Sunday January 7 12:45 PM ET Stocks May Fall Despite Fed Cuts

By Elizabeth Lazarowitz

NEW YORK (Reuters) - The Federal Reserve (news - web sites) 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 - news) 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 - news) 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 (NYSE:BAC - news) 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. (NYSE:AA - news), 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. (NYSE:MOT - news) 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. (NasdaqNM:YHOO - news), 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. (NasdaqNM:ARBA - news) 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.'' http://dailynews.yahoo.com/h/nm/20010107/bs/markets_stocks_dc_1187.html

-- Carl Jenkins (somewherepress@aol.com), January 07, 2001

Answers

"...Wednesday's Fed action sparked a wild buying spree in U.S. stocks that helped the Nasdaq Composite Index (^IXIC - news) rack up the biggest one-day gain ever in its 30-year history -- up more than 14 percent..."

Nothing more than a short-squeeze play designed to "catch the shorts" with their pants down, so-to-speak. Also known as the "one day wonder" rally - since there's no follow through it makes one wonder why anyone bothered?

-- Keep (YourPowder@Dry.com), January 07, 2001.