Wall St Week Ahead: Stocks to fall despite Fed cuts By Elizabeth Lazarowitz NEW YORK, Jan 7 (Reuters) - The Federal Reserve briefly ignited the stock market with interest rate cuts last week, but concerns the United States still may face a harsh economic winter will send a chill through Wall Street in days ahead. Stocks are likely to fall on worries the central bank already may be too late to keep dwindling growth from crunching corporate profits. Traders are wringing their hands as they await this year's first major earnings reports, and will scrutinize economic data for signs of the economic slowdown. To make matters worse, a financial scare is rippling through Wall Street. Investors fear big U.S. banks could face losses on financings to near-bankrupt California utilities. "The big problem right now is that, while the Fed is in an easing mode and has demonstrated its willingness to reduce rates, the fundamental story remains pessimistic," said Paul Cherney, market analyst at S&P Marketscope. In a surprise move that caught many traders mid-lunch last Wednesday, the Fed cut interest rates by a half percentage point, bringing its key fed funds overnight bank lending rate to 6.0 percent. The ease came four weeks before the Fed's regularly scheduled policy-setting meeting at month's end. Wednesday's Fed action sparked a wild buying spree in U.S. stocks that helped the Nasdaq Composite Index <.IXIC> rack up the biggest one-day gain ever in its 30-year history -- up more than 14 percent. By Thursday, however, the rally had fizzled as concerns grew that the Fed may have acted too late to avert a deep slowdown at least for the first half of the year. The Nasdaq ended a shortened week down 2.5 percent, while the Dow Jones industrial average <.DJI> finished off 1.2 percent. "It's really hard to turn the economy on one Fed rate cut," Peter Gottlieb, portfolio manager at First Albany Asset Management, said. "It takes some time before the rate cuts take effect, and so I'm not sure that in the near-term you're going to see enough of an impact on the economy to really make a difference." On Friday, new U.S. jobs data showing the economy continues to slow dragged the stock market lower, while financial shares were crushed by rumors -- later denied by the company -- that Bank of America <BAC.N> was facing significant losses from its involvement with California utilities. Stocks of banks and brokerages are normally viewed as the best performers in an environment of easier monetary policy as the lower cost of credit encourages borrowing. "If they seem to falter, I think the implication is that there may be some trouble ahead for the rest of the market," Gottlieb said. EARNINGS SEASON TAKES OFF The earnings picture, however, will be foremost on Wall Street investors' minds as fourth-quarter earnings start to trickle in and Wall Street listens to what companies see for the quarters to come. Alcoa Inc. <AA.N>, aluminum giant and Dow 30 stalwart, kicks off the week on Monday with its quarterly earnings statement. On Wednesday, after the close of trading, Motorola Inc. <MOT.N> reports its fourth-quarter earnings. In December, the world's No. 2 mobile phone maker sent a chill through the high-tech industry when it announced its quarterly profits would fall some 40 percent below earlier estimates. Internet media giant Yahoo! Corp. <YHOO.O>, part of a sector plagued in recent months by worries that the evaporation of the dot-com boom will mean dwindling advertising revenues, also reports its fourth-quarter earnings on Wednesday. After Thursday's close, software company Ariba Inc. <ARBA.O> will issue its quarterly earnings report. Its shares came under siege last week amid fears about its exposure to flailing Internet firms. KEY DATA FOR SIGNS OF SLOWDOWN Traders will be watching out for key U.S. retail sales and inflation data, both due on Friday, for more signs that the economy is becoming ever more sluggish. Retail sales -- a gauge of the consumer spending that has helped power the longest U.S. economic expansion ever -- are expected to have fallen 0.4 percent in December following a similar drop in November, according to U.S. economists in a Reuters survey. They predicted slackening in sales of automobiles would account for a significant chunk of the drop, however, which means retail sales excluding cars and trucks gained 0.1 percent versus the prior month's 0.2 percent gain. In a separate report, the U.S. government will release data on producer-level inflation. Economists on average saw the Producer Price Index (PPI) ticking up 0.1 percent in December both overall and excluding volatile food and energy prices. In November, PPI rose 0.1 percent and was flat minus food and energy. Those results and the degree of economic sluggishness they show could impact the Fed's decision on interest rates when it next meets on Jan. 30-31, analysts said. The central bank is widely expected to lower rates again by a quarter percentage point at the meeting. "The economy really is a lot weaker than people thought," Guy Truicko, portfolio manager at Union Management, said. "The Fed's going to have to ease to get this thing rolling, and the market's telling us it's still behind the curve." But the Fed's rapid shift to a much easier monetary policy means that, although stocks may be headed for a rough patch as the economy slows to a more moderate pace, there is light at the end of the tunnel for Wall Street, analysts said. "The market is going to start discounting better times ahead," Truicko said. "The Fed's not going to let this economy die."
ANALYSIS-Fed faces new challenge with homegrown problems By Andrew Priest NEW YORK, Jan 8 (Reuters) - For years the main threat to U.S. prosperity was seen coming from an emerging market tidal wave, but policymakers are now finding that it may be the landmines in America's own backyard that finally derail a decade long economic expansion. The Fed shocked financial markets last week with a surprise half percentage point inter-meeting interest rate cut which came against a background of crumbling U.S. stock markets, faltering economic production and dimming consumer confidence. But since Wednesday's Fed move stocks have begun to slip again and the dreaded 'r' word even reared its ugly head on Wall Street on Monday when Morgan Stanley Dean Witter said the U.S. economy would probably sink into recession in the first half of 2001, breaking its longest expansion in history. "(Fed Chairman) Alan Greenspan may have become deft at dealing with foreign crises and reading psychology but the real test for him may be now," said David Jones, chief economist at Aubrey Lanston and a respected Fed watcher. Warning bells have rung loud and clear for the U.S. economy in recent weeks and for once all the problems have been homegrown. The sickly manufacturing sector shows no signs of pulling out of a slump, consumer confidence is at its lowest levels in two years and, as winter bites, natural gas prices remain robust after almost quadrupling in the last year. And the problems don't stop there as far as jittery financial markets are concerned. A brewing crisis over California's near bankrupt utilities jolted financial markets last week as investors fretted that the near bankruptcy of major electricity companies could pose spillover problems further afield in the United States due to the utility sector's links with major U.S. commercial banks. EMERGING MARKETS -- A SIDE SHOW While possible blowouts in emerging markets are always in the minds of policymakers, global financial markets have shown little concern in recent months over economic stagnation in cash strapped Argentina or politically uncertainty in Peru. Last week's declaration by Moscow -- since rescinded -- that it planned to skip repayment of some $1.5 billion dollars it owes the Paris Club of sovereign creditors in the first quarter of 2001 caused few ripples, overshadowed by concern that the giant U.S. economy was backfiring. Part of the reason is that global markets are now much more insulated from emerging market troubles, economists said. Not only have governments in many of these countries put their political and economic houses more in order, "hot" or speculative money flows into these countries have been replaced by more buy-and-hold investment from longer-term investors like pension funds. "In 1998 the Fed was reacting to the domestic consequences of a remote and largely irrelevant event in Russia caused by a largely irrational panic in the U.S. market," said David Resler, chief economist at Nomura Securities. "Now the problem is at home and the Fed is not going to be able to prevent a recession if the forces are not monetary or credit in nature, In fact, the most important factor in the U.S. slowdown is going to be the same as in the last three recessions -- high energy prices such as natural gas and electricity," he said. As consumers feel the pinch from higher heating costs so they may crimp spending, pulling the rug from under the economy's already shaky feet, economists argue. And tax cuts, rather than monetary changes, may be the ticket to bolstering confidence in this regard. "The Fed is now engaging in a series of counter cyclical rate cuts aimed at countering weakness in the economy," said Jones. "This is not an easy process now. All these rate cuts may only keep the stock market and the economy from weakening further instead of creating the environment for a strong rally." BUSH TO THE RESCUE In fact, the U.S. Federal Reserve may need a little helping hand from the White House, in the guise of tax cuts, if they are to succeed in not just stopping the economic rot but also reigniting the economy, Wall Street economists said. "It may in fact require, much to the surprise of everyone including (President elect) George W. Bush, a series of tax cuts to get things moving again and I'm guessing that Greenspan will come out sooner rather than later in favor of tax cuts," Jones said. A top economic advisor to President-elect George W. Bush in an interview on the "Fox News Sunday" program, said it was becoming clear that many sectors in the U.S. economy "are in deep trouble" and that the recent moves by the Fed to cut interest rates would not by themselves halt the economic slowdown. Lawrence Lindsey said Bush would, therefore, press quickly for his proposed $1.3 trillion tax cut. "The Fed lowering rates another 100 basis points or so just isn't going to make a great deal of difference," said Resler.
