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Markets & Finance

Euphoria Fades, Worry Takes Hold

Rate cut? What rate cut?

Two days after a much hoped-for rate cut by the Federal Reserve, stocks hit fresh session lows after a rumor about Bank of America (BAC) and concerns over banks' exposure to the California utilities crisis sent the market sinking. Investors' thoughts turned to earnings or lack thereof, as the Nasdaq fell amid worries over weak employment data and the next onslaught of profit warnings.

"Two things tend to drive the market, one is interest rates, the other is earnings," Eric Efron, co-manager of USAA Mutual Fund:Aggressive Growth Fund (USAUX) told Standard & Poor's AdvisorInsight.

"The interest rates were lowered pretty dramatically by Greenspan the other day, and that got people excited. But I think that on reflection investors have come to the conclusion that earnings are going to be very bad immediately ahead of us, and they are placing a greater weight on the bad earnings outlook then they are on the improving interest rate outlook," Efron said.

The latest jobs data showed an unchanged unemployment rate, which supports the case for another interest rate cut later in January. Analysts and market watchers are betting on a rate cut of at least 0.25%. On Wednesday the Fed unexpectedly announced a rate slash, a move which kick-started the markets and sent the Nasdaq soaring to a record point and percentage gain.

But as the euphoria faded it was apparent that "all of this reflects a lot of uncertainty," said Michael Reynolds, associate managing director at ISI Group. Though the rate cut provided a much needed boost to the ailing stock market, investors still have a bumpy ride ahead.

"People are realizing a rate cut doesn't mean the economy resumes growing at 4%. There are ongoing implications for warnings and negative reports," said Ron Hill, investment strategist at Brown Brothers Harriman. The bottom line is that the bottom line is still the No. 1 concern for investors. "There's still a lot of rough sledding for techs and cyclicals in general," Hill said.

Financial stocks led the Dow's decline Friday. Banking giants Citigroup (C) and J.P. Morgan Chase & Co. (JPM) slipped as investors fretted over possible fallout from loans to troubled California utilities companies and whether the Fed's interest rate cut would hurt the banking system.

Speculation that Bank of America would announce negative news about its derivatives business sparked a selloff in banking issues and beyond. About one hour into the trading session, B of A issued a statement saying it had not experienced any significant losses in derivatives. The stock ended down 4-1/2, to 47.

Today's losses tested investors' confidence in financial stocks, which should naturally be the leaders when the Fed slashes interest rates, Hill said "When they stumble around people get concerned." Instead of looking to banking stocks for strength today, the Street bought back healthcare and energy stocks that they sold off after the interest rate decision Wednesday.

The B of A tension spread elsewhere as the majority of the Dow's 30 components finished sharply lower. After it cut fourth-quarter revenue and profit guidance, No. 3 airline Delta Air Lines Inc. (DAL) was falling most of the day. In sympathy, airplane maker and Dow Jones Industrial member Boeing . (BA) shed 2-5/16.

Retailers continued to report disappointing holiday sales, implying a substantial decrease in consumer confidence. Department store Nordstrom Inc. (JWN) said preliminary December sales at stores open at least a year fell 2.9% from a year earlier, prompting the company to lower its earnings forecast.

Meanwhile electronics retailer Circuit City Stores Inc. (CC) said sales at stores open at least one year fell 1 percent, but climbed 7% excluding the appliance category, which the company exited during the third quarter.

Another selling victim: broadband communications equipment specialistNext Level (NXTV) after it warned of lower-than-expected earnings. Formerly a $220 stock, the company said it expected a fourth quarter loss from operations on $31 million revenues, citing reduced revenues from Qwest and slower than expected customer development in Korea. A slew of investment banks cut their ratings and estimates on Next Level following the company's revised forecast, sending the stock to finish at 10-13/16.

The tech-heavy Nasdaq composite index, which soared to a record gain of 324.83 points on Wednesday, lost 158.82 points, or 6.19%, to 2,408.01. The Dow Jones industrial average slid 251.62 points, or 2.31%, to 10,660.79. The Standard & Poor's 500 index, a broad stocks gauge, tumbled 34.93 points, or 2.62%, to 1,298.41.

Treasury Market

U.S. Treasuries finished higher after the government's latest job report sparked a downslide in equities. The jobs data showed non-farm payrolls rose 105,000 and unemployment remained unchanged from last month at 4.0%. Hourly earnings jumped 0.4%. Weather seems to be a major factor behind December weakness, and this implies a possible January rebound.

Standard & Poor's economic research unit had expected December payrolls to rise 135,000 while the unemployment rate is expected to rise to 4.1% from November's 4.0%. The unit expected the workweek to remain at 34.3 hours, while hourly earnings are projected to increase 0.3%.

With evidence of a sharp slowdown over the last few months, December job figures also reflect this ongoing moderation. Overall, a weak report today supports the view that the Fed will follow up on its surprise 50 basis point cut with another rate cut at the January meeting.

The latest housing data showed a 2.2% decrease in home sales in November.

Stocks in the News

According to Dataquest, mobile phone maker Nokia (NOK) extended its global market share lead in the third quarter to above 30%, more than double the share of number two Motorola.

UBS Warburg upgraded Pfizer (PFE) stock to strong buy from buy.

Morgan Stanley Dean Witter downgraded credit card company Capital One (COF) to neutral.

World Markets

European markets were mixed after the latest U.S. jobs report. The London Financial Times-Stock Exchange 100 index, which had been rising earlier in the session, ended up 12.5 points, or 0.20%, to 6,198.1. In Germany, the DAX Index finished up 5.77 points, or 0.09%, to 6,382.31. Meanwhile, France's CAC 40 ended off 57.97 points, or 1.00%, at 5,758.02.

In Asia, Japan's Nikkei 225 Index closed up 176.12 points, or 1.29%, to 13,867.61. Hong Kong's Hang Seng index ended up 212.58 points, or 1.40%, to 15,447.61. By Amy Tsao

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