The Fed to the rescue

Bernanke says central bank ready to take 'substantive additional action' to cut interest rates in order to support lagging economy.

Federal Reserve Chairman Ben Bernanke painted a bleak picture of the U.S. economy Thursday and said the central bank is ready to cut interest rates again.

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CNNMoney.com Editor-at-large Paul La Monica analyzes the current economic turmoil in light of past downturns. Play video

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Goldman Sachs analyst Jan Hatzius says a recession and a more serious downturn in the housing market are on the horizon. Play video

NEW YORK (CNNMoney.com) -- Federal Reserve Chairman Ben Bernanke said in a speech Thursday that the central bank is prepared to continue lowering interest rates in order to help keep the economy on track.

He also reiterated that the Fed does not believe the economy will slip into a recession this year.

"We stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks," Bernanke said in prepared remarks before the Women in Housing and Finance and Exchequer Club in Washington, D.C.

However, some economists suggested that rate cuts may be too late to stop a recession. But stocks, which had been trading lower before the speech, rebounded modestly in the afternoon and soared following reports that Bank of America (BAC, Fortune 500) was in talks to buy embattled mortgage lender Countrywide Financial (CFC, Fortune 500).

Read Bernanke's prepared remarks

Wall Street interpreted Bernanke's comments to mean that there is now an increased likelihood the Fed will lower its key federal funds rate by a half percentage point, to 3.75 percent, at the conclusion of its two-day meeting on Jan. 30.

"A half-point cut is certainly on the table and it's about time. The Fed has a lot of work to do," said James Glassman, senior economist with JPMorgan Chase.

To that end, investors are pricing in a 92 percent chance that the Fed will lower rates by a half-point on Jan. 30, according to federal funds futures listed on the Chicago Board of Trade.

"The Fed has changed course. It has moved from a limited loosening mode designed to mitigate the impact on the financial markets to more aggressive loosening aimed at stimulating growth," said Chris Probyn, chief economist with State Street Global Advisors in Boston.

Recession may already be here

Probyn said he expects a half-point cut later this month followed by a quarter-point cut at its next meeting in March and did not rule out further cuts at meetings in April and June as well.

But Bernanke's speech comes as more and more economists are saying that the economy is either already in a recession or on its way toward entering one. Bernanke stopped short of describing current conditions as a recession in his prepared remarks but he did paint a bleak picture for the economy in 2008.

"Downside risks to growth have become more pronounced. Notably, the demand for housing seems to have weakened further, in part reflecting the ongoing problems in mortgage markets," Bernanke said.

"In addition, a number of factors, including higher oil prices, lower equity prices, and softening home values, seem likely to weigh on consumer spending as we move into 2008," he added.

Economic pain likely to linger

During a question-and-answer session, Bernanke said the Fed is not currently forecasting a recession in 2008. Instead, he said the Fed expects growth to slow.

He added though, that it is difficult to make a determination about whether an economy is in recession until after the fact.

Probyn agreed. And he said that if the economy is already in a recession or close to one, a rate cut later this month would be too little, too late. The best the Fed can do now is to take steps to ensure that the recession does not last long.

"If we do have a recession, it would be quite mild and probably in the first half of the year. Nothing the Fed does today can do anything about that," Probyn said. "But rate cuts may stimulate growth by late summer and into the end of the year."

Glassman, however, said that the Fed may have waited far too long to cut rates aggressively and that even if the economy doesn't dip into a recession, there could be a prolonged slump since the job market has weakened in a relatively short period of time.

"When you have to step up the pace of easing and you're doing it after unemployment has been rising, you're not exactly ahead of the curve," he said.

In case of emergency, slash rates

Bernanke discussed inflation as well, but he said that "inflation expectations appear to have remained reasonably well anchored," and suggested that rising oil and food prices "may be a negative influence on growth" in addition to putting pressure on inflation measures.

That comment appears to give more evidence to those who think the Fed is now more concerned about a recession than rampant inflation.

"Obviously, inflation is a concern but for the Fed, you're better off front-end loading rate cuts now," said John Derrick, director of research with U.S. Global Investors Inc, a money management firm based in San Antonio. "If you have to take them back later and raise rates to deal with inflation, you deal with that then."

As such, some market strategists and economists have even suggested in the past few days that the Fed could cut rates in an unscheduled meeting before January 30.

Bernanke did not comment in his remarks about whether a rate cut before Jan. 30 was possible. But he did say that the Fed "must remain exceptionally alert and flexible, prepared to act in a decisive and timely manner and, in particular, to counter any adverse dynamics that might threaten economic or financial stability."

Bernanke also said the central bank's new auction program, which it announced in December as a way to loan money to banks in need of cash at a rate below the Fed's discount rate, appears to be a success and could "become a useful permanent addition to the Fed's toolbox."

The Fed has already conducted two auctions for a combined $40 billion and will be loaning $60 billion more later this month through two additional auctions. 

U.S. retailers expect tepid sales

NEW YORK (AP) -- Most of the nation's major retailers are slated to report tepid sales gains for December on Thursday, likely making the holiday shopping season the weakest since 2002.

Figures expected Thursday could show the worst shopping season since 2002.

But several retailers, including teen merchants American Eagle Outfitters and Hot Topics reduced their earnings forecasts on Wednesday amid sluggish sales, a sign that doesn't bode well for the holiday profit and sales picture.

The size of the pullback in consumer spending could inflame recession fears that have grown amid a recent batch of negative economic reports.

Consumers, faced with higher gas and food prices, a slumping housing market and an escalating credit crisis, have been cutting back on spending over the past year. But recent news of $100-a-barrel oil, a weakening job market and a mortgage sector in distress are making economists more worried about consumers' financial health.

"I am very pessimistic about the outlook for consumer spending," said Carl Steidtmann, chief economist at Deloitte Research, who forecasts declines in same-store sales in coming months. "There is a strong host of headwinds that consumers are facing."

Same-store sales are sales at stores opened at least a year and are considered a key indicator of a retailer's health.

According to the International Council of Shopping Centers-UBS tally, same-store sales are expected to be up no more than 1.0 percent for December, reduced from the original 1.5 percent projection. That would mean that the holiday shopping period, spanning November and December, will be up a modest 2.25 percent, according to Michael P. Niemira, chief economist at the association.

If December's sales fall below the 1 percent gain, that would make the 2007 holiday shopping season the weakest since 2002 when the holiday period was up a meager 0.5 percent.

According to the ICSC-UBS tally, same-store sales growth has averaged 2.4 percent so far this fiscal year, compared with 3.6 percent for the entire fiscal 2006. Retailers' fiscal year ends in late January.

December sales were hurt in part by a quirk in the calendar, which pushed the post-Thanksgiving shopping week into November rather than December.

Nevertheless, a weakening economy clearly has made shoppers more frugal.

"This holiday season, consumers were even more bargain-oriented that we have since at least the 2001 recession," said Ken Perkins, president of RetailMetrics LLC, a research company in Swampscott, Massachusetts.

Perkins noted the slowdown in spending has been broad-based, and he and others fear that a further deterioration in the job market -- the last remaining leg propping up consumer buying -- could derail the pace even more.

On Friday, the job report from the Labor Department showed that hiring practically stalled in December, driving the nation's unemployment rate up to a two-year high of 5 percent.

Meanwhile, The American Bankers Association reported last Thursday that late payments on a cluster of consumer loans, including those for autos, home improvement and certain home equity loans, rose in the summer to their highest level since the country's last recession in 2001.

On Wednesday, Countrywide Financial Corporation, the nation's largest mortgage lender, said the delinquency and foreclosure rate of mortgages in its portfolio skyrocketed in December, sending off alarm bells of a worsening mortgage crisis.

Over the past week or so, reports of weak sales from various merchants have been trickling in confirming how such economic woes are taking a toll on consumer spending.

Late Wednesday, Hot Topic reported a 6.2 percent decline in same-store sales for December; analysts polled by Thomson Financial expected a 6.5 percent decrease. The retailer cut its fourth-quarter earnings outlook.

American Eagle, meanwhile, announced a 2 percent same-store sales decline, in line with Wall Street estimates. It also lowered its fourth-quarter profit forecast.

On Tuesday, supermarket chain Supervalu Inc. reduced its full-year profit outlook, suggesting that financial pressure was hurting its customers. And Family Dollar Inc. reported a 4 percent drop in fiscal first-quarter profits and said it expects second-quarter sales will fall due in part to lower consumer spending.

Last week, CVS Caremark Corp. and other drug store chains, which are usually vulnerable to a recession, released weak sales reports for December. While CVS and its rivals blamed a mild flu season for muted business, they also cited a weaker economy.

Analysts say that discounters should fare best since shoppers are trading down to less expensive stores. Wal-Mart Stores Inc., the world's largest retailer, has maintained that it will meet its goal of same-store sales growth for December of 1 percent to 3 percent.

But the hardest hit will be apparel chains, which have languished because of the slowing economy and lack of compelling fashions. The popularity of gadgets like iPods and flat-panel TVs have also siphoned away sales from apparel sellers. Luxury stores should continue to do well, though the sales pace is slowing, according to Gilbert Harrison, chairman of Financo Inc., an investment banking firm specializing in retailing.

In the end, Harrison says that those retailers that have "the most interesting, innovative offerings" are going to win.

Recession may already be here

Economists shift from wondering if there will be a recession to asking if the U.S. economy has already shifted into reverse.

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Goldman Sachs analyst Jan Hatzius says a recession and a more serious downturn in the housing market are on the horizon. Play video

NEW YORK (CNNMoney.com) -- The question for many economists is not if the U.S. economy will fall into a recession. It's whether it already has.

The formal recognition of a start of a recession probably wouldn't come for at least six months if not more than a year, as official judges from the National Bureau of Economic Research (NBER) pour through various economic readings.

But top economists from two of the major Wall Street firms - Merrill Lynch and Goldman Sachs - say recession is likely already here.

The tipping point for both economists was the report released last Friday that showed a sharp jump in the unemployment rate in December, coupled with little growth.

"Friday's employment report strongly suggests that an official recession has arrived," wrote David Rosenberg, North American economist for Merrill, in a note this week entitled "Recession a reality."

He wrote that history points to a recession when the average length of the work week fell in back-to-back quarters, as it did in the third and fourth quarters of 2007. And he said at no time in the past 60 years has there been a half-percentage point climb in the unemployment rate from the low point without a recession following. The latest unemployment reading stands at 5.0 percent, up from 4.4 percent in March.

In case of emergency, slash rates

The traditional sign of a recession is two or more quarters when economic activity declines rather than grows. That hasn't happened - the final reading of growth in the third quarter came in at a healthy 4.9 percent.

The NBER's calculation of when a recession starts and when it ends is far more refined than the two-quarters-of-economic-decline test. It looks at a number of factors, such as employment, real personal income and manufacturing, and comes up with a date pegged to a specific month, rather than a quarter. For example, it judged that the most recent recession ran from March 2001 to November 2001.

There's wide agreement among economists that growth in the fourth quarter fell sharply from third quarter levels, although most still forecast slim growth in the period. But many are forecasting a better-than-even chance that some quarters in 2008 will show declines.

Goldman's senior U.S. economist Jan Hatzius is one of those saying a 2008 recession is likely, with roughly a two-in-three chance. Hatzius is worried about the three-month average for unemployment, which has jumped more than one-third of a percentage point from its low.

"Whenever you've tripped the one-third-percentage point barrier, it's an [recession] indicator that's ten out of ten," he said.

Hatzius is expecting the recession will be fairly mild, lasting only 6 months, with the economy declining by no more than 1 percent in any quarter.

Recession cures - plans to goose growth

But that is based on his assumption that the Federal Reserve cuts rates deeply and quickly, to 2.5 percent from its current 4.25 percent. He also believes that given election-year pressures, there's likely to be some form of tax cut or rebate to try stimulate the economy.

"If the data is every bit as bad as we're expecting and the Fed for some reason refuses to respond, you could see a more severe recession," Hatzius said.

Hatzius also said he believes that the downturn in housing is nowhere near being played out. Hatzius is forecasting that home prices end up plunging 20 to 25 percent below peak levels. And he said that a further sharp decline in housing prices will hit both consumer spending and credit markets, which are two more reasons he's forecasting a recession.

Cautious optimism

Of course, there are still economists who believe that the economy is more likely to avoid a recession than sink into one. But even they admit to being more concerned than they were a few weeks ago.

"Our own recession-warning model currently indicates that the odds of a recession occurring in the next six months are slightly greater than 50 percent," said the monthly economic outlook from Wachovia. "That said, we still believe the economy will avoid an outright downturn, as a good part of December's weakness appears to be tied to special factors." It cited severe winter storms in much of the country as one of the issues distorting the latest readings.

Even some other economists who believe a recession is likely, such as Harvard University's Martin Feldstein, the president of the NBER, don't believe the economy has already started to shrink.

Bush tax cut guru: Recession now likely

"Of course these numbers can be revised, but as long as we have positive numbers for employment growth - very weak but still positive - and for industrial production, when the business-cycle dating committee looks at the evidence, they wouldn't say we're currently in a recession," he said.

Feldstein, one of the fathers of the Bush administration tax cuts passed early in his tenure, is advocating tax cuts and further Fed cuts to respond to the current weakness, even if the economy doesn't slip into recession.

Economist Bob Brusca said that while he thinks there is now a better than even chance that there will be a recession, that doesn't mean the Fed can start slashing rates because of the continued threat of inflation.

"A lot has yet to happen if recession is to kick in," Brusca said. "It may yet happen. But for policy that is not the issue. Policy needs to react to circumstances and that refers to both the inflation and growth profiles."

Other economists point out it's almost irrelevant as to whether the economy fell into a recession in December, or does so a few months from now.

Bernard Baumohl, executive director of the Economic Outlook Group, said that even if the economy avoids a recession, it will do so with very slow growth in 2008. He said it's almost immaterial from that perspective if there is a recession or not.

"It'll have the same painful effect on businesses and households," Baumohl said. 

In case of emergency, slash rates: Some are calling for the Fed to cut interest rates sooner rather than later to fight off recession.

Recession S.O.S. - goosing growth: Lawmakers are considering a host of options to stimulate the economy, and some may mean more for your bottom line.

Bush tax cut guru: Recession now likely: Martin Feldstein argues tax cuts and more Fed rate cuts necessary to address looming recession.

Stocks pull off comeback

Wall Street bounces back as investors scoop up shares hit in the recent selloff.

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Hans Redeker of BNP Paribas on fears that the U.S. markets may plunge into a recession. Play video

NEW YORK (CNNMoney.com) -- Stocks snapped back Wednesday, erasing earlier losses, as investors set aside worries about the economy to scoop up a variety of issues battered in the recent selloff.

The Dow Jones industrial average (INDU) added 1.1 percent. The broader S&P 500 (INX) index gained almost 1.4 percent and the Nasdaq (COMPX) composite gained 1.4 percent.

Stocks had flip-flopped on both sides of unchanged throughout the session Wednesday earnings forecast, oil and gold prices near records and Goldman Sachs' forecast that the economy may already be in a recession.

Stocks tumbled again in the afternoon, led by the financial sector. But in the last hour of trade, investors staged a recovery.

"It's the old rubber-band effect, where the market was very compressed and just snapped back from a vastly oversold condition," said Steven Goldman, market analyst at Weeden & Co.

Treasury prices slumped, boosting the corresponding yields. The dollar bounced back versus other major currencies.

After the close, Dow component Alcoa (AA, Fortune 500) reported higher quarterly earnings that topped estimates, starting off the fourth-quarter reporting period on a plus note. Shares of Alcoa gained around 4 percent in after-hours trade. (Full story).

Also after the close, Target (TGT, Fortune 500) said its CEO will retire in May amid slumping sales. He will be replaced by the retailer's president. Target shares were little changed in after-hours trade. (Full story).

There are no big market-moving earnings or economic reports scheduled for Thursday, with a speech from Fed Chairman Ben Bernanke the biggest event. Bernanke is due to speak Thursday afternoon in Washington, D.C., on the economic outlook and monetary policy.

Recession S.O.S. - goosing growth

In the first five trading days of the year, through Tuesday's close, the S&P 500 lost about 5.3 percent, while the Dow industrials fell 5.1 percent and the Nasdaq composite fell 8 percent.

"It's been a bad start to the year," said Greg Church, president at Church Capital.

Church said a bigger snapback could be in the works in the days ahead, but that it depends a lot on what the financial sector does, since the broad market is taking its cue from the financial sector.

The financial sector led the late-session turnaround Wednesday, with JP Morgan (JPM, Fortune 500), Citigroup (C, Fortune 500), Morgan Stanley (MS, Fortune 500) and Merrill Lynch (MER, Fortune 500) all recovering from earlier losses.

In corporate news, MBIA (MBI) said it will cut its dividend and raise $1 billion from the sale of notes, as a means of raising money and avoiding a ratings downgrade. The bond insurer also said that regulators have probed how thoroughly it disclosed risks, and that regulators are now looking at the $1 billion investment it received in December from Warburg Pincus.

MBIA shares fell 4 percent, recovering from bigger losses thanks to the end of the day turnaround.

Countrywide Financial (CFC, Fortune 500) slipped for a second session after the mortgage lender said that the delinquency and foreclosure rate of home loans in its portfolio jumped in December. Shares fell 6 percent and dragged on Washington Mutual (WM, Fortune 500).

On the upside, E*Trade Financial (ETFC) gained almost 7 percent. The company said it sold $3 billion in mortgage-backed securities and municipal bonds and that it is getting out of its institutional trading business as it attempts to accelerate its turnaround effort.

Also on the upside, chemical maker DuPont (DD, Fortune 500) said that it will post stronger-than-expected earnings in the fourth-quarter 2007 and full-year 2007, as well as full-year 2008, despite the slowing economy. That sent shares of the Dow component up around 4.8 percent.

Market breadth was mixed. On the New York Stock Exchange, winners topped losers 3 to 2 on volume of 2.06 billion shares. On the Nasdaq, decliners narrowly edged advancers on volume of 2.86 billion shares.

Bracing for bad bank earnings

Investment bank Goldman Sachs added to the growing talk of a pronounced slowdown, saying that recent data suggest the economy is falling into a recession.

Goldman Sachs said that as a result of this slowdown, the Federal Reserve is likely to cut the fed funds rate, a key short-term lending rate, to 2.5 percent by late 2008. The fed funds rate currently stands at 4.25 percent after the Fed cut it three times in a row.

Some on Wall Street are calling for the Federal Reserve to step in and take action ahead of the next policy meeting at the end of the month. (Full story).

St. Louis Fed President William Poole said that fundamentals remain strong and that it is too early to tell if the problems in the housing market will push the economy into recession, Briefing.com reported. Poole was a voting member of the Fed's policy committee in 2007.

In cash of emergency, slash rates

Stocks tumbled Tuesday, extending the abysmal start to the new year, on speculation that Countrywide Financial could file for bankruptcy and a warning from AT&T that it's consumer business is suffering. The corporate news played into growing worries that the economy could be headed for a recession amid the credit and housing market fallout.

Overall, the three major gauges have now fallen at least 10 percent off the recent highs hit in October on a closing level - the technical definition of a market correction. That can spark a big rally, as in November, with people using the selloff as an opportunity to jump back in at lower levels. Or a correction can lead to more selling and eventually a bear market, defined as a drop of 20 percent off the highs.

Treasury prices slumped, raising the corresponding yields on the 10-year note to 3.82 percent from 3.77 percent late Tuesday. Treasury prices and yields move in opposite directions.

In currency trading, the dollar gained versus the yen and euro.

U.S. light crude oil for February delivery fell 66 cents to settle at $95.67 a barrel on the New York Mercantile Exchange Tuesday. The price of oil seesawed following the morning release of a mixed oil inventories report.

COMEX gold for February delivery rose $1.40 to settle at $881.70 an ounce, nearing record highs hit on Tuesday. 

Goldman Sachs sees US 'falling into recession'

Countrywide's loan fundings edge higher

Nation's largest home lender says December loan fundings increased 1%; stock bounces after tanking in previous session on bankruptcy rumors.

CALABASAS, Calif. (AP) -- Countrywide Financial Corp., the nation's largest mortgage lender, said Wednesday its December loan fundings rose 1 percent from November and were ahead of internal forecasts.

The stock, which lost nearly a third of its value on Tuesday amid rumors of bankruptcy -- which the company strongly denied -- rose 13 percent in premarket trading.

Countrywide said it funded $24 billion in loans in December, giving it a total of $69 billion for the fourth quarter. Average daily mortgage applications in the month slipped from November, but Countrywide attributed that to a typical seasonal decline.

The company's banking operations had assets of $113 billion at the end of December, up from $83 billion at the end of November.

Countrywide (CFC, Fortune 500) also said it saw a slower rate of people paying off loans early, which made its servicing business more valuable. Servicers collect payments and manage loans for their owners. 

Investors brace for bad bank earnings

Green energy's hottest stocks for 2008

Investing experts say to stay away from solar, which saw a huge run up in 2007, and instead focus on wind, energy efficiency specialists or the battered biofuels sector.

Solar may be played out for 2008, but experts say thre's plenty of money to be made in wind, efficiency and maybe even biofuels.

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Special Reportfull coverage

NEW YORK (CNNMoney.com) -- Despite the astronomical jump in clean-energy stocks in 2007, investors say 2008 will also be be a good year for most stocks in emerging energy technology.

Driven by record oil prices that lifted the broader energy sector in general - and perhaps investor enthusiasm stoked by global warming fears - 2007 was a fantastic year to own renewable energy stocks.

The WilderHill clean energy index - an index of 48 large U.S. stocks in the renewable energy sector - rose over 58 percent for the year. That compared to an 8 percent gain in 2006 and an anemic 5 percent rise in 2005.

Solar was the big winner in 2007. Most solar stocks in the index rose over 100 percent. First Solar, a maker of thin-film solar panels that is half-owned by the estate of Wal-Mart founder Jim Walton, surged a staggering 795 percent last year alone. Its stock hit nearly $300 a share.

But after a big runup in solar stocks, experts suggest looking at wind and energy efficiency specialists for market-leading performance in 2008, and perhaps a rebound for biofuels, which took a beating last year.

Here's what the experts say, sector by sector:

Solar

The leader in 2007 is already seeing a pullback. Solar stocks in the WilderHill Index - which include SunPower (SPWR), Evergreen Solar (ESLR), Suntech (STP), and First Solar (FSLR) - have fallen an average of around 10 percent since the start of the year.

The decline seems to be a simple case of investors bailing out of what they see as an overvalued sector.

"When I see valuations that are out of control, it just kinda scares me," said Paul Ferreri, a renewable energy portfolio manager at McClurg Capital, a San Rafael, Calif.-based capital management company.

That said, almost all renewable energy investors still think the sector is a good bet for the long term.

Wind

Experts say the wind sector, which boasts the technology of choice for utilities looking to buy green power, is now undervalued compared to solar.

"Wind is a steady grower, and it will continue to be supported by legislation and production targets," said Jens Peers, head of Eco Funds at Dublin-based KBC Asset Management.

The problem is, there are very few U.S. wind companies to invest in. Most big makers of wind turbines - like Spain's Gamesa, India's Sulzon, or Denmark's Vestas - do not have U.S. stock listings.

General Electric (GE, Fortune 500) is the big U.S. player, although making wind turbines is obviously a small part of its business. But it is a growing part, accounting for over $1 billion in sales in the last quarter and boasting a backlog of over $7 billion in orders, according to Ferreri.

Another way for U.S. investors to play wind is to get in on the parts companies. Zoltek (ZOLTEK), which makes carbon fiber that's used in turbine blades, is an investor favorite. Its stock rose over 100 percent last year, and a mind-blowing 1,849 percent over the last 5 years. But with earnings growth of over 100 percent over the last 12 months, the runup may be justified - although the company has yet to turn a profit.

And American Superconductor (AMSC), among its many products, makes devices used in transferring energy from wind turbines. That company's stock rose 178 percent last year.

Biofuels

This sector got killed in 2007 as corn prices rose, ethanol prices fell, and the media churned out stories highlighting corn-based ethanol's inefficiency and the problems with using food-based crops for fuel.

Verasun's (VSE) stock lost 26 percent and Pacific Ethanol (PEIX) sank over 50 percent.

But that may mean it's a good time to buy.

"[These stocks] are extremely cheap, and legislation could push [them] back up," said Peers.

For corn-based biofuels stocks, experts said to be careful of the smaller companies and stick to names like Verasun or Pacific Ethanol. Ferreri likes the diversity offered by Archer Daniels Midland (ADM, Fortune 500), the agriculture giant with a big stake in the sector.

Experts also like the biofuel companies working outside the corn area.

Cosan (CZZ) is a big Brazilian company specializing in sugar-based ethanol, which is more efficient that corn. Its stock has risen about 10 percent since debuting on the New York Stock Exchange this past summer. And Nova Biosource Fuels (NBF) a maker of biodiesel, was named by WilderHill index founder Robert Wilder as a stock to watch.

Efficiency

Companies that specialize in helping other outfits boost thier energy efficiency haven't gotten nearly as much press as their sexier cousins in wind and solar, but experts say cutting demand is just as important as generating new, clean power when it comes to meeting future energy needs.

Companies like Orion (OESX), which manages power demand, Itron (ITRI), which makes so-called "smart" electric meters, or Cree (CREE), which makes super-efficient light emitting diodes, are all on investors' radar screens.

"I think you'll see a lot more of these plays come to market," said Les Satlow, a portfolio manager with Cabot Money Management, a Salem, Mass.-based capital management company.

Satlow also said good plays in renewable energy could include companies that make equipment used to make solar panels, like Applied Materials (AMAT, Fortune 500), or Vecco (VECO), which makes precision equipment used to manufacture microelectronic products.

With all the different types of renewable technologies out there, he likened the race to find the dominant few to a war.

"We don't really know who's going to be the winner, so we prefer to go with the arms dealer," he said.  

Stocks look for direction

Futures point to flat open after major gauges sink into correction; DuPont boosts profit outlook.

NEW YORK (CNNMoney.com) -- Investors were once again looking for direction Wednesday after tumbling into correction the previous session, as investors prepared for the start of earnings season.

At 7:30 a.m. ET, Nasdaq and S&P futures were little changed, pointing to a flat start for stocks, as investors balanced higher oil prices and recession fears with positive outlook from Dow component DuPont.

A late-day sell off on Tuesday pushed stocks to more than 10 percent below highs hit in November - the technical definition of a market correction.

In addition to economic worries and concerns about the housing market, AT&T (T, Fortune 500) said Tuesday it was seeing a pull back in consumer spending.

But futures got a lift Wednesday when chemical maker DuPont (DD, Fortune 500), a Dow component, increased its 2007 full-year earnings outlook to reflect stronger business results in the fourth quarter. The company also raised its guidance for 2008 results, but the boost to futures was short-lived.

Earnings season kicks off with results from Dow component Alcoa (AA, Fortune 500) due after the market close. Analysts surveyed by Briefing.com forecast that the company's earnings fell 55 percent from a year-earlier levels.

David Kelly, chief market strategist for JPMorgan Funds, said he believes stock investors aren't focused on earnings quite yet, but that rather there is a tug between recession fears and the belief that recent sell-offs have produced attractive prices for many stocks.

"I think that's a fundamental struggle here that could help futures look OK even with negative momentum in the market," he said.

Kelly said the results of the New Hampshire primary, with an upset win for Hillary Clinton and a comeback victory for John McCain in the Republican primary might be weighing on the markets slightly because it casts uncertainty on the nomination process.

"If after Iowa and New Hampshire, we had two wins for Clinton and two wins for (Mitt) Romney, it'd be much clearer where the races are headed," he said. "We now have what looks like a two-horse race on the Democratic side, and at least a four-horse race on the Republican side, and that is having an overall effect on markets because they don't like uncertainty."

But Kelly said he doesn't believe the election results will be the big factor for investors Wednesday.

"What we have is a clash between the low pressure system of recession fears and the high pressure system of valuation," he said. "The election is a little bit of fog out there somewhere. It's not the big weather story."

The only key economic report due Wednesday is the weekly report on U.S. fuel inventories, which is forecast to show yet another decline in supplies. Oil prices rose ahead of that 10:30 a.m. ET report, adding 59 cents to $96.92 a barrel in electronic trading, although that's off highs of the morning that had taken prices above $97 a barrel.

Among stocks to watch, Apple (AAPL, Fortune 500) agreed to scrap its online pricing policies across Europe for its iTunes music downloads, settling a dispute with the EU, regulators there announced. Apple shares lost almost 4 percent in early trading in Frankfurt on the news.

Troubled discount brokerage E*Trade Financial (ETFC), which Tuesday saw shares dip to an all-time low on growing mortgage segment losses, said Wednesday it sold about $3 billion of mortgage-backed securities and municipal bonds in the fourth quarter in addition to its previously announced sales.

McGraw-Hill Cos. (MHP, Fortune 500), the parent of both the Standard & Poor's credit ratings agency and BusinessWeek magazine as well as an educational publisher, said after the bell Tuesday it is cutting more than 600 jobs, resulting in a fourth-quarter charge of $43.7 million.

Also after the close of trading Tuesday, Bear Stearns (BSC, Fortune 500) confirmed earlier reports that James Cayne was giving up the CEO spot, while remaining in the chairman position at the embattled Wall Street firm. Shares, which slipped nearly 7 percent during regular trading Tuesday, edged 0.3 percent higher in after-hours trading.

Late Tuesday General Motors (GM, Fortune 500) CEO Rick Wagoner unveiled concept cars powered by plug-in hybrids and fuel cells at the Consumer Electronics Show in Las Vegas, saying "the auto industry can no longer rely exclusively on oil." He also showed off technology that may one day allow cars to drive themselves.

In global trade, most Asian markets edged higher. European stocks tumbled in morning trading. 

Investors brace for bad bank earnings

Wall Street is anticipating a deluge of disappointing quarterly reports from the financial sector as credit crisis rolls on.

Big trouble ahead for banks Earnings estimates for some of the nation's biggest banks look pretty dreadful compared to a year ago. This Quarter Year Ago Citigroup (-0.88) 1.03 Washington Mutual (-1.20) 1.10 Merrill Lynch (-4.57) 2.41 Bank of America 0.21 1.19 Wachovia 0.32 1.19 Wells Fargo 0.42 0.64 JPMorgan Chase 0.96 1.09 Source:Thomson Financial as of 1/8/2008

NEW YORK (CNNMoney.com) -- Sometimes when it rains, it pours on Wall Street. And next week, forecasters are calling for a flood.

Beginning next Monday, Wall Street will most likely find itself drowning in a torrent of dreary earnings news from some of the nation's biggest banks, marking yet another grim milestone for the troubled financial sector.

"It's not going to be a pretty sight," said Frank Barkocy, director of research at the investment advisory firm Mendon Capital Advisors in New York, which owns shares of a number of large banks including Bank of America and Washington Mutual.

Of the five banks and brokers scheduled to report results next week, three are expected to post a fourth-quarter loss - Merrill Lynch (MER, Fortune 500), Citigroup (C, Fortune 500) and Washington Mutual (WM, Fortune 500). JPMorgan Chase (JPM, Fortune 500) and Wells Fargo (WFC, Fortune 500) are expected to report a decline in quarterly earnings.

Since the summer, the nation's biggest banks have found themselves hamstrung by a host of problems, including tough conditions in the credit markets and ongoing woes in the housing sector as home prices fell and foreclosures rose.

The worst news is expected from Citigroup and Merrill. The two companies, which have both hired new CEOs and acquired capital infusions from foreign state-run investment funds in the past two months, are expected to take a combined $19 billion in writedowns, according to Wall Street estimates.

Some experts anticipate the amount will exceed that since their newly installed chief executives may look to take bigger mark downs on their toxic mortgage securities now in order to avoid even more charges throughout 2008.

"Banks like Citi and Merrill may be as conservative as they can," said David Easthope, senior analyst at independent research and consulting firm Celent LLC. "What investors hate is quarter after quarter of writeoffs."

Other banks have taken a preemptive approach, giving advance warning of dismal results. Last month, Washington Mutual, the nation's largest thrift, said it would report a loss in the fourth quarter, while also announcing it would slash its dividend and lay off more than 3,000 workers in an effort to shore up its capital.

Bank of America (BAC, Fortune 500), which is scheduled to report its results during the week of January 21, also gave Wall Street plenty of warning that its results would not be good.

Speaking at a Goldman Sachs conference in New York last month, Bank of America CEO Kenneth Lewis said its quarterly earnings would be "disappointing", adding that he expected the company to take more than the originally estimated $3 billion in writedowns.

BofA's crosstown rival Wachovia (WB, Fortune 500) -- both are headquartered in Charlotte, N.C. -- is expected to report a steep drop in fourth-quarter earnings during the week of January 24 as well.

Two banks that could buck the broader trend are JPMorgan Chase (JPM, Fortune 500) and Wells Fargo (WFC, Fortune 500), both of which report results next week.

While both firms are expected to post a decline in profits, their earnings shouldn't fall as much as their rivals. And executives at both firms have publicly stressed the health of their company's respective loan portfolios.

Granted, much of next week's focus will be on the size of the writedowns all the big banks take. But Wall Street analysts will also be watching several other key areas including the health of these companies' different businesses and the credit quality in their portfolios.

One area of concern among analysts covering mortgage-focused banks like Washington Mutual and Wells Fargo is how these companies' commercial real estate portfolios are holding up, an area that some suspect could be the next trouble spot in the credit markets.

"If it does happen, that's another whole leg down for these banks," said Paul Miller, an analyst with Friedman, Billings, Ramsey & Co., regarding the possibility of a commercial real estate slump.

Also in focus will be the bank's net interest margins - a key metric that measures the profits banks make from taking in deposits and lending them back out.

Recent cuts in short-term interest rates by the Federal Reserve would normally bode well for net interest margins because rate cuts usually allow the banks to offer lower yields on CDs and money markets. But competition for customers has been so tough that the banks have been unable to cut their deposit rates as much as they would have in the past.

Analysts think some banks may also view next week as an opportunity to announce major restructuring moves.

A number of reports have surfaced recently suggesting that Citigroup could cut as much as 10 percent of its workforce or reduce its dividend, which yields an attractive 7.6 percent.

And there has been speculation that both Citi and Merrill could sell some assets in order to raise additional capital. Merrill has already sold its consumer finance unit to General Electric Co. while reports have surfaced that Citi could shed its stakes in Student Loan Corp. or the Brazilian credit-card company Redecard SA.

Although it is certain that the results for the fourth quarter will be bleak, it doesn't look like the worst is over just yet. Banks will have to at endure at least another two quarters of pain before they start to see any relief, said Mendon Capital Advisors' Barkocy.

"Many [banks] are looking to the second half of the year to be significantly better than the first," he said.

But for bank stock investors, the second half of 2008 is an eternity away. 

Stocks look for a comeback

Futures point higher after major gauges sink into correction, as investors await earnings season kickoff and key oil reading.

NEW YORK (CNNMoney.com) -- Stocks were poised for a rebound Wednesday after tumbling into correction the previous session, as investors prepared for the start of earnings season.

At 6:30 a.m. ET, Nasdaq and S&P futures rose, pointing to a positive start for stocks, although a rise in oil, recession fears or worries about corporate profits could derail any advance.

A late-day sell off on Tuesday pushed stocks to more than 10 percent below highs hit in November - the technical definition of a market correction.

In addition to economic worries and concerns about the housing market, AT&T (T, Fortune 500) said Tuesday it was seeing a pull back in consumer spending.

But futures got a lift Wednesday when chemical maker DuPont (DD, Fortune 500), a Dow component, increased its 2007 full-year earnings outlook to reflect stronger business results in the fourth quarter and also raised its guidance for 2008 results.

Earnings season kicks off with results from Dow component Alcoa (AA, Fortune 500) due after the market close. Analysts surveyed by Briefing.com forecast that the company's earnings fell 55 percent from a year-earlier levels.

The only key economic report due Wednesday is the weekly report on U.S. fuel inventories, which is forecast to show yet another decline in supplies. Oil prices rose ahead of that 10:30 a.m. ET report, adding 73 cents to $97.06 a barrel in electronic trading.

Among stocks to watch, Apple (AAPL, Fortune 500) agreed to scrap its online pricing policies across Europe for its iTunes music downloads, settling a dispute with the EU, regulators there announced. Apple shares lost almost 4 percent in early trading in Frankfurt on the news.

McGraw-Hill Cos. (MHP, Fortune 500), the parent of both the Standard & Poor's credit ratings agency and BusinessWeek magazine as well as an educational publisher, said after the bell Tuesday it is cutting more than 600 jobs, resulting in a fourth-quarter charge of $43.7 million.

Also after the close of trading Tuesday, Bear Stearns (BSC, Fortune 500) confirmed earlier reports that James Cayne was giving up the CEO spot, while remaining in the chairman position at the embattled Wall Street firm. Shares, which slipped nearly 7 percent during regular trading Tuesday, edged 0.3 percent higher in after-hours trading.

Late Tuesday General Motors (GM, Fortune 500) CEO Rick Wagoner unveiled concept cars powered by plug-in hybrids and fuel cells at the Consumer Electronics Show in Las Vegas, saying "the auto industry can no longer rely exclusively on oil." He also showed off technology that may one day allow cars to drive themselves.

In global trade, most Asian markets edged higher. European stocks tumbled in morning trading. 

EU presidency expects economy to weaken in 2008

World Bank sees modest global growth, US recession risk

Credit card debt spikes to six-month high

Total consumer borrowing shoots up to 7.4 percent in November as buyers rely on credit cards in the face of housing market collapse.

WASHINGTON (AP) -- Consumer borrowing rebounded in November as credit card debt shot up by the largest amount in six months.

The Federal Reserve reported Tuesday that consumer borrowing rose at an annual rate of 7.4 percent in November, far higher than the 1 percent rise in October.

The category that includes credit card debt surged at an annual rate of 11.3 percent, a six-month high, reflecting the fact that shoppers are continuing to rely heavily on their credit cards to finance purchases since home equity lines of credit have become harder to get.

The category that includes auto loans also increased in November, rising at a rate of 5.1 percent after having fallen by 3.5 percent in October.

The 7.4 percent overall increase in credit pushed total credit up by $15.4 billion - much stronger than the $8.5 billion increase that analysts had been expecting.

The 11.3 percent rise in credit card debt was the seventh straight month of strong gains in this area and was the biggest jump since a 12.8 percent rise in May.

Pay off debt AND fund your IRA

Economists believe that consumers are being forced to rely more heavily on borrowing on their credit cards with the collapse of the housing market, which has depressed home prices and prompted banks to tighten up on lending standards for mortgages and home equity lines of credit.

The five-year housing boom had prompted a lot of homeowners to refinance their mortgages and take out home equity lines of credit to take advantage of the surging values of their homes - a boom that is being reversed in many parts of the country by the current housing slump.

The overall increase left total consumer credit at a record $2.51 trillion. The Fed's credit report tracks all debt not secured by real estate meaning that mortgages, a big chunk of the debt load carried by most households, is not covered. 

Fed meeting illuminates rate disagreement

Minutes of Federal Reserve's December meeting reveal regional banks' variety of views on discount borrowing rate.

WASHINGTON (Dow Jones/AP) -- Reflecting a highly uncertain and divided monetary policy outlook, regional U.S. Federal Reserve banks supported three different scenarios for the discount rate last month, according December meeting minutes released Tuesday.

With suggestions ranging from no change to an aggressive half-point cut, the Fed ended up splitting the difference. The central bank voted last month to lower the discount rate it charges banks that borrow directly from it by a quarter percentage point to 4.75 percent.

The Fed also lowered its primary policy instrument, the federal-funds rate at which banks lend to each other, by a quarter percentage point to 4.25 percent.

The central bank has cut the discount rate by one and a half percentage points since August to boost liquidity in credit markets. It has also lowered the fed funds rate by a total of one percentage point since September. The Fed is expected to cut both rates even further amid signs that the housing and credit crunch is starting to grip the broader economy, as evidenced by a sharp rise in unemployment last month.

Directors at seven regional Fed banks - Atlanta; Richmond, Va.; St. Louis; New York; Philadelphia; Cleveland and Chicago - requested a quarter-point discount rate cut. Minneapolis, Boston and San Francisco preferred a half-point reduction while Kansas City, Mo., and Dallas wanted the Fed to keep the discount rate at 5 percent.

"The presence of dissenting discount rate requests on both sides of the change that was actually implemented is unusual and is further evidence of the wide range of views on the [Federal Open Market Committee] in a period of heightened uncertainty," JPMorgan economist Michael Feroli said in a research note.

The Fed's Washington-based Board of Governors decides whether to approve discount rate requests.

Investors brace for bad bank earnings

The FOMC consists of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven Reserve Bank presidents, who serve on a rotating basis.

Banks backing a quarter-point point cut "agreed that the downside risks to economic growth had increased and that conditions in financial markets had recently deteriorated," according to the minutes, which covered meetings on Dec. 10 and 11. Those favoring a half-point cut "expressed similar concerns" but thought financial conditions "and the economic outlook" required a more decisive move.

Directors at the Kansas City and Dallas Fed banks, in contrast, thought incoming data were "within their expectations" and that the situation in credit markets was a "necessary adjustment," the minutes said. The directors also said continued inflation risks "offset" the risks to the economy.

Many Wall Street economists had expected the Board of Governors to back a half-point discount rate cut last month to reduce the penalty rate between the fed-funds and discount rates and encourage use of that lending facility.

Equity markets tumbled in response to the Dec. 11 decision. But on Dec. 12, the Fed announced creation a new instrument aimed at easing credit strains, the Term Auction Facility. The Fed already has sold $40 billion in new loans through the TAF.

On Friday, the Fed said it will hold two more auctions this month totaling $60 billion. It also said the TAF auctions will continue "for as long as necessary to address elevated pressures in short-term funding markets." 

Home sales sink, outlook darkens

Pace of pending sales slows again; realtors now see biggest drop in home values at start of '08; forecast for price rebound pushed back to '09.

NEW YORK (CNNMoney.com) -- Contracts to sell existing homes fell in November and there could be darker days ahead for home values, which are expected to post their biggest decline on record this quarter as a full-year rebound in prices now isn't expected until 2009, according to an industry trade group.

The National Association of Realtors' Pending Home Sales Index, which measures the level of sales agreements, fell 2.6 percent to 87.6 in November, turning lower after two months of modest improvement from a record low hit in August. Economists surveyed by Briefing.com had forecast only a 0.8 percent decline.

The Realtors also cut its existing home price estimate for the current quarter to a 5.3 percent year-over-year decline, which would mean the current period would see the steepest drop in that price measure on record.

Only a month ago the group's estimate was for only a 2.5 percent drop in prices in the first quarter.

The group's forecast released Tuesday also no longer sees even a modest rebound in existing home prices this year, as it had previously forecast, and pushed back the estimate of a full-year uptick in prices to 2009.

The latest reading on pending home sales is better only than the pace of sales in August and September, when the meltdown in mortgage markets cut off the availability of mortgage financing for many buyers.

"It's not surprising, but it's certainly not good news," said Mike Schenk, senior economist at Credit Union National Association. "We may be near the bottom. But the trouble is we're likely to stay at or near the bottom for a while. It's going to take us 6 to 9 months to claw our way out of this situation, at least."

How they got housing wrong

The November reading is even worse than the 89.8 reading recorded in September 2001, the month when terrorist attacks shook buyer confidence. That reading had been the weakest month on record before the current housing downturn. An index reading of 100 represents the level of sales at the start of 2001, when the index was started.

In its first forecast for sales and the economy through 2009, the group said it expects a 3.1 percent rebound in existing home prices next year. But the trade group now sees existing home prices remaining flat this year, rather than its previous forecast of a narrow 0.3 percent recovery from 2007 levels.

"Consumers continue to wait for additional signs of market stabilization," Lawrence Yun, chief economist for the Realtors, said in a statement. "There are more people with financial capacity now than in 2005, but many are trying to market-time their purchase. As a result, the exact timing and the strength of a home sales recovery is a bit uncertain."

Home prices post record declines

The report came the same day that one of the nation's largest builders, KB Home (KBH, Fortune 500), reported a large widening of its quarterly loss. The loss was much worse than forecasts due largely to writedowns in the value of its holdings and the cost of getting out of some land purchase options.

KB Home is not the only builder to be hit by large charges due to the downturn in the housing market. No. 1 builder Lennar (LEN, Fortune 500), as well as No. 2 Centex (CTX, Fortune 500), No. 4 Pulte Homes (PHM, Fortune 500) and No. 6 Hovnanian Enterprises (HOV, Fortune 500), all reported bigger-than-expected quarterly losses due to such charges.

While No. 3 builder D.R. Horton (DHI, Fortune 500) reported a smaller-than-expected loss in late November, that followed a quarter with a loss that was much wider than forecast. In December, luxury home builder Toll Brothers (TOL, Fortune 500) posted its first loss in 22 years as a public company.