decline."

In the fourth quarter of 2007, AutoNation earned $51.7 million, or 28 cents per share, compared with a year-ago profit of $75.2 million, or 36 cents per share. Revenue slipped 4 percent to $4.21 billion, from $4.39 billion in the prior-year period.

Analysts expected profit of 31 cents per share on revenue of $4.22 billion, according to a poll by Thomson Financial.

Shares of AutoNation fell 11 cents to $14.81 Thursday, after falling as low as $14.06 earlier in the session.

The slowdown of vehicle sales in California and Florida — which together account for half of the retailer's new vehicle sales — drove down earnings. The two states account for 20 percent of industrywide new vehicle sales.

Fort Lauderdale-based AutoNation said the sluggish housing market in Florida and California curbed consumers' ability to buy big-ticket items such as new vehicles. A construction slowdown has hurt light truck sales, and Chief Operating Officer Mike Maroone said AutoNation was managing softness in used vehicle demand by lowering prices.

In the past two years, U.S. auto retail sales have declined 12 percent, the company said. Jackson said economic downturns run in cycles of 30 to 40 months, and the market is currently 24 months into the downswing.

Same-store sales in the fourth quarter were down 4.5 percent compared to the same period in 2006.

"Considering the tough environment that we're in, I think we're managing through it as well as we can," Jackson said.

Jackson said the major Detroit automakers have acknowledged the tough economic times by "reducing production to avoid the situation where they had in '05, where they had to resort to extreme incentive programs."

Ford Motor Co., General Motors Corp. and Chrysler LLC accounted for 34.8 percent of new vehicle revenue in 2007 — down from 37.8 percent in 2006.

"It's relative reliance upon the sale of U.S. domestic brands ... also likely continued to be a drag on performance," analyst Mark Warnsman of Calyon Securities Inc. wrote in a report.

For all 2007, net income was $278.7 million, or $1.39 per share, compared to $316.9 million, or $1.38 per share, for all of 2006. Both years included items for discontinued operations.

The company's revenue for 2007 totaled $17.7 billion, down 5 percent compared to 18.6 billion in 2006.

AutoNation operates 322 franchises in 15 states.

Softbank profit surges fourfold

TOKYO - The president of a Japanese mobile carrier that owns a stake in Yahoo said Thursday he is in talks with Yahoo chief Jerry Yang about how to respond to Microsoft's takeover bid.

"The talks have just started," said Masayoshi Son, president of Softbank Corp., at a news conference about earnings. "We need much more exchange before coming to a final decision."

Last week, Microsoft offered to buy Yahoo Inc. for about $44.6 billion. Softbank owns a 3.9 percent stake in Yahoo of the U.S. and about 40 percent of Yahoo Japan. Yahoo Inc. in turn owns about a third of Yahoo Japan.

Son declined to elaborate on his role in the talks or a possible outcome. In response to a reporter's question, he denied he was thinking of offering a counter offer to Microsoft Corp.

"Anything is possible, but I'm not thinking about that at the moment," he said.

Softbank, which has built its Internet empire through acquisitions, bought Vodafone's Japan unit for $15 billion in 2006.

Son, who boasts friendships not only with Yang but also Microsoft Chairman Bill Gates, noted Yahoo and Softbank have two important assets in common — Yahoo Japan and Chinese search engine Alibaba Group.

Revenue related to Softbank's one-third stake in Alibaba was a major boost to its October-December profit, lifting it by more than sixfold to 46.73 billion yen ($438.8 million) from 7.49 billion yen. Softbank booked a 57 billion yen ($535.2 million) one-time gain from the listing of affiliate Alibaba.com Ltd. in Hong Kong.

Son stressed Yahoo and Alibaba were still more popular search engines in Asia than Google, underscoring a cultural difference.

If Yahoo rejects Microsoft, some analysts believe the company may have to line up another acquisition offer, or make changes to better satisfy shareholders. Google reportedly has broached a potential partnership with Yahoo, but that alliance might be blocked by antitrust regulators.

In Japan's intensely competitive mobile service market, Softbank's price cuts have been luring subscribers away from Japan's top mobile company, NTT DoCoMo Inc., as well as from No. 2 KDDI Corp.

The defections to Softbank have accelerated since Japan adopted late last year "number portability," allowing people to switch carriers without changing phone numbers.

Softbank beat rivals in monthly subscriber gains for nine straight months, Son said. Softbank, which also offers Internet services, has been aggressive in wooing users with TV ads after it bought British cellular giant Vodafone Group PLC's struggling Japanese operations in 2006.

Symbolic of Softbank's aggressive tactics is a student discount starting this month that offers most services for free.

"We must first increase market share," he told reporters in a news conference broadcast live on the Internet.

Sales in the three months ended Dec. 31 was flat from a year earlier, inching down 1 percent to 694 billion yen ($6.5 billion) from 702 billion yen, the company said.

Japanese have been ahead of users in other nations in using cell phones to do restaurant searches, exchange e-mail, making electronic payments, read digital novels and download music.

Like offerings from rivals, Softbank's latest handsets show digital TV broadcasts and come with sophisticated digital cameras.

Son said that digital content, such as the news and entertainment, will increasingly be accessed on the Net via mobile phones as connection speeds grow faster. That will provide profit opportunities for Softbank, which he predicted will emerge the world's No. 1 Internet company in a decade or two.

For the first nine months of the fiscal year, Softbank's profit rose dramatically to 93.20 billion yen ($875.1 million) from 21.93 billion yen the same period the previous year. Nine-month sales rose 13 percent to 2.059 trillion yen ($19.33 billion).

Softbank shares jumped 6.2 percent to 2,130 yen ($20) in Tokyo. Earnings were announced after trading ended.

(This version CORRECTS in 4th graf that counter offer would not be to buy Microsoft.)

"Guitar Hero" makes Activision into profit hero

SAN FRANCISCO (Reuters) - Activision Inc (ATVI.O) on Thursday posted a higher-than-expected quarterly profit and gave a bullish revenue forecast, citing strong sales of its hit "Call of Duty 4" and "Guitar Hero 3" video games.

Activision, which is awaiting approval of its merger with the games unit of French telecoms and media giant Vivendi (VIV.PA), said a more aggressive roll-out of "Guitar Hero 3" in Europe this year will help sustain growth.

Activision expects revenue in its current, fourth fiscal quarter to be $350 million, about 25 percent higher than the average forecast of Wall Street analysts on Reuters Estimates.

"What's yet to be demonstrated is whether demand for 'Guitar Hero' will be as robust throughout Europe as a whole as it has in the North American market," said Ed Williams, an analyst with BMO Capital Markets.

"Guitar Hero 3," in which players strum guitar-shaped controllers in time with rock songs playing on-screen, was one of the best-selling games last year but had a muted European launch as Activision focused on satisfying U.S. demand.

The company is also banking on games tied to upcoming films such as "Kung Fu Panda" from DreamWorks (DWA.N) and a new James Bond title from Sony Corp (6758.T).

"All those products will be important this year but 'Guitar Hero 3' will probably be the most important," Activision Chief Executive Bobby Kotick told Reuters in an interview.

"We are making progress (in Europe) on the inventory front, on getting local content. We are definitely a year behind in Europe versus what we did in North America."

Activision posted a third-quarter net profit of $272.2 million, or 86 cents per share, compared with $142.8 million, or 46 cents per share, a year earlier. Excluding special items such as stock-based compensation, Activision earned 90 cents per share, beating the average Wall Street target of 81 cents.

Revenue soared 80 percent to $1.48 billion and beat an average forecast of $1.39 billion from Reuters Estimates.

Shares rose 0.9 percent, the equivalent of a shrug from investors now used to Activision's blistering growth. The stock has soared 55 percent over the past year, compared with a fall of 11 percent in both Electronic Arts Inc (ERTS.O) and Take-Two Interactive Software Inc (TTWO.O).

Many investors are in a holding pattern as they wait for the merger to close some time before the end of June, creating a new titan called Activision-Blizzard that will rival EA for the industry's top spot.

"When you get somewhere closer to actual consummation of the deal, people will sit down and decide whether they want to own this," said Kaufman Bros analyst Todd Mitchell.

PepsiCo profit falls on year-ago benefit

NEW YORK - PepsiCo Inc., the world's second-largest soft drink maker, said Thursday its fourth-quarter profit fell 31 percent from a year earlier, when results were boosted by a tax benefit. Without the benefit, earnings rose 8 percent.

The $602 million tax benefit — which added $128 million, or 36 cents per share, to the 2006 bottom line — was the result of a settlement with the Internal Revenue Service over a review of 1998-2002 returns.

The company, which also owns the Frito-Lay snacks business, said it expects earnings and revenue growth in 2008. Its shares rose 5.5 percent.

Net income dropped to $1.26 billion, or 77 cents per share, in the last three months of 2007 from $1.83 billion, or $1.09 per share, a year ago.

Excluding the tax benefit and certain restructuring costs, the company said it earned 80 cents per share in the latest quarter versus 74 cents a share a year earlier, putting it one penny ahead of analysts' expectations.

Analysts surveyed by Thomson Financial, who normally exclude one-time charges, had predicted earnings of 79 cents per share on revenue of $11.56 billion.

Revenue in the October-to-December quarter rose 17 percent to $12.35 billion.

Chief Executive Indra Nooyi said the company has been able to leverage its strong brands to deal with higher commodity costs. The company's current projections are for mid-single digit growth in commodity prices, and executives are especially concerned with price increases for energy and grains, such as wheat, corn and oats.

Chief Financial Officer Richard Goodman said Frito-Lay and PepsiCo International performed particularly well. Frito-Lay posted "very, very solid" 3 percent volume growth and 8 percent revenue growth, he said.

"International just continues to be a terrific story," Goodman added. The international business had revenue growth of 26 percent in the quarter with snacks volume up 8 percent and beverages volume up 9 percent.

For all of 2007, the company earned $5.66 billion, or $3.41 a share, versus $5.64 billion, or $3.34 a share, in 2006. Core earnings, a measure the company used to exclude one-time costs — rose 13 percent to $3.38 a share from $3 a share in 2006.

Revenue for the full year rose 12 percent to $39.47 billion from $35.14 billion.

PepsiCo said it expected 3 percent to 5 percent volume growth, mid- to high-single digit revenue growth and full-year earnings per share of $3.72 in 2008. That reflects a 10 percent growth rate from last year.

Its shares rose $3.68, or 5.5 percent, to $70.41 Thursday.

Analyst Bill Pecoriello of Morgan Stanley told investors the quarterly results were in line with expectations, and the company's stock could be better off given its outlook for the year.

"The market was certainly worried the guidance could have been lower as indicated by recent share performance," Pecoriello wrote in a research note.

Executives said Thursday they planned to introduce a number of new products this year.

In North and South America, the lineup included drinks such as a new low-calorie Gatorade called G2, a Tiger Woods-branded Gatorade, an energy drink called Amp and Tropicana Pure Valencia orange juice, which is made with the top 3 percent of the company's harvested fruit.

Snacks include True North nut clusters, nut chips and flavored nuts; Quaker Stila bars and granola pops and Pinch of Salt Ruffles. Frito-Lay said earlier this year it had also started a joint venture with hummus maker Sabra.

New products overseas included a Lay's sausage-flavored chip called Shaslik in Russia, baked bread chips in Turkey and the expansion of a drink called H2OH.

Purchase, N.Y.-based PepsiCo, which is second only to The Coca-Cola Co. in soft drink sales, has been expanding its non-cola and snacks portfolio. Recent details include expansions of partnerships with Unilever NV for Lipton-brand ready-to-drink teas and Starbucks to sell Starbucks Frappucino bottled drinks in China.

The company spent $1.3 billion on acquisitions in 2007, and Nooyi, the CEO, said the company had a robust pipeline of deals.

D.R. Horton swings to 1Q loss on charges

FORT WORTH, Texas - D.R. Horton Inc., the nation's largest homebuilder, said Thursday it swung to a loss in its fiscal first quarter, due to hefty charges to write off inventory and land values as the housing slump continues to worsen.

Losses for the quarter ended Dec. 31 totaled $128.8 million, or 41 cents per share, compared with profit of $109.7 million, or 35 cents per share, a year ago. The 2008 quarter includes $245.5 million in pretax charges to write down inventory and the value of land deposits.

Revenue plunged to $1.71 billion from $2.8 billion a year ago. The builder closed on 6,549 homes, down sharply from 10,202 in the 2007 period.

Analysts surveyed by Thomson Financial expected a loss of 25 cents per share on revenue of $1.62 billion.

D.R. Horton said its sales order backlog of homes under contract at Dec. 31 was 8,138 homes ($2.0 billion), compared to 16,694 homes ($4.7 billion), at Dec. 31, 2006. The cancellation rate for the first quarter was 44 percent.

"Market conditions remained challenging in our December quarter as inventory levels of both new and existing homes remained high while pricing remained very competitive," said Donald R. Horton, chairman, in a statement. "Lending standards continue to be more restrictive than during the previous year, and buyers continued to approach the home buying decision cautiously."

Horton said he expects the housing environment to remain challenging. The company's 2008 goal is to generate at least $1 billion in cash flow from operations. In the first quarter it generated more than $550 million in cash flow from operations, mainly driven by $476 million in cash generated by reducing our inventories.

Shares rose 23 cents, or 1.6 percent, to $15.04.

Unilever profit falls, revenue up

AMSTERDAM, Netherlands - Unilever NV, the maker of consumer products such as Dove soap, Ben & Jerry's ice cream and Lipton tea, on Thursday reported a sharp decline in its fourth-quarter profit compared with results a year ago fattened by a gain from selling a business. Its sales edged up.

Chief Executive Patrick Cescau said rising commodity costs would be an issue again in 2008, but expects sales growth.

"We're clearly facing a more challenging business environment in 2008," Cescau said at a news conference in London. "There's no doubt that some kind of an economic slowdown in the U.S. is now under way."

Unilever, with dual headquarters in London and in Rotterdam, Netherlands, is the world's second largest maker of consumer products after Procter & Gamble Co.

Net profit dropped to 721 million euros ($1.06 billion) in the last three months of 2007 from 2.03 billion euros a year earlier. Sales rose 1.7 percent to 9.89 billion euros ($14.6 billion) from 9.72 billion euros a year ago.

In the fourth quarter last year, Unilever booked a 1.2 billion euro gain on selling its frozen foods division in Europe.

Without the impact of that disposal and the weakening dollar, sales would have risen 6 percent, split evenly between volume growth and price increases, it said.

The company said it continued to see growth in the United States, despite fears of a slowdown.

"In the U.S., overall consumer demand has held up well in our categories," the company said in a statement. "Market growth in home care and personal care slowed somewhat in the second half-year, but this was compensated for by robust demand in foods."

But the company said U.S. margins slipped as it had not been able to fully pass on increasing costs to customers.

At his news conference, Cescau said forecast company wide sales growth "at the upper end" of a 3-5 percent range in 2008.

He said it was likely a U.S. economic slowdown would have some spillover into European markets, but expects overall growth of 4 percent to 5 percent in Unilever's markets globally.

He said there was no sign consumers were switching to cheaper products to save money, but noted that Unilever's less expensive brands, such as Suave shampoo in the U.S., would benefit if they did.

Shares fell 2.8 percent to 21.06 euros ($31.02) in Amsterdam.

Full year net profit fell to 3.89 billion euros ($5.73 billion) from 4.75 billion euros, while sales rose 1.5 percent to 40.2 billion euros ($59.2 billion).

Analysts were generally upbeat about Unilever's earnings.

"Given the higher commodity costs ... we are impressed with Unilever's performance on margins, which was helped significantly by pricing and the benefits of ... restructuring," said Sanford Bernstein analyst Andrew Wood wrote in a note.

In Europe, Unilever's largest market, sales were up 3.4 percent to 3.74 billion euros in the quarter.

Rob Mann of Collins Stewart said that increase, "albeit against a weak comparison, is the best that has been achieved for many years."

He said the company's underlying profit margins had improved "less than the market was hoping for, but must be balanced against the delivery of ongoing top line performance, much the more important of the two."

Unilever's other brands include Knorr soups, Hellmann's mayonnaise and the diet products range Slimfast, among other products.

"We have seen improving trends almost everywhere," the company said. "All major countries grew in the year, including the UK, Germany, Italy and the Netherlands. In France sales were slightly up in a challenging market."

In the Americas, sales fell 3.3 percent to 3.33 billion euros ($5.51 billion) although the company said that "underlying" sales, which ignores discontinued operations and currency exchange movements, were up.

In August, the company announced plans to cut 20,000 jobs worldwide in the coming four years to reduce costs, around 11 percent of its 179,000-member work force.

Around half of those jobs are at businesses it plans to sell, including its U.S. laundry arm, with annual sales of around 2 billion euros ($2.9 billion).

Unilever's detergent brands, including All, Surf and Snuggles, face an uphill battle against Procter & Gamble's U.S. brands such as Tide, Bold, Bounce and Downy.

In Asia and Africa, sales rose 5.7 percent to 2.82 billion euros ($4.15 billion).

"India, Indonesia, the Philippines, South Africa and Turkey...all grew in double digits and (in) big categories such as laundry and personal wash," Unilever said.

Infineon reports 1Q loss

FRANKFURT, Germany - Infineon Technologies AG, the German maker of semiconductors, said Thursday that a downturn at its Qimonda computer memory chip subsidiary pushed it to a loss in the first quarter of its fiscal year as chip prices fell.

The company also reduced its outlook for demand for its products used by cell phone makers, and its shares tumbled 13.6 percent in Frankfurt to close at 5.79 euros ($8.47).

The Neubiberg-based company posted a loss of 396 million euros ($578.9 million) in the October-December period — its fourth consecutive quarterly loss — compared with a profit of 120 million euros a year earlier. Still, the results were still better than the loss of 445 million euros ($650.6 million) that analysts polled by Dow Jones Newswires had forecast.

The loss was largely due to a decline in profit from Qimonda, in which Infineon holds a 77.5 percent stake, the company said.

Revenue slipped to 1.6 billion euros ($2.3 billion) in the quarter from 2.1 billion euros a year ago.

Investors were disappointed by the company's revelation that it expects to post a pretax loss for the rest of the fiscal year on its communications unit, which makes chips and other products for wireless communications and applications.

The company said it expects that revenue in the unit will fall by 30 million euros ($43.9 million) in the second quarter because of declining demand from mobile phone makers.

Despite the drop, chief executive Wolfgang Ziebart said Infineon was still optimistic it could reach its target of a 10 percent pretax margin in the 2009 fiscal year, but added that "uncertain prospects for the global economy, the adverse currency development and the revised outlook are headwinds that make reaching this goal more challenging."

Excluding Qimonda, Infineon said its pretax profit was 65 million euros ($95 million) in the quarter, compared with a loss of 9 million euros a year earlier.

FTSE 100 falls after weak earnings

The FTSE lost ground on Thursday as the Bank of England delivered the expected cut in UK interest rates but cautioned on rising inflation.

The move by the bank's monetary policy committee to cut the official bank rate by a quarter of a percentage point to 5.25 per cent amid growing signs of a weakening UK economy had been widely expected and already priced into the market, strategist said.

But with a few dealers hoping for a cut of 50 basis points, leading shares came off as the bank warned of an upside risk for inflation in coming months.

The bank said: "The prospects for output growth abroad have deteriorated and the disruption to global financial markets has continued. In the UK, credit conditions for households and businesses are tightening.

"Consumer price inflation, at 2.1 per cent in December, was close to the 2 per cent target, but higher energy and food prices are expected to raise inflation, possibly quite sharply, in the coming months."

Howard Archer, strategist at Global Insight, said: "Despite calls for a 50 basis point cut the bank was never really likely to cut by more than 25bp. While the bank clearly needed to take further action to try and limit the growing downside risks to the growth outlook, its scope to cut interest rates aggressively is limited by significant inflationary pressures."

Edward Menashy, chief economist at Charles Stanley, said: "Many will find the current reductions in interest rates as questionable given the pressure from inflation. Inevitably the choice is between two evils: no cuts and a possible recession; cuts and possible inflation."

Down 40 points prior to the rate announcement, the FTSE 100 extended its losses as a raft of weak earnings news added to the rate disappointment. At the close, the senior London index was down 151.3 points, or 2.6 per cent, to 5,724.1. The mid-cap FTSE 250 lost 140.3 points, or 1.4 per cent to 9,764.2.

GlaxoSmithKline fell 7.6 per cent to £10.77 after forecasting lower earnings this year due to competition from manufacturers of generic treatments and falling sales of blockbusters such as diabetes drug Avandia. Concerns over generic competition prompted Dresdner Kleinwort to lower its target price on AstraZeneca from £20.98 to £18.40.

Analyst Tim Franklin said: "Generic launches against Nexium and Seroquel would negatively impact our 2008 base forecast by 11 per cent and EBIT and EPS by 30 per cent." AstraZeneca shares fell 2.4 per cent to £20.20.

Yell Group was the FTSE 100's biggest faller after the directories group's chief executive said it was suffering as the UK economy weakened.

John Condron said the group was on track to meet full-year earnings targets but cut revenue forecasts because of "rising economic uncertainties". The shares fell 15.2 per cent to 276p.

British Telecom fell 9.8 per cent to 247¾p after third-quarter core earnings rose in line with forecasts, but revenues at the telecoms group missed expectations as lower growth in premium rate services offset strong growth from broadband and IT services.

Rolls Royce dropped 10.2 per cent to 436¼p as investors were left disappointed by the size of the aerospace engine group's share buybacks.

Announcing a 13 per cent rise in underlying full-year profit, Rolls Royce said it would continue to deliver profitable growth and positive cash flow in 2008 and increased its final dividend by 51 per cent to 8.96p a share.

BG Group rose 3.8 per cent to £11.16 after beating forecasts with a 25 per cent rise in fourth-quarter net profit. However, the company pared its medium-term growth targets and issued disappointing figures on reserves replacement, saying only half the oil and gas extracted last year was replaced by new reserves.

British Land fell 1.3 per cent to 949½p after reporting a 17 per cent fall in the net asset value of its portfolio as commercial property valuations continued to drop. The market had expected a fall of 20 per cent.

Global Reach Helps Cisco Post Strong Earnings

Cisco Systems posted solid financial results for its most recent quarter on Wednesday, but the networking giant lowered its financial forecast for the months ahead, citing a slowdown in U.S. and European markets.

The company's earnings were in line with financial expectations. Excluding charges, earnings were US$2.4 billion, or $0.38 per share, on $9.8 billion in revenue. Financial analysts had been expecting earnings of $0.38 per share on $9.78 billion in revenue, according to a survey by Thomson Financial.

Sales were up 16.5 percent year over year for Cisco's second fiscal quarter of 2008, which ended Jan. 26.

Cisco, the world's largest router manufacturer, has benefitted from the growth of Internet traffic over the past decade, and-- more recently-- from the flurry of investments in Web 2.0 technologies. But there have been signs recently that growth may be slowing in this area. Just last week, Google alarmed Wall Street by falling just short of expectations, and worries of a U.S. recession may have caused jitters in U.S. stock markets recently.

The next few quarters will be "extremely challenging," Cisco Chairman and CEO John Chambers said in a conference call with analysts, adding that his recent participation in the World Economic Forum in Davos, Switzerland, only reinforced this perception. "We are seeing our U.S. and European customers becoming increasingly cautious. This was my key take-away from the World Economic Forum two weeks ago."

The company saw sales growth drop off during January, and it is sharply lowering its financial guidance for the quarter.

Cisco expects revenue to grow "approximately 10 percent" year over year during the third quarter, Chambers said. Analysts had been expecting revenue growth in the 15 percent range, according to Thomson Financial.

Cisco's stock took a drubbing in after-hours trading after the results were released. It was trading at $21.34 late Wednesday afternoon, down more than 7.5 percent from the day's close, according to Yahoo Finance.

Still, Chambers sounded some optimistic notes during the call. He said that he does not expect market conditions to deteriorate further, and added that lower valuations of technology companies could actually help Cisco, which made 11 acquisitions in 2007.

"It is our intent to expand our market share during this correction, as we have done in the past," he said. "We think we can gain more market share during the challenging time."

Growth in Web 2.0 applications will drive overall growth for the next five to seven years, he predicted. More than 60 percent of the company's business now occurs outside of the U.S., he added.

This was the last financial analyst call for outgoing Chief Financial Officer Dennis Powell, who plans to retire on Feb. 15. He will be succeeded by Cisco Senior Vice President of Finance Frank Calderoni.

Higher prices, volume boost Reynolds 4Q

CHARLOTTE, N.C. - Reynolds American Inc., the nation's second-largest tobacco company, said Thursday its fourth-quarter profit climbed 65 percent on higher prices and volume.

Net income at the Winston-Salem, N.C.-based tobacco company rose to $297 million, or $1.01 per share, from $180 million, or 61 cents per share, in the year ago period.

Revenue rose 7.8 percent to $2.23 billion from $2.07 billion in the previous year.

The company reported a one-time trademark impairment charge of $65 million, or 14 cents per share, in the quarter.

Wall Street estimated earnings of $1.15 per share on $2.26 billion of sales, according to analysts polled by Thomson Financial. Thomson estimates usually exclude special items.

Excluding the impairment charge, Reynolds matched Wall Street expectations.

During the period, market share for the company's "growth brands" — Camel, Kool and Pall Mall — rose 0.5 share points to 13.2 percent. Leading that share gain was a strong performance by the flagship Camel brand.

Sales from the company's new smokeless tobacco division, Conwood Co., rose 13 percent to $175 million. The second-largest U.S. snuff maker, acquired by Reynolds in 2006, makes the Kodiak and Grizzly brands.

For the year, Reynolds American reported earnings of $1.31 billion, or $4.43 per share, compared with $1.21 billion, or $4.10 per share, in 2006. Revenue rose 6 percent to $9.02 billion.

D.R. Horton posts loss after charges

NEW YORK (Reuters) - D.R. Horton Inc (DHI.N), the largest U.S. home builder, posted a quarterly loss that was narrower than expected on Thursday as it took big inventory charges and wrote off land option contracts.

D.R. Horton posted a loss of $128.8 million, or 41 cents per share, for the first quarter ended December 31 compared with a year-earlier profit of $109.7 million, or 35 cents per share.

The results included land impairment and write-off charges totaling $245.5 million.

Analysts expected the company to lose 45 cents per share.

"Market conditions remained challenging in our December quarter as inventory levels of both new and existing homes remained high while pricing remained very competitive," board Chairman Donald Horton said.

"Lending standards continue to be more restrictive than during the previous year, and buyers continued to approach the home-buying decision cautiously. We expect the housing environment to remain challenging," he said.

First-quarter home-building revenue fell 39 percent to $1.71 billion. The company closed on 6,549 homes in the quarter, down 36 percent from the year-ago quarter.

Net orders in the quarter fell 52 percent to 4,245 while the value tumbled 61 percent to $900 million.

D.R. Horton generated more than $558 million in cash flow from operations during the quarter by selling off part of its inventory of unsold homes and reducing the mortgages it held for sale. It used part of the cash to pay off the outstanding balance on a revolving credit facility and to pay down other debt.

In November, the company said it set a goal to generate at least $1 billion in cash flow from operations in fiscal 2008.

PepsiCo profit falls

NEW YORK (Reuters) - PepsiCo Inc (PEP.N) reported lower quarterly profit on Thursday, hurt by a higher tax rate and a decline in sales volume of carbonated soft drinks.

The company, which makes Pepsi Cola drinks, Frito Lay snacks and Quaker oatmeal, said net income for the fourth quarter ended December 29 was $1.26 billion, or 77 cents per share, compared with $1.83 billion, or $1.09 per share, a year earlier.

Excluding restructuring charges and tax items, the company earned 80 cents per share, meeting the average estimate of analysts polled by Reuters Estimates.

Net revenue for the quarter rose to $12.35 billion, from $10.57 billion a year ago.

For 2008, PepsiCo said it expects performance to be in line with its long-term targets. The company is expecting sales volume to rise 3 percent to 5 percent, net revenue to rise at a mid-to-high single digit percentage rate and earnings per share of at least $3.72.

The company said it expects total worldwide costs to rise at a mid-single-digit rate.

Last month Pepsi Bottling Group Inc (PBG.N), the world's largest bottler of Pepsi drinks, reported flat sales volume in the United States and weaker sales of refrigerated drinks, sold at places such as convenience stores and service stations.

One analyst said those results implied economic weakness rather than shorter-term issues such as weather.

Membership growth lifts Aetna 4Q profit

HARTFORD, Conn. - Aetna Inc. said Thursday its fourth-quarter profit rose 3 percent from membership growth and premium and fee rate increases, and the managed care provider benefited from continued cost cuts and stock buybacks.

Net income grew to $448.4 million, or 87 cents per share, from $434.1 million, or 80 cents per share, a year ago. Excluding items, profit totaled 88 cents per share in the latest period.

Revenue rose 12 percent to $7.14 billion from $6.36 billion a year ago.

Aetna had forecast fourth-quarter earnings of about 87 cents per share. Analysts polled by Thomson Financial predicted earnings of 88 cents per share on slightly higher $7.17 billion in revenue.

The company's combined medical-loss ratio, which measures the amount of money spent on services compared with the amount of payments collected, widened to 80.3 percent for the fourth quarter from 78.8 percent in the 2006 period.

Fourth-quarter total medical membership increased organically by 168,000. Including Goodhealth Worldwides 58,000 members, total medical membership at Dec. 31 was 16.85 million members compared with 16.61 million at Sept. 30 and 15.43 million a year ago.

Looking ahead, Aetna forecast first-quarter adjusted earnings of 92 cents per share and 2008 profit of $4.

Wall Street is predicting higher quarterly earnings of 94 cents per share and 2008 earnings per share of $4.03.

Covidien quarterly net income climbs

NEW YORK (Reuters) - Covidien Ltd (COV.N) said on Thursday its fiscal first-quarter earnings rose, spurred by strong sales from its imaging solutions and medical devices business.

Net income in the quarter ended Dec 28, 2007 was $420 million, or 84 cents a share, compared with a year-ago profit of $338 million, or 68 cents a share.

Excluding items, income from continuing operations was 59 cents a share, down from 69 cents a share, a year earlier.

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.