Misery Continues for Big Mortgage Players

Talks of a Countrywide buyout may have bolstered mortgage stocks on Jan. 10, but one big deal won't cure the sector's ills

Talk that Bank of America (BAC) may be close to cementing a deal to buy Countrywide Financial (CFC) may have rescued stocks of mortgage lenders from their lows on Jan. 10, but no one expects the acquisition to save the mortgage industry as a whole from an extended period of pain as the housing slump runs its course.

And while there's little similarity between Countrywide and companies like Thornburg Mortgage (TMA), which aren't seen at serious risk of going under, investors' aversion to all kinds of mortgage debt has caught the various players in the industry in the same net.

Given continued deterioration in the credit markets, it's hard to fault the market for hammering shares of Thornburg after the company's Jan. 9 announcement that it plans to raise $200 million in capital through two public offerings.

After all, Thornburg's announcement came fast on the heels of a rumor that Countrywide would soon be filing for bankruptcy protection, a rumor the nation's largest mortgage lender denied. That talk of insolvency dissipated quickly on Jan. 10 after the Wall Street Journal reported that BofA is in "advanced talks" to acquire Countrywide.

It was a $2 billion investment by BofA last August, in the form of a non-voting convertible preferred security yielding 7.25% annually, and which is convertible into a 16% equity interest in Countrywide, that's widely believed to be the reason for the company's survival to this point.

Volatile activity in Countrywide shares has raised eyebrows on the Street in recent days and shone a spotlight on the mortgage sector. The shares swooned amid bankruptcy rumors on Jan. 8 and fell further after a Jan. 9 update in which the company said payments in December were overdue on 7% of the total loans it services, compared with 6.3% in November and 5% a year earlier. Foreclosures were pending on 1% of all loans serviced, up from 0.65% a year before.

The steep drop in Countrywide's market cap over the past year to roughly $5 billion makes it attractively priced, even if its assets may be worth less than its liabilities, Standard & Poor's said in a research note on Jan. 10.

While Countrywide's being acquired by Bank of America won't shorten the process the housing sector needs to go through to right itself, a deal could still provide some comfort.

Talk that BofA was interested in buying Countrywide enabled shares of the troubled mortgage lender to bounce back from being down nearly 6% to a 51.4% gain to $7.75 at the close of trading on Jan. 10.

"We believe that a solvent Countrywide is good for the overall market, since a failure of the company could have further negative implications for the housing market," the S&P note said.

Still, it's not really fair to paint Thornburg and Countrywide with the same brush. Unlike Countrywide, Thornburg originates or buys mortgages to wealthy homeowners with top-notch credit quality. The high quality of its assets ensures access to necessary financing from securities dealers, notes Bose George, an equity analyst at Keefe Bruyette & Woods.

Nor has Thornburg been tainted by questions about dubious lending practices that may have encouraged borrowers to take on mortgages they couldn't afford. Thornburg, based in Santa Fe, N.M., issues only jumbo-sized mortgages, worth at least $417,000, though many of them still have adjustable rates.

But in a credit environment that has investors generally avoiding mortgage debt, market perception of the distinctions between the two companies have blurred.

On Jan. 9, Thornburg said it would launch two public offerings concurrently to raise about $200 million in long-term capital. One offering will be for an additional 4.5 million shares of its existing convertible, redeemable preferred stock and the second is for 11 million shares of common stock.

The majority of the net proceeds of the offerings will be used to finance the acquisition or origination of additional adjustable-rate mortgages, Thornburg said in its news release. The rest of the money will cover liquidity needs and working capital, possibly including repayment of maturing debt obligations, it said.

Investors may have balked at the dilutive effect the additional shares will have on Thornburg's earnings per share, and the stock initially sank on the news on Jan. 10. The BofA news later in the day helped Thornburg shares regain some ground, and the stock closed 4.6% lower at $8.38 after having fallen as much as 12% earlier in the day.

Thornburg, which is structured as a Real Estate Investment Trust, surprised the market in mid-October when it eliminated its dividend, citing the need to conserve cash for further events related to the credit crisis. But during the fourth quarter, the company successfully met all of its margin calls - or requirements to boost the collateral it posts on loans - from lenders thanks to $500 million in cash it had raised by selling $21.9 billion worth of assets in August, said George at KBW.

In December, the company declared a 25-cent common dividend for the fourth quarter, though its book value dropped substantially as the value of its asset and swaps fell during the quarter.

Company executives recently spoke of attractive investment opportunities with returns on equity between 15% and 20%, George wrote in a Jan. 10 research note. (KBW expects to provide investment banking services to Thornburg within the next three months and makes a market in its securities.)

Although Thornburg said it was raising capital in order to buy assets, Bose said that he thinks part of the market's concern is that the company might want some excess capital on hand in case credit market conditions continue to worsen.

A profusion of weak data from mortgage companies has put pressure on Thornburg's stock price, and asset values prices and liquidity have been extremely weak since the beginning of this year, George said.

Although it acknowledged the attractive yields new investments will probably offer, Standard & Poor's said on Thursday that it had concerns about earnings-per-share dilution stemming from the equity offering at a price below S&P's book value estimate. The stock research outfit reaffirmed its hold rating on the stock but trimmed its 12-month target price to $9 from $10 to reflect lower peer multiples. (S&P, like BusinessWeek, is a division of The McGraw-Hill Companies (MHP).)

Thornburg's book value remains at risk due to lingering hostility from the financing market and the threat to its swap values posed by declining interest rates, Credit Suisse analyst Moshe Orenbuch said in a Jan. 10 research note.

He predicted Thornburg shares would trade at a discount to their $8.20 book value and reiterated his underperform rating and $5 price target. (Credit Suisse does and seeks to do business with the companies covered in its research reports.)

Market perception may become more positive if the company is able to get sufficiently strong returns on the assets it buys, which will be mortgage-backed securities from the secondary market, said George at KBW.

As for Countrywide, analysts may have to follow it from afar as just another name in the giant BofA stable.

Movers: Countrywide, Delta Air Lines, Capital One, Target, Gap

Countrywide Financial (CFC) shares surge 48% on a Wall Street Journal report that Bank of America (BAC) is close to buying the struggling mortgage lender.

Delta Air Lines (DAL) rises after the Wall Street Journal reports DAL board to consider formal merger talks with Northwest Airlines (NWA) and UAL (UAUA). S&P reiterates hold on DAL.

Gap (GPS) falls after posting 6% December same-store sales drop, 6% total sales drop.

Capital One Financial (COF) sees fourth quarter EPS of about $0.60, 2007 EPS of about $3.97, below its prior expectation of about $5.00. It says the reduction in expected EPS is driven primarily by increased provision expense, additional legal reserves established in the fourth quarter.

Target (TGT) posts 5% lower December same-store sales (reported basis), 0.1% higher total sales. On adjusted basis, December same-store sale rose 0.6%. Says Decmber sales were in line with mid-month update provided on Decmber 24; as a result, it continues to believe that fourth quarter EPS will not meet last year's performance.

Wal-Mart Stores (WMT) expects January same-store sales to run at about 2%. It anticipates fourth quarter EPS guidance within previously stated guidance of $0.99-$1.03 from continuing operations, however, notes fourth quarter EPS will be pressured by higher interest expense vs. last year. Posts 2.4% higher Decmber total U.S. comp-store sales (excluding fuel), 8.4% higher total sales.

Alcoa (AA) posts $0.74 (including $0.38 gain from restructuring adjustment and a tax benefit) vs. $0.29 a year ago, fourth quarter EPS from continuing ops despite 5.4% revenue decline, due to lower LME prices and the exclusion of results from the soft alloy extrusion business.

Freddie Mac (FRE) falls after Moody's Investors Services places FRE A-Bank Financial Strength Rating (BFSR) on review for possible downgrade reflecting the rating agency's view that it may experience higher credit losses than Moody's previous expectations.

The Wall Street Journal reports that Citigroup (C) and Merrill Lynch (MER) are in talks to get additional capital infusions from investors, primarily foreign governments. Citigroup could get as much as $10 billion, while Merill is expected to get $3-$4 billion.

Huntington Bancshares (HBAN) sees fourth quarter loss of $0.65 per share, which reflects net negative impact from significant items of $1.00 consisting of costs associated with Franklin Credit Management Corp., market-related losses, merger-related costs, VISA indemnification charge, additions to litigation reserves on existing cases.

Men's Wearhouse (MW) cuts $0.43-$0.48 fourth quarter EPS guidance to $0.16-$0.18, bringing the fiscal year 2008 view to $2.60-$2.62 (from previous estimate of $2.87-$2.92). It says "substantially" lower traffic levels in Decmber at all of its retail stores, in both U.S. and Canada, drove weaker-than-planned comparable store sales results. It expects continued weak traffic trends this month.

GameStop (GME) posts a 35% rise in total sales for 2007 holiday period, 20% rise in comp-store sales.

posts 9% lower November/Decmber (holiday selling period) same-store sales, 10% lower revenue. For the second quarter, it now expects same-store sales to decrease approximately 8%-9%, EPS from continuing operations are expected to be between $1.08-$1.13.

Dillard's (DDS) posts 5% higher Decmber same-store sales, 5% higher total sales.

Gymboree (GYMB) raises guidance, now sees fourth quarter same-store sales up in mid-to-high single digits. It raises fourth quarter EPS guidance by $0.10 to $0.88-$0.90; it sees fiscal year 2008 EPS of $2.64-$2.66.

AnnTaylor Stores (ANN) posts 9.4% Decmber same-store sales drop, 3.8% total sales drop. Based on year-to-date business results through Decmber and its current outlook for January, it now sees fiscal year 2008 EPS of $1.80-$1.85.

Limited Brands (LTD) posts 8% lower Decmber same-stores sales, 14% lower total sales. Although there is still a month left in its fourth quarter, as a result of 8% drop in comps, it now expects to report fourth quarter EPS at low-to-mid point of its previously announced range of $0.90-$1.05.

Chico's FAS (CHS) posts 14% lower company-owned same-store sales, 5.6% lower total sales. With the lower than anticipated sales, combined with the higher markdowns and additional promotions required to move the merchandise in the fourth quarter, now expects a loss of $0.13-$0.16 for the fourth quarter.

Electronics for Imaging (EFII) sees lower-than-expected fourth quarter non-GAAP EPS of $0.22-$0.24 on revenue of about $152 million. It cites weak demand for its high-margin Fiery products, which resulted in increased pressure on gross margin. Also notes higher-than-expected operating expenses of about $72 million. It sees first quarter revenue of $133-$137 million; it notes continued weakness in the Fiery business, compounded by normal seasonality coming off a lower fourth quarter.

Pfizer (PFE) says New York state court ruled in favor of PFE on motion relating to litigation over the company's Celebrex medication, ruling that the plaintiffs failed to present reliable scientific evidence necessary to prove that Celebrex can cause heart attacks and strokes at 200 mg daily -- the most commonly prescribed dosage of the Pfizer pain medication.

Morton's Restaurant Group (MRT) cuts $0.46-$0.48 fourth quarter EPS guidance to $0.36-$0.39 on lower-than-expected revenue of about $100.4 million; it expects decline of about 0.7% in fourth quarter same-restaurant revenues, down from previous guidance of +2% to +3%. It cites "challenging and uncertain macroeconomic environment" in U.S. and industry headwinds, which resulted in weaker guest traffic throughout the industry.

Charming Shoppes (CHRS) sees $0.17-$0.20 fourth quarter loss, vs. previous $0.06-$0.08 loss guidance. It says revised guidance includes net sales in range of $790-$795 million, vs. $874 million reported last year.

E*Trade Fails to Sway the Skeptics

At first glance, a Jan. 9 report from troubled online broker E*Trade Financial (ETFC) looked like good news. The upbeat press release came one day after E*Trade stock hit an 11-year low, with the firm saying its turnaround plan was finding "early success."

The stock opened 15.6% higher on Jan. 9, but then the rally fizzled. Investors and analysts, trained by the credit crisis to be suspicious, started worrying they were only getting half the story. Key questions about E*Trade's future remained unanswered.

Among the news released by E*Trade: It sold off $3 billion in asset-backed securities over the past month and lost less than $5 million on the transactions. That compares well with the sale of $3 billion of more toxic debt in November. The online bank and broker, which has seen its balance sheet demolished by the credit crisis, netted just $800 million from that transaction — in effect losing $2.2 billion.

After worries about its financial situation surfaced last fall, the firm lost customers, who pulled billions of dollars out of E*Trade accounts. On Jan. 9, E*Trade implied the bleeding had stopped.

Customers opened 87,000 new accounts in December, the firm says. Total client assets fell modestly, from $192 billion on Nov. 29 to $190 billion at the end of the year, but cash held steady at $33 billion.

"We have taken important steps in the execution of our turnaround plan by reducing balance sheet-related risk and maintaining strong bank capital levels," E*Trade's acting chief executive and president R. Jarrett Lilien said in a statement.

E*Trade is providing "partial information," says Standard & Poor's equity analyst Jason Willey. "There are just not enough details." (S&P, like BusinessWeek, is a unit of the McGraw-Hill Companies.)

For example, E*Trade said it signed up 87,000 new accounts in December, but didn't say how many accounts had been closed.

And several analysts said they were worried E*Trade is offering expensive incentives to attract those clients' assets. Bank of America (BAC) analyst Michael Hecht wondered how much the firm is paying in advertising, promotion, high-interest rates on deposits and free trading and bonus offers.

Until recently, E*Trade was a leader among online brokers, attracting thousands of new clients and posting record trading volume. But worries about toxic debt, including subprime mortgages, on E*Trade's balance sheet shook clients' confidence.

While most of the worst debt has been unloaded, investors are still closely watching the $12 billion in home equity loans that E*Trade owns. As home prices around the country fall, the quality of these loans is in question. E*Trade said its home equity balance had fallen a bit, from $12.7 billion to $12 billion in the past quarter, a sign borrowers are paying off their debts, but provided no other information on credit quality.

E*Trade has enough strength to survive financially, says Morningstar (MORN) analyst Jaime Peters. A bailout from Citadel Investment Group may have been expensive — investors had to give up 18% of the company to Citadel — but it put E*Trade's risky balance sheet on firmer footing. However, Peters adds, "The question is: Are customers going to lose confidence in them?"

E*Trade's web- and investment-savvy customers are aware of E*Trade's plight, and are already considering moving their money elsewhere, she says. And E*Trade's rivals are doing whatever they can to win them away. A large-scale defection would be disastrous. As Peters wrote recently, "Keeping client assets is the number-one priority for the company, because without clients, E*Trade has no business."

E*Trade made other announcements Jan. 9, including the decision to close its small institutional trading business and lay off 30 employees.

But the big focus of investors will be Jan. 24, when E*Trade releases its full quarter results. Then, investors will get key information they were looking for on Jan. 9: How many customers have really left E*Trade? How expensive are the incentives being used to keep and attract client money? How is the quality of the home equity portfolio holding up?

By the early afternoon on Jan. 9, E*Trade's stock had given up the day's gains, putting the stock briefly below its 11-year low again. In the late afternoon, as the rest of the market rallied, E*Trade did, too. It ended the day up 15 cents, or 6.7%, to $2.40 per share. Since the beginning of the year, the stock is still down 32%. Since July, it's off almost 90%.

The Jan. 9 release might have stopped E*Trade's fortunes from sliding even further, but it looks like the company will have to provide a second helping of positive news later in the month to ease the market's worries.

Analyst Actions: Garmin, Alliant Techsystems, Apollo Group, Shutterfly

DEUTCHE BANK DOWNGRADES GARMIN TO HOLD FROM BUY

Deutche Bank analyst Jonathan Goldberg says after checks at the Consumer Electronics Show, he's concerned about competitive pressure in the U.S. and pricing. He comes away with a sense that Tom Tom is determined to gain further share in the U.S. and may prove more aggressive than previously expected to achieve those aims.

Also, Goldman says Garmin (GRMN) cautioned some EU markets are slowing, the first such caution it expressed. And while Asia is showing signs of promise, it's not likely to become material until 2009 at the earliest.

While he thinks the near term still looks good, increasing uncertainty for 2008 means Garmin can no longer attract a premium multiple, especially in light of the recent market selloff. He cuts his price target to $90.

FRIEDMAN DOWNGRADES ALLIANT TECHSYSTEMS

Alliant Techsystems has negotiated definitive agreements with Canadian-based MacDonald, Dettwiler and Associates to acquire its Information Systems and Geospatial Information Services businesses for C$1.325 billion. Friedman analyst Patrick McCarthy says he cuts Alliant Techsystems (ATK) to market perform from outperform as he thinks the company growing its space unit makes perfect sense in the long term, but he sees the shares under pressure in the near term.

Given its breadth and depth of the acquisition, McCarthy thinks ATK's buying spree is likely complete, with only possible tuck-in acquisition to fully complete the picture. He thinks the critical question is if operating margin will be sustainable as the mix of U.S. business grows, which he doesn't think will be the case. He thinks market will view acquisition as too expensive until there better visibility into top-line growth and long-term margins.

He has a $136 price target, but thinks the specter of a potential equity offering is likely to cause a big overhang until resolved.

STIFEL NICOLAUS SAYS APOLLO GROUP's RESULTS BETTER THAN EXPECTED

Stifel Nicolaus analyst Jerry Herman says Apollo Group's (APOL) first quarter EPS of $0.83, vs. $0.65 a year ago, was well above his $0.74 estimate and $0.73 consensus with revenue 3% above his estimate. He notes total degree enrollment was 1% above his estimate, selling & promotional expenses were about 80 basis points under his estimate, reflecting lower-than-expected enrollment counselor compensation costs.

Herman says despite lower-than-expected start growth, the stock reaction may be positive given the level of outperformance elsewhere and magnitude of the stock's recent decline.

He says his $2.80 fiscal year 2008 (August) and $3.25 fiscal year 2009 EPS estimates are under review. He keeps buy and $78 price target on the stock.

JEFFERIES UPGRADES SHUTTERFLY TO BUY FROM HOLD

Jefferies analyst Youssef Squali says he finds Shutterfly (SFLY) attractively valued following a 38% decline in the stock in last three months, exacerbated recently by news of a 25% price cut on 4x6 prints by Snapfish. Fundamentally, he thinks SFLY is still attractive, evidenced by strong year-over-year growth in customers, orders and average order value over the last several quarters.

Squali notes that while price cut by Snapfish is a negative for SFLY and could set off a round of price cuts in the segment, he believes the risk to SFLY is somewhat mitigated by SFLY successfully pursuing a strategy of building a premium brand, which has allowed it to price products at a premium to competitors.

He sees $0.50 2008 EPS. He has a $30 price target on the stock.

Stocks Stage Late Rally

After see-sawing much of Wednesday, indexes moved decisively higher in the final 90 minutes of trading, aided by bargain hunters

Finally, the stock market managed to arrest its downward slide on Wednesday. Major stock indexes managed to recoup earlier losses and hold onto a rally, as financials, airlines and other stocks rebounded from oversold conditions.

The late break to the upside was a welcome relief after see-sawing moves for most of the session. Nagging fears about recession and inflation had investors skittish as they brace for what promises to be a rocky fourth-quarter earnings season.

On Wednesday, the Dow Jones industrial average closed 146.24 points, or 1.16%, higher at 12,735.31. The broader S&P 500 index advanced 18.94 points, or 1.36%, to 1,409.13. The tech-heavy Nasdaq composite index gained 34.04 points, or 1.39%, to trade at 2,474.55.

Solid gains by Dow components DuPont (MBI) and Hewlett-Packard (HPQ), as well as comments from Berkshire Hathaway Inc. (BRK-A) that it wouldn't rule out an investment in one of the beleagured bond insurers, provided much-needed psychological support to the equities in the face of growing pessimism about the economy as a whole.

In one expression of that deepening gloom, Goldman Sachs projected negative U.S. growth in the second and third quarters. Goldman economists expect the Fed funds rate to drop by another one and three-quarter percentage points from the current 4.25% to 2.5%, with a half-point cut at the end of January. Other Wall Street economists have changed their outlooks since last week's data releases showed a jump in unemployment to 5%, a paltry 18,000 gain in jobs and significant weakening in the Institute for Supply Management manufacturing figures.

Not everyone's convinced that a recession is on the way, however. William Poole, president of the St. Louis Fed and a non-voting member of the central bank’s policy committee, said Wednesday that the economic data isn't all pointing to a slowdown, saying that labor market remain tight despite the December jobs report and that prime mortgages aren't under strain. But well-anchored inflation expectations give the Fed leeway to make large interest rate cuts without risking inflation, he added.

The markets will be listening eagerly on Thursday to Fed Chairman Ben Bernanke's speech about the financial markets, the economic outlook and monetary policy for clues about what action the Fed may take on Jan. 31.

"It comes down to whether he tries to disabuse investors' expectations of a 50-basis point easing" in interest rates, said Bob Ried, president of Ried Thunberg & Co., in Palm City, Fla. "I don't think he can do it. Three [regional Fed] banks requested a 50-basis point cut in the discount rate back in December and economic conditions have deteriorated since then."

In a reversal from his stance for much of the past two years, Ried said it's critical that the Fed fights the recession winds first and worry about rising inflation later. But he believes the recession has already taken hold and that the Fed needs to look to the second half of 2008 to figure out how it can limit it to just two quarters of negative growth.

Among stocks in the news Wednesday, MBIA (MBI) shares fell 14.8% after the company announced a plan to shore up its capitalization by offering $1 billion in debt, to be treated as capital, and cutting its quarterly dividend to 13 cents from 34 cents a share. Fitch Ratings said MBIA would be able to maintain its triple-A rating if it can successfully raise that debt. The announcement comes a day after MBIA shares fell more than 20% in response to Morgan Stanley cutting its profit estimates for MBIA and Ambac Financial Group (ABK), citing deteriorating credit markets.

In economic data, the Mortgage Bankers Association released its weekly mortgage applications survey, which showed a 32% jump in the Market Composite Index, which measures loan application volume, in the holiday-shortened week ending Jan.

4 from the prior week, which included the Christmas holiday. The refinance portion of mortgage activity increased to 57.7% of total applications from 50.9% the previous week, while adjustable-rate mortgages fell to 9.3% of total applications from 9.8% a week earlier.

Oil prices settled lower, unable to hold onto gains despite a rekindling of supply concerns after the U.S. Energy Information Administration reported a much bigger decline in oil inventories than had been anticipated.

February NYMEX crude oil ended 66 cents lower at $95.67 per barrel, as traders focused on increases in gasoline and distillate stockpiles instead of on the 6.8 million barrel drawdown in crude inventories during the week ending Jan. 4, which was more than triple the 2.1 million drop that Platts had predicted.

In other news Wednesday, E*Trade Financial (ETFC) shares were well off earlier highs, trading up 6.7% after the company said that after the Nov. 29 sale of its $3 billion asset-backed securities portfolio, it successfully completed the orderly sale of additional $3 billion of securities, including a combination of mortgage-backed securities and municipal bonds. It also reduced wholesale borrowing levels at its bank by eliminating about $3.5 billion in Federal Home Loan Bank advances and repurchase agreements, vs. the prior quarter.

Oneok (OKE) shares rose 10.0% after it raised its earnings forecast for 2007 to between $2.75 and $2.79 from $2.62 to $2.72 per share, reflecting better-than-anticipated performance in its Oneok Partners segment. The company sees 2008 earnings of $2.75 to $3.15 per share, also driven by Oneok Partners.

Apollo Group (APOL) shares rose 16% after the education company posted a 23% gain in first-quarter earnings to 83 cents per share on a GAAP basis, vs. 65 cents a year ago, on 17% higher revenue. Standard & Poor's reaffirmed its buy rating on the stock.

Robbins & Myers (RBN) reported a first-quarter profit of 80 cents per share vs. 62 cents a year ago on a 12% increase in sales. The industrial equipment maker said that based on first-quarter strength, it was raising its fiscal 2008 earnings outlook from $3.30-$3.50 to $3.55-$3.75 per share and announced a 2-for-1 stock split. Shares were up 12.6%.

Garmin Ltd. (GRMN) shares fell 5.3% on a Deutsche Bank downgrade to hold from buy on rising competitive pressures in the U.S. and pricing concerns. The maker of GPS navigational devices warned for the first time that some European markets are slowing.

European stocks were trading lower Wednesday. In London, the FTSE 100 index dropped 1.32% to 6,272.70. In Paris, the CAC 40 index fell 1.10% to 5,435.42. Germany's DAX index was off 0.86% at 7,782.71.

Major Asian markets finished mostly higher. Japan's Nikkei 225 index climbed 0.49% to 14,599.16. In Hong Kong, the Hang Seng index rose 1.86% to 27,615.85. The Shanghai composite index advanced 0.91% to 5,435.81.

Treasury market

Treasury bonds drifted lower as equities moved decisively higher. The 2-year Treasury note inched down 02/32 to 101-00/32 for a yield of 2.72%, the 10-year note fell 11/32 to 103-15/32 for a yield of 3.82% and the 30-year bond dropped 18/32 to 110-27/32 for a yield of 4.34%.

Movers: Alcoa, Men's Wearhouse, MBIA, Countrywide, Apollo Group

Alcoa (AA) reported fourth-quarter EPS jumped to 75 cents, from 41 cents a year ago, including a favorable restructuring adjustment and tax benefit totaling $323 million, or 38 cents per share, mostly stemming from the company's recent agreement to sell the packaging and consumer businesses. Revenue in the quarter fell to $7.39 billion from $7.84 billion last year, due to lower metal prices and the exclusion of results from a soft alloy extrusion business that is now part of a joint venture. Analysts estimates were EPS of 33 cents on $6.92 billion in revenue.

Men's Wearhouse (MW) warned that fourth quarter GAAP diluted EPS estimate to be in the range of $0.16 to $ 0.18, and fiscal year 2007 GAAP diluted EPS to be in a range of $2.60 to $2.62, vs. prior guidance of $0.43 to $0.48 for the fourth quarter and $2.87 to $2.92 for the fiscal year. It blamed "substantially lower traffic levels at all of the company's retail stores", and anticipates continued weak traffic trends for January. The shares skidded nearly 14% in after-hours trading.

MBIA (MBI) plans to issue $1 billion of surplus notes, due 2033. Fitch Ratings expects to assign an 'AA' rating to the $1 billion offering of surplus notes that MBI plans to issue over next several days. MBI cuts quarterly dividend to $0.13 from $0.34.

Countrywide Financial (CFC) reports that total loan fundings for the month of December 2007 were $24 billion, up 1% from November 2007.

E*Trade Financial (ETFC) says subsequent to Nov. 29 sale of its $3 billion asset-backed securities portfolio, it successfully completed orderly sale of additional available-for-sale securities totaling about $3 billion, including a combination of mortgage-backed securities and municipal bonds. It also reduced wholesale borrowing levels at the Bank by eliminating about $3.5 billion in Federal Home Loan Bank advances and repurchase agreements quarter-to-quarter.

DuPont (DD) sees 2007 EPS at upper end of its previously announced range of $3.15-$3.20, which excludes $0.09 of charges for significant items recorded in first nine months of 2007, $0.02 net benefit it expects to record for fourth quarter 2007. Raises $3.31-$3.52 2008 EPS forecast to $3.35-$3.55.

Apollo Group (APOL) posts $0.83, vs. $0.65 a year ago, first quarter GAAP EPS on 17% revenue rise. Stifel Nicolaus says results were better than expected.

Garmin Ltd. (GRMN) falls after Deutsche Bank downgrades to hold from buy.

CB Richard Ellis Group (CBG) was lower as the company and numerous other companies were feeling the effects of overall recession worries. Specifically, S&P downgrades CBG shares to sell from hold as continued pressures and the significant jump in financing rates may have an adverse short-term effect on its business.

Merchantile Bank (MBWM) posts $0.01, vs. $0.54 a year ago, fourth quarter EPS on 9.8% decline in net interest income. It says earnings reflect an elevated level of nonperforming assets and a lower net interest margin relative to 2006 and year ago fourth quarter.

Alliant Techsystems (ATK) says it has negotiated definitive agreements with Canadian-based MacDonald, Dettwiler and Associates to acquire its Information Systems and Geospatial Information Services businesses for C$1.325 billion. Beginning Apr. 1, 2008, ATK will establish a fourth business group, ATK Space Systems. S&P keeps buy. Friedman downgrades to market perform from outperform.

Mosaic Company posts $0.89, vs. $0.15 a year ago, second quarter EPS on 44% rise in sales.

Robbins & Myers (RBN) reported a first-quarter profit of 80 cents per share vs. 62 cents a year ago on a 12% increase in sales. The industrial equipment maker said that based on first-quarter strength, it was raising its fiscal 2008 earnings outlook from $3.30-$3.50 to $3.55-$3.75 per share and announced a 2-for-1 stock split.

QLogic (QLGC) sees third quarter revenues of $155-$157 million, vs. its earlier forecast of $147-$151 million. It sees third quarter GAAP EPS of $0.20-$0.21, $0.27-$0.28 non-GAAP EPS vs. previous forecast of $0.23-$0.25.

Oxford Industries (OXM) posts $0.71, vs. $0.68 a year ago, second quarter EPS from continuing operations on 1.2% sales rise. Moderates its expectations for the 2-month period from Dec. 1, 2007, through Feb. 2, 2008, due to seasonality, weak holiday performance by most of its wholesale customers. Now sees net sales for 2-month period to be slightly below year ago, EPS to range from breakeven to a modest profit.

Technitrol (TNL) agrees to acquire capital stock of Denmark-based Sonion A/S, a producer of innovative microacoustic transducers and micromechanical components for manufacturers of hearing instruments, advanced acoustic devices, medical devices and mobile communication devices, for about $385 million in cash, based on current exchange rates. Expects deal to be accretive to earnings in year-two by about $0.25 per share.

VF Corp. (VFC) sees 2008 revenue growth of 9%, EPS growth of 10%, excluding the impact of any new acquisitions. It raises its 6%-8% long-term revenue growth target to 8%-10% annually, sets goal of $11 billion in revenues by 2012. Ups 14% operating margin target to 15%, sets target for EPS growth of 10%-11%.

CKE Restaurants (CKR) posts 1.2% rise in December blended same-store sales. Separately, its board authorizes further expansion of its stock buyback program, raising its authorization by an additional $50 nillion, for a new limit of $400 million.

Viropharma (VPHM) sees $210-$235 million 2008 net product sales. Reconfirms it expects sales in 2007 to be within its guidance range of $202-$208 million.

Helen of Troy (HELE) posts $0.81, vs. $0.70 a year ago, third quarter EPS from operations as absence of certain charges offset 1.4% lower sales.

Oneok (OKE) raises 2007 EPS guidance to $2.75-$2.79 from $2.62-$2.72, reflecting better-than-anticipated performance in its Oneok Partners segment. It sees 2008 EPS of $2.75-$3.15, also driven by its Oneok Partners segment.

McGraw-Hill Companies (MHP), the parent company of BusinessWeek and Standard & Poor's, announces that it restructured a limited number of business operations in the fourth quarter, and that in the quarter it incurred a restructuring charge of $43.7 million pre-tax, consisting mostly of employee severance costs related to a workforce reduction of approximately 600 positions (about 3% of global workforce) across the corporation.

Shaw Group (SGR) posts $0.49, vs. $0.11 a year ago, first quarter EPS (excluding Westinghouse segment) on 34% revenue rise. SGR also reportedly restates first quarter results to a loss of $0.15 from originally reported loss of $0.26, to correct an accounting error.

Shore Financial (SHBK) agrees to be acquired by Hampton Roads Bankshares (HMPR). Terms: Either $22 per share in cash or 1.8 HMPR shares for each SHBK share.

Cleveland-Cliffs (CLF) says its board approved a 40% increase in the its regular quarterly cash dividend to $0.175 per share from $0.125. The new rate will be payable March 3 to shareholders of record Feb. 15.

S&P: Time to Play Defense

Standard & Poor's has downgraded cyclical sectors such as IT in favor of traditionally defensive groups such as consumer staples. Here's a rundown

On Jan. 9, Standard & Poor's Equity Strategy Group embraced a more defensive view of the market by upgrading the traditionally defensive sectors and downgrading the traditionally discretionary/cyclical sectors. Specifically, we upgraded Consumer Staples, Health Care, Energy, and Utilities to overweight from marketweight; downgraded Information Technology to underweight from overweight; and downgraded Industrials to underweight from marketweight.

Here is a rundown of S&P's views of the sectors in question:

Consumer Staples
Raised to overweight from marketweight

With investor risk aversion rising amid slowing economic growth, we believe the sector's predictable revenues, low beta, above-average international exposure, and 2.3% market-cap weighted dividend yield will allow it to outperform. In addition, the sector boasts a high average market cap, which positions it to "favorable," given investors' ongoing large-cap growth orientation, in our view.

Energy
Upgraded to overweight from marketweight

While S&P forecasts that prices for the benchmark West Texas Intermediate grade of crude oil will average near $76 per barrel in 2008, we believe there is risk prices will remain elevated throughout the year. As a result, we believe the Energy sector's earnings-per-share growth is unlikely to be negatively revised, despite heightened EPS risk for the broader market. In addition, the Energy sector trades at only 12.4 times our 2008 estimated sector EPS, the second lowest price-to-earnings (p-e) valuation in the S&P 500 index. We also think the sector stands to benefit from increasing inflation pressure, rising geopolitical unrest, and continued U.S. dollar weakness.

Health Care
Raised to overweight from marketweight

Following an increase by S&P Economics in its perceived recession risk to 50%, and with several U.S. equity benchmarks recently closing below mid-2007 lows, we recommend investors increase exposure to traditionally defensive sectors such as health care, because of the relatively static demand for their products and services. We believe companies with well-defined growth prospects and generous dividend yields should hold up relatively well. We think the sector's predictable revenues, low beta, and above-average international exposure will allow it to outperform other groups on a relative basis.

Industrials
Downgraded to underweight from marketweight

With the U.S. economic slowdown accelerating and mid-cycle slowdowns now under way in Europe, Britain, Canada, and Japan, we believe this cyclical sector is vulnerable to a contraction in its p-e multiple as investors increasingly question the prospects for its future EPS growth. While S&P analysts currently forecast a 10% gain in 2008 EPS for the Industrials sector, we believe this may be revised lower should global growth continue to slow. In addition, the sector's valuations are relatively high, given that we are late in the current economic cycle.

Information Technology
Downgraded to underweight from overweight

Slowing global economic growth is fueling heightened risk aversion, making a repeat of the IT sector's strong 2007 outperformance unlikely, in our view. In addition to the U.S. economy flirting with recession, mid-cycle slowdowns are now under way in Europe, Britain, Canada, and Japan, which we think undermines the benefit the sector derives from its 55% international sales exposure. Also, the sector's 18.1X p-e ratio is the highest in the S&P 500, leaving little room for earnings disappointments, in our view. We believe 2008 EPS estimates for this sector will be revised lower in the months ahead.

Utilities
Raised to overweight from marketweight

Since S&P Economics has raised its perceived risk of a recession to 50%, and several U.S. equity benchmarks recently closed below summertime lows, we see more downside price action likely and think a more cautious approach is prudent. We recommend investors increase exposure to traditionally defensive sectors, such as utilities, because of relatively static demand for their services. S&P analysts see 2008 operating EPS for the sector rising 12%, and we believe the sector's 2.9% dividend yield, second highest among the 10 sectors in the S&P 500, will offer additional support.

Stocks: Playing the 2008 Election

The fates of various industries depend on who becomes the next President. Who benefits? Who suffers? Here, insights from a slew of top investors

As the U.S. Presidential campaign kicks off, Wall Street is watching every primary and caucus result closely, hoping to make money no matter who Americans choose as their next leader.

Investment houses are digging deep into each candidate's policy statements, trying to predict his or her Presidency's effect not just on the economy and market as a whole, but on specific stocks and sectors such as health care, defense, and energy.

Might a push to fight global warming—most likely by a Democrat—hurt utility stocks but help solar companies? Does a Republican victory help the health-care sector, where investors are already worried about lower profits under a Democratic universal health-care plan?

Such questions abound. We asked more than a dozen fund managers, investment advisers, and analysts for their thoughts regarding how the 2008 election will affect stocks. They offered differing theories on how stocks generally perform in an election year. Many echoed partisan arguments, debating whether Democratic or Republican policies better help the economy in the long term.

And some dismissed a lot of this speculation outright.

"The overriding influence on the stock market is the economy," says Bryant Evans of Cozad Asset Management. The effects of the government on the economy are complex and hard to predict. Plus, when candidates become Presidents, they're often forced by politics or new events to shift their priorities in unpredictable ways, he adds.

Partisan Consequences

Still, as the political cliché goes, "Elections have consequences." If they didn't, industries wouldn't pour so much money into election campaigns. Presidential candidates have already raised almost $420 million, a number that probably will exceed $1 billion by the November election.

Analysts are paid to think about the consequences of each political development: At the Jan. 3 Iowa caucuses, Keefe, Bruyette & Woods (KBW) analyst Brian Gardner noted that almost twice as many Democrats showed up to caucus as Republicans, despite the fact Iowa is a swing state that President George W. Bush won four years ago. That Democratic strength might hurt private student loan companies (because Democrats favor direct government lending) but help government-sponsored enterprises such as Fannie Mae (FNM) or Freddie Mac (FRE), he wrote.

The most obvious consequence of a Democratic victory could be in health care, where all the Democrats are proposing some kind of universal health-care coverage. "That casts a cloud over the health-care sector," says William Rutherford of Rutherford Investment Management. To pay for the uninsured, Democrats will want to cut costs, and that could mean narrower profit margins for everyone in the sector, from hospitals to pharmaceutical companies to insurers. The one exception may be firms that use technology to cut costs. Rutherford cites Express Scripts (ESRX).

Defense Spending

With most of its revenue coming from taxpayer money, the defense sector is also closely watching the election. Democrats John Edwards, Barack Obama, and Hillary Clinton all have plans to withdraw all or most troops from Iraq, while most Republicans support a bigger military presence around the world (Ron Paul being a notable exception).

But even if withdrawal from Iraq happens, few expect either party to actually cut defense spending overall. "No matter who wins, more is going to be spent on defense because of the mess we're in," says Brant Keller of FAC Wealth Management.

If the new President can find a way out of Iraq, "Is there an impact? Maybe, but it may not be as much as conventional wisdom" believes, says James McIlree, a defense analyst at Collins Stewart (CLST).

It could take years before the new President can put a stamp on defense spending, and, though spending on Iraq might fall in any Administration, spending may increase on bipartisan priorities like intelligence technology. "Our system is built for gradual change," McIlree says.

Energy Levels

On energy, alternative energy producers—including farmers whose corn is turned into ethanol—have already benefited from federal policy. That may continue under either party, with nearly all candidates talking about the importance of gaining more independence from expensive foreign oil.

Democrats, however, are more likely to worry about global warming, possibly helping solar companies such as First Solar (FSLR) but hurting others like utilities or heavy industry outfits that emit a lot of greenhouse gases. Republicans may renew their push for more domestic oil exploration, which could help Transocean (RIG) and other drilling firms.

Democratic Concerns

The companies on Wall Street itself have reasons to worry about a Democratic Administration. That's one reason why, though there are a few high-profile liberals here and there, the financial industry has a decidedly conservative ideological bent. Financial-services firms are worried about "more regulation, more control, and at the same time higher taxation," says Walter Gerasimowicz of Meditron Asset Management.

Republicans such as Mitt Romney and John McCain would like to make President Bush's tax cuts permanent and perhaps cut rates further. (Of course, Mike Huckabee's "Fair Tax" plan shows the GOP is not unanimous on the issue.) Democrats want tax cuts aimed at the rich to expire, which has the financial sector worried about the future of the estate tax and taxes on dividends and capital gains. Hedge funds—with Blackstone Group (BX) as a prime example—could also be subject to higher taxes under a Democratic President.

The Status Quo

So how much should investors adjust their portfolio as the campaign grinds on?

Bruce Bittles, chief investment strategist at Robert W. Baird, warns against making too much of the election. "The market really is bipartisan," he says. It has done just as well under Republicans and Democrats.

However, unlike many voters and candidates this year trumpeting "change," the stock market prefers the status quo. Thus, expect the market to be hurt if it looks like Republicans are set to lose the White House, he says.

Bull or bear, donkey or elephant, 2008 promises to be an interesting ride for Wall Street.

Stocks Plunge as Economic Worries Grow

Jittery investors dumped shares Tuesday, driving the S&P 500 down over 5% in the first five days of the trading year

The wintry gloom that has enshrouded Wall Street thickened on Tuesday as major indexes slumped once again. Repeated attempts by equities to rally unraveled amid mounting jitters about an economic slowdown. While further weakness in the financial sector eroded early gains but it was consumer pullback fears in the telecom industry that added fuel to the sell-off in major stock indexes.

On Tuesday, the Dow Jones industrial average finished 238.42 points, or 1.86%, lower at 12,589.07. The broader S&P 500 index was down 25.99 points, or 1.84%, at 1,390.19. The tech-heavy Nasdaq composite index dropped 58.95 points, or 2.36%, to trade at 2,440.51.

On the New York Stock Exchange, 21 stocks traded lower for every 11 that gained ground, while on the Nasdaq, the ratio was 21-9 negative.

The 5.32% drop in the S&P 500 index in the first five trading days of this year is the biggest decline since 1950, beating the 4.7% drop seen in the first five trading days of 1978.

Countrywide Financial (CFC) helped set off the weakness in financials, plunging more than 30% at one point to its lowest levels since the 1987 stock market crash on rumors that it's close to filing for bankruptcy protection. The company denied the rumors.

Morgan Stanley cut its profit estimates for Ambac Financial Group (ABK) and MBIA Inc. (MBI) on Tuesday, saying that the deteriorating credit markets are continuing to hurt the bond insurers' earnings and revenue. That sparked selling in both stocks.

The market sell-off gained momentum in the final half-hour of trading, led by AT&T (T) and other telecom names on renewed worries over softness in consumer spending. Stoking those concerns were comments by AT&T's chairman and chief executive, Randall Stephenson, about weakness in its consumer business segments driven by service disconnections due to nonpayment of its access lines and home broadband services.

The inability for the stock market to record two consecutive days of gains so far this year indicates that the path of least resistance is toward the downside, and it's hard to fight that psychology among investors, said Art Hogan, chief market analyst at Jefferies & Co. in Boston.

Among the reasons for that pessimism on Tuesday were comments by Treasury Secretary Henry Paulson, who wasn't as upbeat about the housing market as he's been in the past, and simultaneous fears about rising inflation and a slowdwon in the economy, Hogan said. A U.S. Presidential election that's wide open, where the market implications of a victory by either of the current front-runners are unknown, is also troubling, he added.

"To get two up days in a row, we need to see a day where there is no other-shoe-to-drop rumor, no Countrywide news, no negative economic data or no earnings writedown," he said. "The problem is that as we get into earnings season, it’s difficult to find that day."

Elsewhere in the financial sector, James Cayne is expected to resign as CEO of Bear Stearns, according to a Wall Street Journal report, bowing to mounting pressure from Joe Lewis, who owns a 9% stake in the brokerage firm and has lost about $200 million on his investment due to the firm's exposure to subprime mortgage-backed securities. Cayne will reportedly remain in his post as chairman of the company.

Leading this week's trickle of new economic data were U.S. pending home sales, which fell 2.6% to 87.6 in November, from an upwardly revised 89.9 in October. Sales were down in three of the four regions, led by a 13% drop in the Northeast. While the reading was slightly better than expected, sales were down 18.5% from a year ago, and suggests existing home sales will see further declines this year, Action Economics said.

The consumer credit surged $15.4 billion in November, nearly double the average forecast of $7.8 billion by economists., while the October figure was revised lower to a gain of $2.0 billion from the prior $4.

7 billion.

The increased use of debit cards and home equity loans, combined with refinancing-related paydowns, have accounted for much of the volatility and restraint in consumer credit growth over the last couple of years, despite the strength in the economy, Action Economics said. Despite high debt levels, interest rates remain low and the ongoing rise in incomes, employment, and the value of household assets leave current debt levels manageable, Action Economics said.

The consumer credit number was so "eye-poppingly different than consensus" -- raising questions about whether consumers are tapped out -- that "when it hit the tape, it got a negative reaction and accelerated the sell-off," Hogan said.

In his January Investment Outlook, published Tueday, PIMCO's Bill Gross concluded that public financing assistance "in the form of lower interest rates and increasing fiscal deficits" will be required to fill the gap created by the failed shadow banking system, which includes collateralized debt obligations and other instruments not backed by cash reserves. He repeated his prediction that the Federal Reserve will slash the Fed funds target to 3% from 4.25% by mid-2008 and also said that Congress and the White House should, but likely won't, cooperated in a tax relief program that benefits low-income homeowners.

Nor was there any comfort to be found in comments from Fed officials Tuesday. Boston Fed President Eric Rosengren predicted the longest housing decline in 50 years if the forecasts are correct and warned home prices could drop more quickly this year if the economy isn't strong, Action Economics said. Rosengren was the sole member of the Fed's policy committee to recommend easing interest rates by a half-percentage point instead of a quarter when the committee met on Dec. 11.

In his daily briefing note, Ed Yardeni, president of Yardeni Research, said a recession in the U.S. is becoming more likely, but he expects the global expansion to continue. He cited the fact that the S&P 500 financial and consumer discretionary sectors are in bear markets, posting declines of more than 23% from their 2007 peaks, while the S&P 500 Bank index is down 39.0% from last year’s peak. The S&P 500 Retailing index has fallen 20.2% from its 2007 peak.

Confidence in the sustainability of the global boom has limited losses in the Materials, Energy, and Industrials sectors to single-digit moves and Yardeni expects them to remain good bets, although "more speed bumps are likely this year than last year," he said.

Jeffrey Kleintop, chief market strategist at LPL Financial Services in Boston, said in an email commentary that while stock market participants have braced for a recession, so far the data indicates only a mid-cycle slowdown. He warned that to shift out of stocks now "may result in missing out on what has historically been a period of strong returns." But he cited the need for a half-percentage point rate cut by the Fed on or before its Jan. 31 policy committee meeting in order to prevent the mid-cycle slowdown from turning into a full-blown recession.

Oil futures rebounded after dropping by nearly $3 per barrel on Monday on speculation that U.S. crude inventories fell last week to three-year lows. The U.S. Energy Department is expected to report on Wednesday that stockpiles fell 1.25 million barrels from 289.6 million barrels last week, a Bloomberg News survey said.

February NYMEX crude oil ended $1.24 higher at $96.33 per barrel, as traders worried that an eighth consecutive decline in inventories would cause supplies to remain tight over the next few months, Bloomberg reported.

Among the stocks in the news Tuesday, Starbucks (SBUX) shares rose 8.1% after it appointed its chairman, Howard Schultz, to take on the additional role of CEO, effective immediately, replacing Jim Donald, who is leaving the company. Starbucks also said it will slow U.S. store growth and accelerate international expansion.

Isis Pharmaceuticals Inc. (ISIS) shares jumped 27.4% after it said it signed a deal with Genzyme (GENZ), under which Genzyme will develop and market mipomersen, ISIS's lipid-lowering treatment for high-risk cardiovascular patients.

Leap Wireless International Inc. (LEAP) shares climbed 6.1% on news that it gained about 152,000 net customer additions during the fourth quarter, bringing the total number of net additions for 2007 to about 634,000 and ending the year with about 2.9 million customers.

The Greenbriar Companies Inc. (GBX) shares fell 12.4% after posting a lower-than-expected second-quarter profit of 16 cents, vs. 12 cents per share in the first quarter, on 16% revenue rise.

European stocks finished higher Tuesday. In London, the FTSE 100 index rose 0.33% to 6,356.50. In Paris, the CAC 40 index advanced 0.79% to 5,495.67. Germany's DAX index climbed 0.42% to trade at 7,849.99.

Major Asian markets finished mostly lower. Japan's Nikkei 225 index edged up 0.19% to 14,528.67. In Hong Kong, the Hang Seng index fell 0.24% to 27,112.90. The Shanghai composite index slipped 0.13% to 5,386.53.

Treasury market

Treasury bonds traded higher on the rout in equities. The 2-year Treasury note rose 04/32 to 101-03/32 for a yield of 2.68%, the 10-year note advanced 14/32 to 103-25/32 for a yield of 3.78% and the 30-year bond was up 16/32 to trade at 111-14/32 for a yield of 4.31%.

Movers: AT&T, Countrywide, E*Trade, Starbucks, Bear Stearns

AT&T (T) falls 4.4% amid cautious comments made by management at Citigroup conference. The telecom company reportedly notes softness in broadband, phone line businesses.

Countrywide Financial (CFC) plunges 28% to a new 52-week low of $5.48 (and traded as low as $5.05) after the New York Times reports that CFC fabricated documents related to bankruptcy case of a Pennsylvania homeowner, court records show, raising new questions about the business practices of CFC. Separately, CFC reportedly denied market speculation it might seek bankruptcy protection. S&P maintains hold.

E*Trade Financial (ETFC) drops 20% to $2.25 -- a new 52-week low. According to a newswire report, ETFC stated, "upon further review of the core business and as part of last month's announced turnaround plan, ETFC has decided to divest itself completely of its institutional sales business as the scale of the business did not warrant the expense of capital."

Starbucks (SBUX) appoints Howard Schultz, chairman, to take on the additional role of chief executive officer, effective immediately, replacing Jim Donald, who is leaving the Company. Starbucks also says it will slow U.S. store growth and accelerate international expansion.

Bear Stearns Companies (BSC) chairman and CEO James Cayne, is stepping down as CEO, according to the Wall Street Journal. The article stated that on Monday, Cayne started notifying the board that he plans to relinquish his CEO post but remain as chairman. Cayne is expected to be succeeded by BSC President Alan Schwartz.

Microsoft (MSFT) agrees to make offer to acquire Fast Search & Transfer ASA, a leading provider of enterprise search solutions, through a cash tender offer for 19.00 Norwegian kroner (NOK) per share, or about $1.2 billion total value.

KB Home (KBH) posts $9.99 fourth quarter loss per share, vs. $1.04 loss from continuing operations on 31% lower total revenues.

Circuit City Stores (CC) posts 11% lower December same-store sales, 8.9% lower total sales. Comps for flat panel televisions increased by a high-single-digit rate, but total t.v. comps decreased by low double digits, as significant declines in projection and tube televisions more than offset the flat panel sales increase.

Isis Pharmaceuticals (ISIS) inks deal with Genzyme (GENZ), whereby Genzyme will develop, commercialize mipomersen, ISIS's lipid-lowering treatment for high risk cardiovascular patients. GENZ will purchase 5 million ISIS shares at $30 per share. Upon completion of final contracts, GENZ will pay ISIS a $175 million up-front mipomersen license fee. In addition to initial $325 million, ISIS to potential to receive "significant" milestone payments for mipomersen, which is currently in Phase 3 trials. Once the product is launched, the two companies will share profits. Needham raises ISIS's target price, reiterates strong buy.

Stanley Works (SWK) sees fourth quarter EPS of about $1.06-$1.11, which includes $0.04 for resolution of legal matters, vs. previous guidance of $1.10-$1.15. It now sees 2007 EPS from continuing operations of about $3.95-$4.00. It says free cash flow will likely exceed $450 million, surpassing previous estimate of $400-$450 million. It sees 2008 EPS of $4.20-$4.40 on organic sales growth of flat to 1%, with its Construction and DIY segment modestly negative.

Merrill Lynch reportedly widens loss estimate for Citigroup sees potential fourth quarter write-downs of $16 billion. It also cuts EPS estimates for JP Morgan (JPM).

Constellation Brands (STZ) posts third quarter EPS of $0.55, vs. $0.45 a year ago, despite 23% revenue drop. It sees $1.06-$1.11 fiscal year 2008 EPS vs. $1.38 in fiscal year 2007 (reported basis).

Tween Brands (TWB) posts 9% higher same-store sales for the nine-week period ended Jan. 5, 21% total sales rise. It notes comps rose 4% at Limited Too and 31% at Justice. Revenue from all other sources nearly doubled, including a 134% increase in e-commerce sales.

Brinker International (EAT) sees $0.30-$0.31 second quarter EPS from continuing operations, before special items, vs. year ago's $0.33. It says second quarter fiscal year 2008 EPS were primarily impacted by a decrease in Brinker comparable restaurant sales of about 2% and the associated impact of sales deleverage on fixed costs. Keybanc downgrades to underweight from hold.

Comcast (CMCSA) and Panasonic Corp. (a unit of Matsushita Electric) unveil the industry's first portable DVR/DVD player powered by tru2way technology at the 2008 Consumer Electronics Show.

Liz Claiborne (LIZ) says it has reached a definitive agreement to sell Laundry by Design and C&C California: is closing Sigrid Olsen; and is retaining the Enyce brand.

Leap Wireless International (LEAP) announces that it gained about 152,000 net customer additions during the fourth quarter, bringing the total number of net additions for 2007 to about 634,000. In addition, customer churn for the fourth quarter was 4.2%. LEAP ended the year with about 2.86M customers. S&P maintains hold.

Avon Products (AVP) says it now expects to achieve annualized saving of about $430M once final initiatives of restructure program are fully implemented by 2011-2012, vs. original objective of $300 million.

Family Dollar Stores (FDO) posts $0.37, vs. $0.36 a year ago, first quarter EPS on 1.0% lower same-store sales, 5.2% higher total sales. It sees $0.40-$0.44 second quarter EPS, $1.56-$1.64 for fiscal year 2008. For fiscal 2008, it expects same-store sales to be flat or increase slightly, total sales to increase 2% to 3%.

Sirtris Pharmaceuticals (SIRT) announces that its first product to enter the clinic, SRT501, was found to be safe and well-tolerated, and was found to significantly lower glucose in oral glucose tolerance test conducted as part of a 28-day Phase 1b clinical study in patients with Type 2 Diabetes.

Greenbrier Companies (GBX) posts lower-than-expected first quarter EPS of $0.16, vs. $0.12 a year ago, on 16% revenue rise. It does not expect that earnings before special charges (net of tax) in 2008 will meet $2.22 realized in 2007, as the company anticipates lower overall new railcar deliveries, lower gains on equipment sales, and a higher tax rate than in 2007.

Newport (NEWP) expects fourth quarter EPS will be higher than its previous $0.16-$0.20 guidance due to partial reversal of valuation allowance recorded against its deferred tax assets, offset in part by charges to cost of sales, primarily in its Lasers Division. Also expects new orders received in the fourth quarter to exceed previous guidance.

ITC Holdings (ITC) sees 2007 EPS near high end of prior guidance of $1.50-$1.60, expects $1.90-$2.00 2008 EPS, including acquisition of the transmission assets of Interstate Power and Light Co. It says it expects to spend $1 billion in capital expenditures over 7-10 years across the newly acquired IPL transmission assets.

Analyst Actions: Starbucks, Circuit City, Intuitive Surgical, Leap Wireless

LEHMAN KEEPS OVERWEIGHT ON STARBUCKS

Lehman Brothers analyst Jeffrey Bernstein says with Starbucks' (SBUX) U.S. performance struggling in terms of traffic trends, Street sentiment extremely negative, and international strength not currently being awarded by investors, SBUX's board announced a series of initiatives to drive short- and long-term shareholder value.

He agrees that Howard Schultz, chairman and former CEO, would be the best person to oversee such significant changes in near-term growth and focus, while making no significant change to its long-term growth profile.

Bernstein notes that in the U.S., the pace of store openings is being slowed, in an effort to renew their focus on store-level unit economics. He has a $30 price target on the stock.

COWEN DOWNGRADES CIRCUIT CITY STORES

Cowen analyst Jonathan Cramer says he is downgrading Circuit City (CC) to neutral from outperform, as he has limited visibility into the timing of the company's turnaround.

Similar to sentiment accompanying his downgrade of Best Buy (BBY) today, he believes a turnaround will be challenging in the near term due to 1) maturing product cycles; 2) a lack of compelling new product cycles on the horizon; 3) a difficult consumer backdrop.

Cramer says for now, there's still value, but, there's no time horizon for when management, or an external catalyst, will unlock that value. He widens $0.48 2007 loss estimate to $1.38 loss, and cuts $0.10 2008 EPS estimate to $1.27 loss.

WACHOVIA CUTS INTUITIVE SURGICAL TO MARKET PERFORM FROM OUTPEFORM

Wachovia analyst Michael Matson says he's downgrading Intuitive Surgical (ISRG) because he now views the stock as fully valued and is concerned market expectations may have moved too high for ISRG.

Matson sees the possibility that ISRG may guide below consensus 2008 estimates (particularly revenue and systems placements), which in his view assume a high level of system sales contribution in the face of tough comps and a credit crunch that could slow hospital capital spending.

He notes his EPS estimates remain below consensus, even though he's raising them to reflect more bullish expectations for procedure growth: $4.58 2008 goes to $4.74, $6.00 2009 to $6.33.

BEAR STEARS REITERATES OUTPERFROM ON LEAP WIRELESS INTERNATIONAL

Bear Stearns analyst Philip Cusick says Leap Wireless (LEAP) had a holiday rebound after a tough summer. He notes the company's pre-announcement of 152,000 net adds in the fourth quarter beat his revised 102,000 estimate and actual third quarter adds of 36,000. He says 4.2% fourth quarter churn was significantly lower than his 4.7% forecast and third quarter's 5.2%, and only slightly up from 4.1% in the fourth quarter of 2006.

Cusick notes this was in line with the company's comment that churn in new markets is showing signs of maturing as the base ages. He believes the low-end wireless consumer could be under pressure but that he/she continues to purchase wireless service in line with seasonal trends. He has a $60 price target on the stock.

Bear Stearns: Is Cayne Walking?

Company president Alan Schwartz will reportedly replace the embattled CEO, and investors applaud the news

After a tumultuous year in which his company was battered by billions of dollars in mortgage-related losses, Bear Stearns' (BSC) chief executive is reportedly stepping down.

The Wall Street Journal reported on Jan. 8 that CEO James Cayne is resigning and will be replaced by President Alan Schwartz . Calls to the company for comment were not returned.

Shares of Bear Stearns rose $1.98, or 2.6%, to $78.23 in premarket trading on Jan. 8.

"We applaud the move to separate the two posts and believe it will result in better risk oversight," wrote Standard & Poor's equity analyst Matthew Albrecht in a Jan. 8 note. "But we think a number of risks remain, including recent losses that have likely caused reputational harm." Albrecht cut his target price on Bear Stearns by $17 to $85, but maintained his hold opinion on the stock.

"Right Choice"

Punk Ziegel analyst Richard Bove said Schwartz is "the right choice for new CEO" because of his background in institutional sales and investment banking, and not in the mortgage and fixed-income trading that has caused Bear Stearns so many problems over the past six months.

In July, Bear Stearns had two hedge funds worth billions of dollars collapse on bad bets in the mortgage market. As mortgage defaults have risen, the bank has been forced to write down the value of bonds and debt backed by the troubled loans.

Under Cayne's watch, "the firm focused its efforts too heavily on the mortgage and credit derivatives markets," Bove wrote in a research note. "Moreover, it apparently never had an adequate risk management system in place."

Bove cut his price target to $67 from $94. He also trimmed his fiscal 2008 earnings estimate to $6.59 per share from $7.96 per share.

Legal Woes

In addition to its financial headaches, Bear Stearns also faces some legal challenges. The Securities & Exchange Commission and the U.S. Attorney's office in Brooklyn are looking into an allegation that at least one Bear Stearns insider associated with the collapsed funds may have been pulling his personal money out of the investment vehicles this spring when the market was in turmoil. The alleged redemptions occurred, according to BusinessWeek sources, during a time the funds' managers were urging other investors to stay put.

Cayne is reportedly staying on as chairman of the board of directors, which Bove said is a mistake since he was in charge of the company as it faltered during the second half of 2007.

Bear Stearns' stock has been hammered as the company deals with the fallout of the weakening mortgage market. Since July 1, shares of Bear Stearns declined 47%. Shares of Bear Stearns have already fallen 14% since the beginning of the year.

Movers: SLM, Network Appliance, Alcoa, Best Buy, Shoretel

SLM Corp. (SLM) says its board appointed Anthony P. Terracciano as chairman. Albert L. Lord has been appointed vice chairman and will continue in his capacity as CEO. Also, the board appointed John (Jack) F. Remondi as vice chairman and CFO. S&P downgrades to hold from buy, citing concerns about declining margins.

Network Appliance (NTAP) falls after UBS Financial downgrades to neutral from buy. UBS also downgraded IBM (IBM).

Alcoa (AA) falls 1.69 to 33.18 after Credit Suisse cuts fourth quarter EPS estimate to $0.38 from $0.65, 2007 to $2.48 from $2.75. It cites: 1) lower aluminum prices during the quarter; 2) adverse currency movement among the Australia, Canadian, Real and Euro dollars, during quarter; 3) energy cost pressure from higher natural gas prices on a quarterly average basis, and; 4) weakness in certain downstream end-markets.

Eli Lilly (LLY) rises after Morgan Stanley upgrades to equal-weight from underweight.

Biogen Idec (BIIB) sees 15%-20% revenue growth in 2008. It sets goal to generate revenue growth at 15% compound annual growth rate (CAGR), non-GAAP EPS at a 20% CAGR from 2007 through 2010. S&P raises estimate, but trims target, reiterates hold.

Zale (ZLC) rises after Breeden Capital Management reports 15.85% stake in the company in 13-D filing.

Dolby Laboratories (DLB) was up 3.80 to 49.33. At 2008 International Consumer Electronics Show (CES), the company was demonstrating its new suite of high dynamic range (HDR) imaging technologies, announcing that the first to market, Dolby Contrast, will be ready for distribution to LCD manufacturers in the first quarter 2008.

DTS (DTSI) rises after DA Davidson upgrades to buy from neutral, citing valuation and Warner Bros.' announcement Friday that it will publish high-definition DVDs exclusively in the Blu-ray disc format.

Best Buy (BBY) moves down after Bear Stearns downgrades to underperform from outperform.

Shoretel (SHOR) cuts $32-$35 million second quarte revenue forecast to $29.7-$30.7 million. It says sales to new customers declined.

Celgene (CELG) says 2007 preliminary unaudited results indicate total revenue will increase by more than 50% year-over-year, to about $1.4 billion, adjusted EPS expected to double to about $1.05. It targets 2008 revenue growth to increase more than 30% to about $1.8 billion and adjustsed EPS increasing about 45% to $1.50-$1.55. S&P keeps buy.

Avocent (AVCT) sees fourth quarter revenues of $155-$157 million, vs. $164.9 million in the fourth quarter of 2006. It cites lower sales of its Management Systems Division's branded products in North America.

Group 1 Automotive (GPI) falls after Goldman downgrades to sell from neutral.

Tibco Software (TIBX) falls after Goldman downgrades to sell from neutral, cites risk profile for early 2008.

Zumiez (ZUMZ) says based on quarter-to-date results, it now expects fiscal year 2008 EPS of $0.82-$0.83 vs. previous guidance of $0.92-$0.94. Posts 3.9% higher December same-store sales, 15% higher total sales.

Jefferies Group (JEF) sees fourth quarter net loss of about $24 million, or $0.17 per share, on $345-$365 million revenue. It notes weak results in its high yield, asset management businesses, as well as losses in two principal trading efforts. S&P cuts estimates, target; reiterates hold.

Schnitzer Steel Industries (SCHN) posts lower-than-expected $0.85, vs. $0.69 a year ago, first quarter EPS on 18% revenue rise. Notes its Metals Recycling Business was hurt by both the high cost of ocean freight as well as the tight supply of ships to carry export cargos.

Empire Resorts (NYNY) says its partner, the St. Regis Mohawk's Tribe, received a letter from the Dept. of the Interior denying the Tribe's application to place 29.31 acres at the Monticello raceway into trust for the purposes of building a casino in accordance with the Indian Gaming Regulatory Act of 1988.

Lifecell (LIFC) estimates product revenues for the fourth quarter were up 34% vs. a year ago, due to significant increase in demand for its flagship reconstructive surgical products, AlloDerm Regenrative Tissue Matrix. Estimates 2007 product revenues were up 35%; expects 2007 EPS to be in previously announced range of $0.80-$0.82. Expects 2008 product revenues to rise in 22%-28% range, with EPS in the range of $0.98-$1.06.

Stocks: The Bear Is Growling

S&P thinks the Fed is running out of time to prevent a real decline in the equity markets

So much for the seasonal strength we were expecting. November was tough with the S&P 500 dropping 4.4%. No rebound in December either, as the "500" fell 0.86%. This has been followed by an ugly start to January.

When the market does not follow its normal seasonal patterns, we think something could be very wrong. We are therefore turning more cautious on the market for the next three to six months, and believe the chances that the 10% correction that we've seen turns into something more like a 15% to 20% decline.

The one potential caveat to our dour forecast is the Federal Reserve, but we are not holding out much hope from them either. In our view, the Fed has been lagging in its loosening campaign since the middle of 2006. That is when the 2-year Treasury yield started to diverge from the federal funds rate. Up until the middle of 2007, the spread remained in the 50 basis point area. However, since then, the 2-year Treasury yield has plummeted to 2.8% from about 4.75% while the federal funds rate has only declined from 5.25% to 4.25%. The current spread of close to 150 basis points is huge on an historic basis, and is very close to what we saw at the end of 2000, another time when the Fed was behind the market.

Our point here is that we think the Fed is running out of time to prevent a real decline in the equity markets, and unless we start seeing some 50 basis point cuts or intra-meeting cuts, we think the bear may get the first laugh in 2008.

As far as the near-term outlook for the S&P 500, the index has broken down out of a symmetrical triangle that it has been tracing out over the past couple of months, a bearish sign in our view, and this suggests we will see another critical test of the 1407 area. This level represented the closing low in August and November and a failure in this zone would be a major technical breakdown for the market, and we believe would open the door to another 5% to 10% on the downside.

Before there is a test of the 1407 area, the S&P 500 must first break trendline support off the lows since July 2006, and that sits at 1425. The 80-week exponential average is in serious danger of giving way today as it lies at 1431. This would be the first weekly close underneath the 80-week exponential since a very minor break in August, 2004. This average has done a great job of providing support for the S&P 500 during the bull market, and a major break would be another arrow in the bull.

If the S&P 500 takes out the 1407 level, the index will have completed a fairly large double top with a width of 158 points. Some are calling the current topping formation a diamond top, but whatever it is, it's big and ugly. Subtracting the width of the pattern from the breakdown point of 1407, gives us a potential measured move down to 1249. This is almost exactly a 20% decline from the October 9 high of 1565. This also equates very closely to a 38.2% retracement of the entire bull market, which would target the 1264 level.

A break below the recent closing lows would most likely turn our longer term charts and indicators bearish, suggesting more damage and that possibly a bear market lies ahead. The 17-week exponential average is very close to breaking below the 43-week exponential average, based on the S&P 500, and this would be the first bearish crossover since November, 2000. That bearish cross in 2000 did an excellent job of keeping investors out of most of the bear market. The signal reversed in June 2003 with a bullish crossover, and has kept investors in for the majority of the current bull market.

On top of this price chart, we plot the 43-week relative strength index (RSI). Basically, when the RSI is above 50, the market is in a bullish mode, and when the RSI drops below 50, it suggests the market is in a major bearish trend. With the current reading of 51, the RSI is getting very close to signaling major trouble for the stock market. The last signal from the 43-week RSI was bullish and occurred in June 2003.

Another combination of moving averages we like to use to determine the major trend of the market is the 10-month and 20-month exponential averages (EMA). The S&P 500 is currently sitting below its 10-month EMA and if we finish January underneath this average, it would be the first monthly close below the 10-month since the break in November, 2000. In addition, the 10-month EMA is declining for the first time since late 2000. The 20-month EMA, which has provided great intra-month support for the S&P 500 during the entire bull market, is sitting at 1427, and a monthly close below this average would be the first since late-2000.

On top of this chart sits the 13-month RSI. Above 50 is considered bull market territory while below 50 is considered bear market territory. The 13-month RSI is at 55 and has traced out a series of lower highs and lower lows since May, 2007.

Another worry is the continued deterioration of market internals. The NYSE advance/decline (a/d) line peaked in June, 2007, and has not kept pace with prices. The a/d line is very close to breaking down below the recent lows traced out in November and August. The other internal concern is that volume is not keeping up with prices. While prices on the S&P 500 were making new highs in October, the NYSE a/d line of advancing and declining volume failed to move to new highs. During healthy markets, the a/d line and a/d volume line should at least mirror prices. Sometimes, the internals actually lead prices to new highs. The a/d line of volume is also very close to breaking the recent lows set in November and August.

While it is easy to look back at these internal failures, they sometimes provide huge lead times as the NYSE a/d line peaked in April, 1998, well before the 2000 peak, while the Nasdaq a/d line of volume peaked concurrently with prices.

Stocks Finish Mixed

Blue chips logged gains Monday as the market tried to shake off its dismal start to 2008

Stocks closed mixed Monday as short covering and bargain hunting helped blue chips and other selected issues rebound after the market's dismal start to 2008 last week due to worries about the economy. Along with blue chips, the makers of consumer staples and drugs, and other types of companies that tend to weather economic slowdowns generated some buying interest, according to Standard & Poor's MarketScope. In the absence of economic data, traders were paying attention to speeches by Treasury Secretary Henry Paulson and Atlanta Federal Reserve Bank president Dennis Lockhart.

On Monday, the Dow Jones industrial average finished 27.31 points, or 0.21%, higher at 12,827.49. The broader S&P 500 index gained 4.55 points, or 0.32%, to 1,416.18. The tech-heavy Nasdaq composite index shed 5.19 points, or 0.21%, to 2,499.46.

Trading volume was moderate on Monday. Market breadth was mixed. On the New York Stock Exchange, 18 shares advanced in price for every 14 that declined, while NASDAQ breadth was 16-14 negative.

U.S. equities took a beating on Friday on the back a dismal report that showed U.S. nonfarm payrolls up by only 18,000 in December, after gains of 115,000 in November and 170,000 in October. The much-anticipated report was seen as a key test of the economy's strength going into the New Year. The unemployment rate climbed from 4.7% to 5%, the highest in two years.

Paulson's speech on the economy Monday discounted a rush to implement economic stimulus and emphasized patience and deliberation over a quick fix. Speculation has been rising, particularly after Friday's poor payrolls report, that the Bush Administration could

seek additional tax cuts or other stimulus measures to ensure the economy does not dip into recession, notes Action Economics.

Atlanta Fed President Lockhart told the Atlanta Rotary Club that "the negatives in our economy may be gaining momentum." Cuts in the Fed funds rate so far, and globally coordinated liquidity injections, "were not sufficient to remedy Wall Street's distressed

conditions." Lockhart said his outlook for this year's economic performance hinges on “how financial markets deal with their problems."

While he is "troubled by the elevated level of inflation," Lockhart expects energy costs will moderate and "inflation pressures will abate." Nevertheless, "At this juncture, the times present even greater uncertainty than usual" he added, noting that "these circumstances call for policymakers to be prepared to respond pragmatically."

Fed Chairman Ben Bernanke could outline plans to fight potential stagflation when he speaks on Thursday, according to S&P MarketScope. Investors are hoping the Fed recognizes the need for further easing of interest rates and takes action on it later this month.

Technology stocks were hit by a raft of downgrades Monday, with UBS lowering its ratings on International Business Machines (IBM) and Network Appliance (NTAP) to neutral from buy, and Bear Stearns downgrading Best Buy (BBY) to underperform from outperform. In addition, Motorola (MOT) announced a round of 1,600 layoffs.

In what's a relatively quiet week for economic data, Tuesday's pending home sales report for November will be watched for further signs of potential stabilization in the housing market, economists are expecting an increase in wholesale sales for November, due out on Thursday. The U.S. trade deficit, to be released on Friday, is expected to widen in November due to soaring oil prices.

February NYMEX crude oil fell $2.82 to $95.09 per barrel Monday on reports that temperatures in the Northeast U.S. may be as much as 30 degrees Fahrenheit above normal through Jan. 9, according to Accuweather. That's expected to hurt demand for heating oil. The warm weather adds to demand concerns stoked by last week's U.S. government jobs report for December, which showed unemployment up at a two-year high. A confrontation between Iranian and U.S. ships in Gulf of Hormuz over the weekend did not appear to have an impact on prices.

COMEX February gold futures fell $3.70 to $862.00 per ounce Monday.

Among the stocks in the news Monday, Celgene (CELG) shares rose after it said its preliminary unaudited results for 2007 show total revenue will increase by more than 50% from the prior year to about $1.4 billion, while adjusted earnings are expected to double to about $1.05 per share. The drug maker is targeting 2008 revenue to grow by more than 30% to about $1.8 billion and profits to increase by about 45% to between $1.50 and $1.55 per share.

ShoreTel Inc. (SHOR) shares plunged after the provider of switch-based Internet protocol (IP) telecommunications systems cut its second-quarter revenue forecast to $29.7 million to $30.7 million from a prior estimate of $32 million to $35 million, citing declining sales to new customers.

Delta Petroleum (DPTR) shares fell after it said it granted a total of 22,542 shares to five new employees on Dec. 31, 2007 under its 2006 New Hire Plan as an inducement to entering into employment with the company.

European stocks finished mixed on Monday. In London, the FTSE 100 index was off 0.20% at 6,335.70. In Paris, the CAC 40 index was up 0.11% at 5,452.83. Germany's DAX index rose 0.11% to trade at 7,817.17.

Major Asian markets finished mostly lower. Japan's Nikkei 225 index fell 1.30% to 14,500.55. In Hong Kong, the Hang Seng index slid 1.24% to 27,179.49. The Shanghai composite index climbed 0.59% to 5,393.34.

Treasury market

Treasuries were higher in price Monday in bit of a flight to safety from volatile stocks and the expectation the Fed will have to cut rates. The 10-year note rose 09/32 to 103-12/32 for a yield of 4.83%, while the 30-year bond rallied 19/32 to 110-30/32 for a yield of 4.34%.

Where the Stock Market Will Find Relief

Despite the year's lousy start, S&P expects Fed rate cuts and decent corporate earnings to lend support to stocks in 2008

The U.S. equity markets had every reason to slip into bear-market mode in 2007, in our opinion. Oil prices rose nearly 60% last year, while the average home price declined for the first time since the Great Depression, slipping 6.1%, according to the Standard & Poor's/Case-Shiller Index. That contributed to tumbling consumer confidence.

Earnings growth for the Standard & Poor's 500-stock index went from a 16% advance in 2006 to a near 1% decline in 2007 (as of midyear, S&P equity analysts were still calling for a year-over-year rise of more than 7%) as a result of the cascading effects of lower home prices, the rise in subprime defaults, and the resulting megabillion-dollar writedowns from unmarketable collateralized debt obligation (CDO) investments, which triggered the as-yet-unresolved credit crunch.

Despite all of these potentially psyche-damaging factors, the S&P 500 gained 3.5% for the year, bested by the Dow Jones industrial average's rise of 6.4% and the Nasdaq composite index's jump of 8.7%. S&P's Equity Strategy group believes that has something to do with expectations toward E.I.E.I.O., or employment, inflation, earnings, interest rates, and oil.

Solid Earnings Growth

Despite the less-than-expected 18,000 increase in nonfarm payrolls announced on Jan. 4 (November's data were revised upward, however) and a rise in unemployment to near 5% (due to a sharp drop in construction jobs), S&P Economics believes the dramatic decline in home prices will not trigger a deep consumer-led recession, such as was experienced in the mid-1970s and early 1980s. We forecast job growth to hold up better than many may be expecting. In fact, S&P Economics projects payroll employment to rise to an average 139.2 million in 2008, vs. 138 million in 2007, and to hit 140.1 million in 2009.

We also don't see the gradual rise in inflation preventing the Fed from its rate-reduction efforts. We see both headline and core (excluding volatile food and energy prices) inflation rising 2.1% in 2008, with the highest year-over-year increase in the first quarter. Our belief is that the Fed is focused on averting recession, and it will live with a slight uptick in inflation for the time being.

Earnings growth expectations continue to support investors' outlooks, in our view. Despite the weekly downward adjustments to 2007 estimates, S&P equity analysts forecast a 15.7% year-over-year increase in 2008 earnings per share (EPS) for the S&P 500. Wall Street consensus estimates are not too dissimilar, according to Thompson First Call.

S&P projects the largest advances in the Telecommunications Services (+35%), Consumer Discretionary (23%), and Information Technology (+23%) sectors, while Energy (+7%), Materials (+7%), and Industrials (+10%) are likely to record the lowest EPS increases. Reasons for these strong EPS advances in the face of a possible recession include easier 2008 comparisons with dismal 2007 results, plus the eventual benefits to U.S. economic growth brought on by lower interest rates. In addition, we project international economies will continue to grow more rapidly than that of the U.S.

Oil Prices Peaking

Since the economy is projected to slow, and inflation is not likely to rise uncontrollably, we think the Fed will continue to cut short-term rates, bringing the Fed funds rate to 3.5% by this summer. What's more, we don't believe the U.S. central bank will be the only one lowering rates. We project the European Central Bank to follow the U.S. and British leads and begin lowering rates by midyear.

The wild card is oil, in our view. To the dismay and disbelief of many, prices for the benchmark grade of West Texas Intermediate (WTI) crude oil rose from an average $26 per barrel in 2002 to a shade more than $100 just a few days ago.

Of course, the natural inclination is to forecast stubbornly high oil prices for the foreseeable future. We disagree. S&P's Energy Group sees WTI oil prices averaging around $76 in 2008. In fact, our Investment Policy Committee recently stated that it believes oil prices may be near a peak, because of the large oil and gas projects beginning to come on stream, the typical seasonal slowdown in global oil demand during the second and third quarters, the projected decline in U.S. growth this year, and the impact of high oil prices on demand.

From Near Lows, Indexes Will Rise

That's not to say there won't be rough sledding over the coming months. On the contrary, even though the S&P 500 has experienced 11 one-day declines of 2% or more since Feb. 27, when we experienced our first in nearly four years, we believe more such days are quite likely. In fact, we think that with at least a 40% chance of recession, the major U.S. equity averages are likely to retest their August and November lows before moving higher later this year. According to Mark Arbeter, S&P's chief technical strategist, critical levels include 1407 for the S&P 500 and 12,743 for the Dow.

Despite the less-than-reassuring start to the new year, we believe the S&P 500 will have surprised many investors by posting a respectable advance of around 12% in 2008, and will close the year near our Investment Policy Committee's target of 1650.

Analyst Actions: Intel, Bed Bath & Beyond, Global Payments, Micrel

JP MORGAN DOWNGRADES INTEL TO NEUTRAL FROM OVERWEIGHT

JP Morgan analyst Christopher Danely says he's growing increasingly concerned on an inventory correction for PC components due to weakening demand and high channel inventory. He says his checks indicate Intel (INTC) experienced a late-quarter slowdown in order rates from the PC end market which negated the upside he believes the company experienced in the fourth quarter 2007.

Danely believes weakness in order rates could be coming from Europe (about 23% of overall PC demand in the third quarter).

He cuts EPS estimates of $1.24 for 2007 to $1.23, and $1.68 for 2008 to $1.66. Although the shares are trading below trough of their normal range and the valuation is attractive, he believes there is little upside and increasing risk to downside to consensus estimates.

MORGAN KEEGAN CUTS ESTIMATES FOR BED BATH & BEYOND

Morgan Keegan analyst Laura Champine says Bed Bath & Beyond's (BBBY) $0.52 third quarter EPS was in line with her estimate, thanks to a $0.03 one-time tax benefit, while fourth quarter EPS guidance of $0.64-$0.67 fell short of her expectations. She says the outlook probably indicates that consumer spending is slowing and that traffic decelerated during the holidays and Christmas, which could be a bad omen for fourth quarter financial results across the home products segment.

Champine cuts BBBY's $0.78 fourth quarter EPS estimate to $0.64, $2.20 fiscal year 2008 (February) to $2.08, $2.54 fiscal year 2009 to $2.26. With the shares down 28% in the past year, she reiterates her market perform rating based on valuation and a fairly neutral risk/reward scenario.

CREDIT SUISSE CUTS GLOBAL PAYMENTS TO UNDERPERFORM FROM NEUTRAL

Credit Suisse analyst Paul Bartolai says Global Payments' (GPN) $0.48 second quarter EPS $0.03 above consensus, with upside driven largely by favorable forex, one-time benefits (which the company would not quantify). He notes Merchant margins declined roughly 200 basis points excluding forex.

Bartolai says while GPN should see some modest margin benefit from cost savings, he thinks ongoing revenue mix shift and competitive pressures will cause further margin pressure in fiscal year 2009 (May). Due to the lack of operating leverage, his expectation for continued margin pressure, and potential for economic weakness, he downgrades the shares.

He raises fiscal year 2008 EPS estimate by $0.01 to $1.93, keeps $2.10 fiscal year 2009 EPS and $35 price target.

CARIS CUTS TARGET AND ESTIMATES FOR MICREL, KEEPS BELOW-AVERAGE RATING

Caris analyst Nicholas Aberle says while the consensus bar is likely to be reset after Micrel's (MCRL) negative fourth quarter preannouncement, he still sees near-term EPS risk with lower book-to-bill utilization. He thinks weakness in wireline infrastructure and wireless handset end-markets is the primary culprit of the fourth quarter shortfall.

Aberle believes Micrel visibility is among the worst in his semiconductor universe. He notes the company sees first quarter revenues flat quarter-to-quarter, but he sees revenues down 3% to be conservative, assuming communications weakness could linger into January and February.

He cuts $0.57 2008 EPS estimate to $0.50 and $9 price target to $7.50. He recommends investors steer clear of MCRL and rotate into his favored small-cap analog IC name, Microsemi (MSCC).

S&P Picks and Pans: BBBY, Regions, Beazer, Southern Co.

S&P REITERATES BUY RECOMMENDATION ON SHARES OF BED BATH & BEYOND

BBBY; $24.85

Excluding a one-time benefit, November-quarter EPS of 49 cents vs. 50 cents is 3 cents shy of our estimate. Comp-store sales increased just 0.8%, highlighting the challenging macro environment for home-related retailers, and we think continued promotional activity will adversely affect near-term results. We are lowering our fiscal 2008 (Feb.) and fiscal 2009 operating EPS estimates to $2.07 and $2.32 from $2.20 and $2.52. We are also cutting our discounted cash-flow (DCF)-based target price by $6 to $38. However, we think BBBY shares are attractive at under 11X our fiscal 2009 EPS estimate and at a ratio of P/E-to-growth (PEG) under 0.9X. /M. Souers

S&P MAINTAINS HOLD OPINION ON SHARES OF REGIONS FINANCIAL

RF; $21.83

Regions says it will take loan provisions of $360 million in the fourth quarter, vs. third quarter's $90 million, since it expects chargeoffs to rise to 0.46% of average loans vs. 0.27% in third quarter. It cites deterioration of home builder loans (8% of Regions' loan portfolio). The company also expects to take $131 million in charges for valuation writedowns. As a result, we are cutting our 2007 EPS estimate by 40 cents to $2.30, and reducing our 2008's by 18 cents to $2.63 on the expectation of rising chargeoffs. We are also reducing our target price $4 to $25, 9.5X our 2008 estimate, a discount to Regions' historical levels. /S. Plesser

S&P REITERATES SELL OPINION ON SHARES OF BEAZER HOMES USA

BZH; $6.86

Beazer has not filed its fiscal 2007 (Sep.) 10-K report or its 10-Q report for June-quarter fiscal 2007 due to accounting issues. Absent a fiscal 2007 balance sheet, we are concerned that reported inventory may be overstated to current market conditions as it relates to asset impairments. Despite $230 million in write-downs in Beazer's preliminary unaudited financial release for September-quarter, we believe the company is exposed to more asset impairments in December-quarter due to its weaker position as a small homebuilder. Applying a target-price-to-book value of 0.2X, lowest of peers, we are reducing our target price to $6 from $9. /K. Leon, CPA

S&P REITERATES BUY OPINION ON SHARES OF SEALED AIR

SEE; $21.89

We project at least 5% organic sales growth in 2008, driven by demand for new food products in Latin America and the Asia/Pacific region. We think pricing initiatives, a better product mix, supply chain efficiencies and global manufacturing strategies will benefit margins and offset volatile resin-based raw material costs. Blending our relative and DCF-based metrics, we now believe the stock deserves a P/E of 14X our $1.85 2008 EPS projection, modestly above peers but slightly below the S&P 500, and we lower our 12-month target price by $3 to $26. /S. Scharf

S&P DOWNGRADES OPINION ON SHARES OF SOUTHERN COMPANY TO HOLD FROM BUY

SO; $38.37

Given the recent rise in the price of Southern Co. shares, we expect a lower rate of total return from the current level. We are raising our fourth-quarter and 2007 estimates by one cent each to 23 cents and $2.10, respectively. We are also reducing our 2008 estimate by one cent to $2.30. A recent rate case ruling in Georgia increased base rates by $99.7 million and will allow for recovery of $222 million a year for environmental investments. We are raising our 12-month target price by $2 to $41, a premium-to-peers P/E of 17.8X applied to our 2008 estimate. /J. McCann

S&P REITERATES BUY OPINION ON SHARES OF WASTE MANAGEMENT

WMI; $32.00

We project 3% organic revenue growth for Waste Management in 2008, as collecting and landfill price hikes offset further weakness in volume. Margins should widen on cost control strategies, while Waste Management continues to divest underperforming assets. Strong cash generation will likely be targeted for more share buybacks, debt paydowns, dividends, and niche acquisitions. Waste Management also offers a dividend yield of 3.0%, compared with 1.9% for the S&P 500. Blending relative and DCF metrics, we use a near-peer P/E of about 16.5X our $2.30 2008 EPS estimate, and reduce our target price by $4, to $38. /S. Scharf