Blue Chip panel puts U.S. recession odds at 50 percent

WASHINGTON (Reuters) - The odds of a U.S. recession stand at nearly 50 percent amid a spate of data showing a weakening labor market, signs of more credit tightening and turmoil in the financial markets, the latest Blue Chip Economic forecast is projecting.

A month ago, economists in this closely watched forecast put the chance the world's richest economy would fall into recession at 40 percent, but government data showing a contraction in hiring, slowed consumer spending and other reports pointing to sagging business activity have indicated a much more deteriorated outlook.

Among those economists, slightly more than 20 percent are now expecting to see the economy contract in at least one or two quarters.

"The economic malaise that originated in the housing sector during 2006 (and) spread to the financial market in 2007, now appears to be infecting Main Street," the newsletter wrote.

And even as the economy slows, inflation is expected to creep higher.

The majority of those surveyed between February 5 and 6, however, continue to say a recession will be avoided. But growth is going to be weak.

Economists are now projecting the economy will grow by just 1.7 percent in all of 2008, down from the 2.2 percent forecast a month ago.

To help avert a recession, Blue Chip economists are expecting the Federal Reserve will continue cutting interest rates. They expect the central bank will reduce its target federal funds rate by at least half a percentage point more this year.

Last month, the Fed cut benchmark interest rates by a sharp 1.25 percentage points in a bold move to support growth as weakness, which was largely contained in the housing market last year, began to spread.

The series of recent cuts took overnight rates, which stood at 5.25 percent in early September, down to 3 percent.

INFLATION PRESSURE TOO?

But those rate cuts may fuel inflation, a concern that has been voiced by a growing number of economists and some Fed officials.

"Despite lowered expectations for economic growth, consensus forecasts of inflation this year continued to creep higher," the newsletter wrote.

Consumer prices, excluding food and energy, are expected to increase 2.3 percent in 2008 and by 2.2 percent in 2009, well above the Fed's 2 percent comfort ceiling.

New home building activity is expected to drop by 25 percent from levels seen in 2007.

"All of our panelists think real residential investment will remain a drag on GDP growth during the first half of this year and 42 percent of them say it will subtract from GDP growth throughout 2008," the newsletter wrote.

The consensus predicts that sales of both new and existing homes will fall another 14 percent this year and prices will decline 9.3 percent.

Even so, the trade sector is expected to remain the bright spot in the economy, as the decline in the value of the dollar and better growth abroad has fueled demand for U.S. goods.

IBD's Top 10 - Friday

Recession Calls Grow Louder

1 The U.S. has entered a recession that'll be deeper and longer than recent slumps, said Richard Curtin, head of the Reuters/Univ. of Mich. consumer sentiment survey. Other economists aren't so sure. Several fed officials have said recession risks have risen, but it's not a done deal. The ECRI leading U.S. index's growth rate fell to -7.9%, the worst since the '01 recession.

Oil Soars On OPEC, Cold, Supply

2 March crude spurted $3.66 to $91.77 a barrel, the highest close since Jan. 31. Several OPEC members floated the idea of an output cut in March. Shutdowns in Nigeria and the North Sea raised supply questions. Arctic cold prompted Northeast consumers to crank thermostats. Also, courts in several countries backed Exxon and froze assets of Venezuela's PDVSA oil company.

Wheat Soars In Monster Squeeze

3 March wheat on the Minneapolis Grain Exchange leapt the daily 30-cent limit to $15.53 a bushel. Options trading, which has no limit, values the contract at $20 or $21 a bushel. The USDA cut its estimate of ending stocks to 272 mil bushels, the smallest in 60 years. Drought and a big ethanol-driven acreage switch to corn set the stage for a wheat shortage.

Voters Head To Polls In 5 States

4 Dem hopeful Barack Obama won the endorsement of Wash. Gov. Chris Gregoire while Hillary Clinton touted herself as the candidate of "dreams and practicality" heading into weekend battles for 185 delegates in Wash. state, La., Neb., Maine and the Virgin Islands. Likely GOP nominee John McCain continued to seek party unity.

Markets Mixed In Quiet Session

5 The Nasdaq rose 0.5%, with the big-cap Nasdaq 100 up 1.2%. But the Dow fell 0.5% while the S&P 500, NYSE composite and small-cap S&P 600 all lost 0.4%. Volume came in well below Thu.'s elevated level. Soaring oil prices helped energy firms and hurt transports. Retailers and financial firms also sold off. The 10-year Treasury yield fell 9 ticks to 3.65%.

ADS Drops Blackstone Lawsuit

6 The credit card transaction processing firm dropped a suit to force the private equity firm to complete its proposed $6.76 bil buyout. Alliance Data Systems (NYSE:ADS - News) said Blackstone (NYSE:BX - News) was committed to the deal, but added there's no guarantee. ADS shares rose early, but closed off 3% to 50. Blackstone, which fell 1%, has agreed to pay $81.75 a share.

Allergan Falls On Botox Review

7 Shares of the maker of Botox fell after the FDA said it's reviewing the drug because of reports of deaths and breathing problems in some patients. A handful of deaths occurred mostly among children treated for cerebral palsy-related limb spasticity, the FDA said. It hasn't OK'd Allergan's (NYSE:AGN - News) popular cosmetic drug for that purpose, but other countries have. Shares fell 6%.

Wholesale Stockpiles Jump 1.1%

8 Dec.'s gain was far bigger than expected and followed Nov. 0.8% rise. Boosting inventories can be sign that firms expect demand to pick up. But maybe not this time. Sales at the wholesale level slid 0.7%, though that followed several hefty gains. The inventory-to-sales ratio remained near record lows.

McDonald's U.S. Sales Improved

9 The fast-food giant's Jan. global same-store sales rose 5.7%, as Europe gained 8.2% and its Asia/Pacific, Mideast and Africa unit gained 7.8%. Domestic same-store sales grew 1.9%. That's not great, but better than Dec.'s flat comps. Analysts have been closely watching McDonald (NYSE:MCD - News)'s U.S. sales to see how much the struggling economy is affecting the industry. Its shares rose 2%.

Amazon Rises On Buyback Plan

10 Shares of the online retailer rose after it announced a plan to repurchase up to $1 bil in stock and $1.25 bil in debt. The 2-year stock buyback replaces a $500 mil program. Citigroup said the buyback underscores the health of Amazon's (NasdaqGS:AMZN - News) cash flow. Along with positive analyst comments on the company's business, shares rose almost 4%.

SEC may seek more disclosure by credit raters

WASHINGTON (Reuters) - The Securities and Exchange Commission may propose requiring credit rating agencies to differentiate between corporate bonds and structured finance products as well as make disclosures around past ratings, the agency's chairman said on Friday.

Chairman Christopher Cox's comments came as credit rating agencies like Moody's Corp (MCO.N), Fitch and Standard & Poor's have been accused of rubber-stamping structured finance products like mortgage-backed securities with high ratings.

Critics have blamed credit raters for failing to highlight risks secured by pools of mortgages, conducting weak analyses and granting higher ratings because they are paid by the companies or issuers whose securities they rate.

Cox told delegates at a securities law conference that rules may be proposed to enhance investor understanding of important differences between ratings for municipal and corporate debt and for structured debt instruments.

He said requiring credit rating agencies to make disclosures on past ratings would promote competitive assessments of the accuracy of past ratings.

"Healthy competition would use the available information to highlight and reward successful past performance and to punish chronically poor and unreliable ratings," he told reporters on the sidelines of the conference.

The SEC has been investigating whether issuers and underwriters of subprime mortgages unduly influenced credit-rating services.

The agency is charged with ensuring credit raters follow their stated procedures for managing conflicts of interest, as well as ensuring they make adequate disclosures.

Michael Macchiaroli, associate director of the SEC's division of trading and markets, said results from an agency review will be used to look at rules to determine whether the commission needs additional legislation.

The agency may have to do "even more than what the chairman stated," Macchiaroli said at the same conference.

Standard & Poor's is a unit of McGraw-Hill Cos Inc (MHP.N) Inc and Fitch is a unit of France's Fimalac SA (LBCP.PA).

Recession to be longer than usual: UMich

NEW YORK (Reuters) - The U.S. economy has entered a recession that will be more painful and drawn out than the usual downturn, the director of the Reuters/University of Michigan consumer sentiment survey said on Friday.

Inflation pressures will linger despite the retrenchment in consumer spending, complicating the task of policy-makers, the University's Richard Curtin said in a report, citing data from industry group The Conference Board.

"This is no ordinary recession," he said. "The aftereffects will last much longer than the typical downturn."

He said the Conference Board's expectations index is a strong predictor of economic contractions, and that it is currently flashing red.

With Americans getting hit with everything from a housing downturn to excess borrowing, things will get worse before they get better.

"Consumers must take more drastic steps to stabilize their finances in the midst of high fuel and food prices, stagnant incomes, and record debt," Curtin said.

TWO AMERICAS

The new report adds that a rising wealth gap will, even more than usual, lead to disproportionate pain for middle- and lower-income Americans.

"Growing income inequality has insulated higher income groups to a greater extent than ever before," the report said.

Yet the rich will not go unscathed, with the stock market's recent slide likely taking a bite out of many an investment portfolio.

Paradoxically, worsening economic conditions will induce families to save money, reinforcing the drag on an economy that has become largely reliant on consumer spending.

"The negative impact will grow as home prices continue to fall in the year ahead," he said.

Bush: Will sign economic stimulus bill next week

WASHINGTON (Reuters) - U.S. President George W. Bush said on Friday he would sign a $152 billion economic stimulus package into law next week.

The Senate and House of Representatives on Thursday approved the measure, a series of tax rebates and business incentives aimed at staving off an election-year recession in the struggling U.S. economy.

"We are in a period of economic uncertainty and we've acted again," Bush told a conservative conference in Washington. "I want to thank the members (of Congress) for passing a good piece of legislation, which I will sign into law next week."

"This bill reflects our principles. It is robust, it is pro-growth, it stimulates business investment and it puts money into the hands of American consumers," he added.

The legislation will provide one-time rebates of up to $600 for individuals or $1,200 for couples, plus $300 for each child. Low-income people, including retirees on Social Security and disabled veterans who pay no income taxes, would receive checks of $300.

The final bill was broader than the original package backed by Bush. The Senate added the benefits for elderly and disabled veterans, who had been left out of the House bill.

To win more Republican support in the closely divided Senate, Democrats had to drop proposed benefits for long-term unemployed workers and other provisions that would have helped low-income people pay heating bills and home builders write off current year losses against previous tax years.

The Senate also added language to ensure illegal immigrants did not receive rebate checks.

With the latest economic date suggesting the U.S. economy is stalling, the bill will inject nearly $152 billion into the economy this year and more than $16 billion next year.

Some economists have said, however, that while the measures will buy time, they may not be enough to avert recession.

Consumer confidence sinks even lower

WASHINGTON - People's confidence in the economy sank even lower amid heightened fears about shrinking job opportunities and the possibility the country is falling into recession.

According to the RBC Cash Index, confidence dropped to a mark of 48.5 in early February, from 56.3 last month. The new reading was the worst since the index began in 2002 and surpassed the previous low reached in January.

The continued erosion in confidence comes despite the fact that Federal Reserve Chairman Ben Bernanke has gotten much more forceful in cutting interest rates to induce people to buy more and bolster the economy. The Fed slashed interest rates twice over the span of just eight days in January — its most aggressive rate reductions in two decades.

The White House and Congress, meanwhile, want to energize the economy by giving rebates to people and tax breaks to businesses. Congress passed an emergency plan Thursday that sends rebates to most taxpayers in an effort to spark the economy. President Bush has indicated he would sign the measure.

Still, an increasing number of economists worry that the rescue efforts by the Fed and the politicians may not be enough to avert the first nationwide recession since 2001. Some economists believe the economy has already toppled into a recession.

"Consumers are being hit by a series of body blows economically," said Carl Tannenbaum, an economic consultant in Chicago.

One of the biggest causes of angst: a weakening job market, analysts said. U.S. employers cut jobs in January for the first time in more than four years, the government reported last week. Wage growth also slowed last month, the report showed.

Another source of anxiety: a housing slump that continues to drag on. The housing bust has led to record-high home foreclosures and has dragged down home values — usually peoples' single biggest asset — making them feel less wealthy. In addition, high energy and food prices are squeezing budgets and turbulence on Wall Street is shrinking nest eggs. All these things are making people feel more insecure about their own financial fortunes and more concerned about the direction of the economy as a whole.

Over the past year, consumer confidence has deteriorated a lot, underscoring the toll of the housing collapse and a credit crunch that has made it harder for people to secure financing for big-ticket purchases such as homes, cars and appliances. Last February, confidence stood at a buoyant 103. The index is based on results of the international polling firm Ipsos.

"We are on the cusp of, or in the early stages of a recession. The confidence numbers clearly reflect consumers' feelings about that," said Greg McBride, senior financial analyst at Bankrate.com.

Economic problems have helped pull the president's approval ratings to all-time lows. Only 29 percent of the public approve of the president's handling of the economy, the lowest mark yet, according to a separate Associated Press-Ipsos poll. Bush's overall job-approval rating slid to 30 percent, also a record low, the poll said.

A measure looking at current economic conditions dropped to 63.6 in early February. And, a gauge of attitudes about investing, including comfort in making major purchases, fell to 62.6. Both readings were the lowest in six years of record keeping.

Looking ahead, individuals' sentiments about the economy and their own financial standing over the next six months stayed in negative territory. This gauge came in at a negative 7 percent in early February. That followed an even worse reading of negative 8.2 percent in January, which was the lowest since right after the deadly blows of the Gulf Coast hurricanes in 2005.

Another index tracking consumers' feelings about employment conditions fell to 101.3 in early February, the lowest since April 2004.

Economists keep close tabs on confidence barometers for clues about peoples' willingness to spend.

Shoppers are showing signs of pulling back.

Major retailers, including Wal-Mart Stores Inc., the world's largest merchant, on Thursday reported weak sales figures for January — further evidence of a faltering economy. Even when redeeming their holiday gift cards, shoppers mostly bought necessities. Affluent shoppers retrenched, too, hurting stores like Nordstrom Inc.

Consumer spending accounts for a big slice of overall economic activity. Thus, their behavior plays a major role in determining how the economy ultimately fares.

The economy nearly stalled in the final three months of last year, and some economists believe it may actually be shrinking in the current January-to-March quarter.

Under one rough rule, the economy would have to contract for six months for the country to be considered in a recession. The likelihood of a recession has risen sharply over the past year, and analysts increasingly believe the U.S. will be in one during the first half of 2008. The worry is that people and businesses will hunker down and pull back their spending, sending the economy into a tailspin.

The RBC consumer confidence index was based on the responses from 1,006 adults surveyed Monday through Wednesday about their attitudes on personal finance and the economy. Results of the survey had a margin of sampling error of plus or minus 3 percentage points. The overall confidence index is benchmarked to a reading of 100 in January 2002, when Ipsos started the survey.

Stores post disappointing January sales

NEW YORK - Here's a sign of how shaky the economy has become: Wal-Mart says its shoppers are redeeming their holiday gift cards for basic items — pasta sauce, diapers, laundry detergent — instead of iPods or DVDs.

Merchants had hoped shoppers armed with gift cards would provide a lift after a dismal holiday shopping season — partly because shoppers tend to spend even more than the value of the card. But that didn't seem to happen last month, and retailers are feeling the pain.

On Thursday, the nation's retailers turned in their worst January in almost four decades as high gas and food prices, a slumping housing market, tighter credit and a tougher job market pushed consumers to the edge.

Sales at 43 retailers surveyed by the UBS-International Council of Shopping Centers rose just 0.5 percent in January, well below the original 1.5 percent forecast.

The results — based on sales at stores open at least a year — followed an anemic 0.7 percent pace in December and were below the 2.1 percent gain for all of last year.

Jill Panell, a 26-year-old homemaker from Sterling Heights, Mich., was using a $20 Wal-Mart gift card on Thursday to stock up on groceries and pet supplies. She wasn't in the market for a present for herself.

"Twenty dollars at Wal-Mart is easy to spend," she said.

Analysts think it's happening in other stores, too.

"Gift cards are being used as a secondary way to save," said Burt P. Flickinger III, managing director of the New York-based retail consulting firm Strategic Resource Group.

Even at department stores, he said, consumers are using gift cards to buy basic apparel such as socks and lingerie.

The assessment by Wal-Mart Stores Inc., the world's largest retailer, that gift card redemptions were below expectations and people were buying only necessities shook up industry observers. Retailers record gift-card revenue only as cards are redeemed.

"It shows you the level of worry. Even with free money in your hand, (consumers) aren't willing to spend on anything more than necessities," said Michael P. Niemira, chief economist at International Council of Shopping Centers.

Niemira said January's retail sales performance was the weakest for that month since at least 1970, when comparable records started.

Shoppers appear to be looking at gift cards not as "free money" but rather as their "own personal cash," said C. Britt Beemer, chairman of America's Research Group, citing his recent surveys with consumers.

They're also holding on to the gift cards longer this year than last year, he said — 15 percent of the 1,000 consumers his group interviewed said they redeemed their gift cards in December, compared with 33 percent who did so last year.

The retail sales results extended a streak of news that showed more signs of consumer strain. Consumer spending accounts for two-thirds of the nation's economic activity, and it appears to have stalled from an already slowing pace seen over the past year.

Shoppers have had to contend with rising gas and food prices and a slumping housing market, and there are signs that the job market is becoming a concern as well.

The Labor Department reported Friday that U.S. employers sliced payrolls by 17,000 in January, the first decline in more than four years. The department said Thursday that jobless claims fell last week by 22,000, but that was a decline was smaller than expected.

And if the job market continues to deteriorate, "all bets are off," said Ken Perkins, president of RetailMetrics LLC, a research company in Swampsott, Mass.

While investors are hoping the Federal Reserve can avert a recession with a series of rate cuts, some economists say the moves may be too little, too late.

Analysts also say that while the government's proposed economic stimulus package, which would send rebate checks to more than 100 million Americans, could help re-ignite spending, the lift would be only temporary.

Nonetheless, shares of several retailers rose Thursday as many either confirmed their earnings forecasts or raised them, signaling they were able to control their inventories.

Hot Topic Inc. and Wal-Mart stuck with their outlooks, while Pacific Sunwear, Wet Seal and Gap Inc. raised their profit guidance despite lower sales.

Retailers are expected to offer a better picture of the impact of slower sales and may shed light on gift card redemptions when they report fourth-quarter earnings over the next few weeks.

Department stores and mall-based apparel retailers posted some of the steepest sales declines Thursday. J.C. Penney Co. saw same-store sales at its department stores drop 1.9 percent, though that was better than the 6.3 percent decline expected by analysts polled by Thomson Financial.

Upscale department store Nordstrom suffered a 6.6 percent decline in same-store sales, much worse than the 0.7 percent decrease expected.

Macy's Inc. had already reported a 7.1 percent decrease in same-store sales on Wednesday, worse than expected. Spokesman Jim Sluzewski acknowledged that gift card sales and redemptions were weaker than last year, reflecting the overall slower sales trend. He noted that Macy's doesn't track how shoppers use their gift cards.

Saks Inc. fared better, saying same-store sales rose 4.1 percent, better than the 2.2 percent estimate. But the luxury retailer said shoppers are still shifting more of their spending to sale merchandise.

Discount retailers have held up better as higher-income shoppers shift their spending to less expensive stores. But their traditional customers are cutting back as well. Target Corp. reported a 1.1 percent decline in same-store sales in January, worse than the 0.6 percent decline analysts expected.

Wal-Mart reported a 0.5 percent gain in same-store sales, far below the 2.0 percent increase expected. The company said it continues to do well with basics like groceries but home furnishings remain weak.

At a Wal-Mart in Cheektowaga, N.Y., near Buffalo, shopper LaShari Jackson, 37, said she was "just getting the basics, household stuff." She said she had no plans to look at electronics, CDs or other splurges: "Can't afford it."

Analysis: Politics boosted stimulus plan

WASHINGTON - The twin pressures of a looming recession and an election year combined to speed a $168 billion economic rescue plan through Congress, sweeping aside lawmakers' political differences in favor of rushing $600-$1,200 checks to their constituents.

The overwhelming House and Senate votes Thursday to approve the measure and send it to President Bush reflected lawmakers' eagerness to show they could act quickly to address economic concerns, which have replaced the Iraq war as the public's top worry.

The package was the product of a rare spate of bipartisan cooperation on Capitol Hill, where Democrats and Republicans teamed with the White House on a bill that fell far short of both parties' priorities but could win quick enactment.

House Speaker Nancy Pelosi signaled early last month her determination to move ahead with a fiscal stimulus bill. As reports about the economy worsened, the White House and congressional Republicans embraced the effort, even as some other Republicans on Capitol Hill worried that the economic bailout would do more to bolster Democrats' sagging approval ratings than it would to help the economy.

The result was a plan that will deliver tax rebate checks starting in May to anyone earning more than $3,000, with smaller rebates for people with incomes of $75,000 — or $150,000 for a couple — and a $300-per-child bonus. Most taxpayers would get $600 rebates, or $1,200 for couples. Those who earn too little to pay taxes, including senior citizens living off of Social Security or veterans on disability checks, would get rebates of $300 for individuals and $600 for couples.

The bill includes tax breaks for businesses investing in new plants and equipment, and steps to boost the ailing housing market.

The White House said Bush would sign it sometime next week, and lawmakers in both parties were quick to claim credit for the deal.

Pelosi trumpeted Democrats' efforts to include rebates for low-income people who make too little to owe taxes, while Republicans were pleased that the centerpiece of the measure was in essence a tax cut.

Pelosi, D-Calif., who forged an early agreement on a $161 billion plan with Minority Leader John Boehner, R-Ohio and Treasury Secretary Henry Paulson, later prodded the Senate to break its stalemate and complete the bill.

Partisan politics played a bigger role in the Senate, where Democrats were determined to use the stimulus package as a chance to highlight their party's priorities — including extending unemployment benefits and providing food stamp and heating aid for the poor — and wanted Republicans to cast tough election-year votes on those items.

They paired those add-ons with rebates for 20 million seniors and 250,000 disabled veterans left out of the House plan, and threatened that GOP senators would have to accept them or risk being blamed for leaving those politically powerful groups out of the stimulus effort.

Republicans blocked the $205 billion package, and when it became clear that he was just short of the 60 votes he would have needed to advance it, Senate Majority Leader Harry Reid, D-Nev., said it was time to declare victory and move on.

"I could have played around with this and tried to pick up that 60th vote, but I made a commitment to get this bill done before (Feb. 15), and we did that," Reid said.

Senate Democrats' campaign committee issued news releases bashing vulnerable GOP senators, like Sen. John Sununu of New Hampshire, for opposing the larger package.

Republican strategists, however, said they were confident that voters would forget that their senators had briefly blocked the stimulus measure once their checks arrived this spring.

"At the end of the day Republicans gave a little, Democrats gave a little, the House gave a little and the Senate gave a little, and I think that is what the American people expect of us," Boehner said.

Mostly absent in the stampede to complete the aid package was any mention of the deficit, which will swell to accommodate the stimulus measure. Some Republicans, though, did express concern that the plan was crafted with an eye toward what would be best for lawmakers facing re-election in November instead of what was best for the economy.

"It might be political stimulus," said Rep. John Campbell, R-Calif., "but it is the wrong economic stimulus."

Japan stocks fall on option-led selling

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

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

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

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

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

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

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

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

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

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

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

Stocks finish higher after fitful day

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Wall Street rises as valuations lure bargain-hunters

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

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

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

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

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

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

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

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

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

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

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

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

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

Wall St rebounds in volatile trading

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Rank escapes FTSE carnage

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

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

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

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

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

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

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

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

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

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

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

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

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

Wall Street volatile on tech worries

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

FTSE 100 falls after weak earnings

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Techs lead European stocks lower

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

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

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

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

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

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

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

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

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

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

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

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

Oil rises $1 on colder weather forecasts

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

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

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

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

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

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

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

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

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

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

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

Wall St volatile on tech worries

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

FTSE losses deepen after rate cut

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

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

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

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

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

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

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

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

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

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

AstraZeneca shares fell 3.6 per cent to £19.55.

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

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

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

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

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

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

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

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

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

Cisco and Wal-Mart gloom set to hit stocks

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

London shares on the backfoot

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

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

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

FTSE down despite UK rate cut

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Baghdad's Stock Market Goes Modern

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

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

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

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

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

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

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

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

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

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

Japan Air notches profit, chairman quits

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Cisco shares fall on gloomy outlook

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

AutoNation quarterly profit, sales fall

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

AutoNation operates 322 franchises in 15 states.

Softbank profit surges fourfold

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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