Elliott Wave Theory

Back in the old school days during the 1920-30s, there was this mad genius named Ralph Nelson Elliott. Elliott discovered that stock markets, thought to behave in a somewhat chaotic manner, actually, did not.

They traded in repetitive cycles, which he pointed out were the emotions of investors and traders caused by outside influences (ahem, CNBC) or the predominant psychology of the masses at the time.

Elliott explained that the upward and downward swings of the mass psychology always showed up in the same repetitive patterns, which were then divided into patterns he called "waves". He needed to claim this observation and so he came up with a super original name: The Elliott Wave Theory.

The 5 – 3 Wave Patterns

Mr. Elliott showed that a trending market moves in what he calls a 5-3 wave pattern. The first 5-wave pattern is called impulse waves and the last 3-wave pattern is called corrective waves.

Let’s first take a look at the 5-wave impulse pattern. It’s easier if you see it as a picture:

That still looks kind of confusing. Let’s splash some color on this bad boy.

Ah magnefico! Me likes colors. It’s so pretty! I’ve color-coded each wave along with its wave count.

Here is a short description of what happens during each wave. I am going to use stocks for my example since stocks is what Mr. Elliott used but it really doesn’t matter what it is. It can easily be currencies, bonds, gold, oil, or Tickle Me Elmo dolls. The important thing is the Elliott Wave Theory can also be applied to the foreign exchange market.

Wave 1
The stock makes its initial move upwards. This is usually caused by a relatively small number of people that all of the sudden (for a variety of reasons real or imagined) feel that the price of the stock is cheap so it’s a perfect time to buy. This causes the price to rise.

Wave 2
At this point enough people who were in the original wave consider the stock overvalued and take profits. This causes the stock to go down. However, the stock will not make it to its previous lows before the stock is considered a bargain again.

Wave 3
This is usually the longest and strongest wave. The stock has caught the attention of the mass public. More people find out about the stock and want to buy it. This causes the stock’s price to go higher and higher. This wave usually exceeds the high created at the end of wave 1.

Wave 4
People take profits because the stock is considered expensive again. This wave tends to be weak because there are usually more people that are still bullish on the stock and are waiting to “buy on the dips”.

Wave 5
This is the point that most people get on the stock, and is most driven by hysteria. You usually start seeing the CEO of the company on the front page of major magazines as the Person of the Year. People start coming up with ridiculous reasons to buy the stock and try to choke you when you disagree with them. This is when the stock becomes the most overpriced. Contrarians start shorting the stock which starts the ABC pattern.

Why a Strong Dollar is Good for the US Economy

For at least the duration of the current administration, the official US stance towards its currency has been a "strong dollar" policy. In hindsight, it appears that this policy was entirely baseless, since its was directly undermined by the simultaneous easy monetary policy, and thus it stands to reason that US policymakers did not actually believe that a strong Dollar policy was necessary to pursue. In a recent op-ed piece published in the Wall Street Journal, one analyst outlines the case for a strong dollar, and by extension, why the depreciating Dollar is bad for the US economy.

First, since oil contracts are settled in Dollars, a weak Dollar has directly contributed to high oil prices, which has several negative economic and geopolitical consequences. Second, a cheap Dollar is eroding the purchasing power of US consumers directly by making imports more expensive and indirectly through inflation. Third, the weak Dollar shifts the balance of economic power in favor of US competitors, which don't need to grow as fast to keep pace with the US, in Dollar terms. Finally, the recent weakness threatens the long term reserve status of the Dollar, which has important implications for economic growth and jobs creation.

On the other hand, argues the analyst, the conventional wisdom that a declining Dollar is necessary to correct the current account and trade deficit is bunk, since much of the trade deficit is accounted for by intra-company trade and since the current account deficit is generally overstated and not connected to currency valuations. In short, he argues, it is in the best interest of the US to align its rhetoric with its economic and monetary policies such that the long term luster of the Dollar is restored.

Euro Commodity Crosses Offer Clear Trade Setups

Commentary – We still favor a EURAUD deeper correction. We favor a deeper correction because wave 5 of the 1.5491-1.7159 rally was extended, and extended 5ths are often fully retraced. This is just in front of the 61.8% of 1.5491-1.7159 at 1.6128. Potential support prior to that level is the 50% at 1.6325 (11/19 low is at 1.6316). (note, W-X--Y indicates that a larger complex correction is unfolding). An alternate count suggests that larger wave 2 is complete at 1.6476. This is setting up to be one of the better trades of the year. Patience is key here though and we will cover any developments to the pattern in the Elliott wave forum. Aggressive traders can trade from the bearish side against 1.6810 for the drop to the 1.6130/50 area.

Strategy – Getting bullish near 1.6150

Commentary – Last week, we wrote that “a setback is due and support should be strong in the 1.4666/1.4824 zone. This is former congestion and is defended by the 50% of 1.1462-1.5198 at 1.4678.” Continue to favor a setback into the 1.4558/1.4680 zone (50%-61.8% of 1.4162-1.5198) before the next bull leg begins.

Strategy – Bullish, against 1.4477, target 1.5890 (aggressive traders can look to add to the position near mentioned support)

Commentary – A triangle is unfolding from the September high at 2.0056. Triangles unfold in 5 waves (a-b-c-d-e) and wave d is close to complete. Therefore, expect additional consolidation in wave e (down) before a terminal thrust higher in larger wave C completes the entire rally from the July low at 1.7029. Potential support is the 1/17 low at 1.8869. This outlook is in line with the other EUR/commodity currency pairs -- that is, expect a drop now that gives way to a big rally.

New Zealand Dollar to Break 10 Year Support Line Against Euro

The EURNZD has consolidated in the form of a triangle since the September high at 2.0185. Prior to the formation of the triangle, the pair rallied over 3,000 pips in less than 2 months! Triangles are continuation patterns, so the next move is higher; and probably violently so.

As mentioned, a triangle is unfolding from the September high. Triangles unfold in 5 waves (a-b-c-d-e) and wave d is close to complete. Therefore, expect additional consolidation in wave e (down) before a terminal thrust higher in larger wave C completes the entire rally from the July low at 1.7029. Price should remain above 1.8510 (bottom of wave c of the triangle) but is likely to remain above what is the low of the month so far at 1.8734 (January 15th low). The next move up should be significant. Minimum expectations are for a rally to exceed 2.0185 but bullish potential is much greater. Notice also how the 200 day SMA is acting as a springboard for this expected explosive move upward. Be sure to visit the Elliott Wave forum for trading ideas and updates to this pattern.

US Dollar Appreciates Against Euro on Dow Jones Tumbles

The US dollar traded modestly higher through end-of-week currency trading, as sizeable declines in the Dow Jones Industrial Average encouraged traders to close dollar-short positions. Indeed, the dollar has kept a strongly negative with the Dow Jones and other risky asset classes—effectively trading lock-step with the now-infamous forex carry trade. The dollar now carries the third-lowest overnight interest rate of all G-10 currencies, and traders have taken advantage of that fact to sell it against high-yielding counterparts. Yet signs of market duress will easily shake increasingly risk-averse speculators out of their low volatility forex strategies, and the dollar will likely gain on any continued drops in the Dow and S&P 500.

A virtually empty US economic calendar left the dollar to the whim of broader financial market forces, and little stood in the way of a Dow-led greenback rally. Such risk aversion likewise led to substantial drops in domestic Treasury yields and similar moves in short-term interest rate expectations. Yet markets seem impervious to developments in domestic bond yields. The dollar’s resilience in the face of sharp Treasury yield drops represents a clear break from more normal market conditions. That said, it remains relatively clear that risk sentiment will be the main driver of dollar price action through the coming months of forex trade.

US Dollar: FOMC and Non-Farm Payrolls Call for a Busy Week

• Life Won’t be Easy for Carry Traders
• ECB: Committed to Fighting Inflation

US Dollar: FOMC and Non-Farm Payrolls Call for a Busy Week
With an emergency 75bp rate cut from the Federal Reserve and Societe Generale losing $7 billion in a trading fraud, volatility has ripped through the financial markets this past week. For those traders who are hoping for the tides to calm in the coming week, they will have to continue hoping because the economic calendar is filled with market moving data. The Federal Reserve has their official monetary policy meeting on Wednesday while non-farm payrolls are due for release on Friday. According to Bloomberg, analysts are calling for only a 25bp rate cut but the futures market is pricing in a greater chance of a 50bp cut. Regardless of who is right, one thing is assured and that is volatility. In addition to the actual rate cut, the Fed’s guidance will also have a meaningful impact on the currency market. An article in today’s Wall Street Journal criticizes Bernanke for being too sensitive to stock market fluctuations. If that is the case, then today’s 171 point slide in the Dow is not going to make him happy. Should equities give back more gains, the Fed may deliver a larger move on the fear that 75bp was not enough. We can’t envision the FOMC statement being hawkish because we expect interest rates to fall to as low as 2.50 percent this year. Friday’s non-farm payrolls report will confirm or deny whether the Federal Reserve has made the right decision. After the weakest rise in job growth since August 2003 analysts expect the labor markets to improve in the month of January. Although it may be difficult to believe that companies are still be hiring in the current market environment, jobless claims suggest that at least they are not firing. In addition to the FOMC and NFP, we are expecting durable goods, personal income, personal spending, Chicago PMI, the University of Michigan Consumer Confidence survey, manufacturing ISM and construction spending. The manufacturing sector is already in a recession and we expect it to remain that way, therefore the PMI and ISM numbers should not be dollar positive.

Life Won’t be Easy for Carry Traders
We have stressed all week that even though carry trades are rallying, traders need to be careful because the current environment is not conducive for Japanese Yen crosses. Carry trades live and die by 3 things, volatility, risk appetite and the direction of monetary policy. Wednesday’s 600 point intraday swing in the Dow and today’s 171 point drop is volatility in action and if anything, traders have grown more risk averse with the Soc Gen incident. In addition, in times of US recession, one of the currency pairs that gets hit the hardest is EUR/JPY. We do not expect the rally in the Yen crosses to last, especially since these currency pairs were exceptionally weak on Friday. In the week ahead, there is a lot of Japanese economic data related to the labor market, consumer spending and manufacturing activity due for release. None of these are expected to be particularly market moving for the Yen given the barrage of US data, but in general, they should reflect the overall vulnerability of the Japanese economy.

Visit the Japanese Yen Currency Room for resources dedicated specifically to the Euro.

ECB: Committed to Fighting Inflation
Throughout the recent turmoil in the financial markets, the European Central Bank has not wavered from their determination to prevent second round effects from threatening price stability. We have questioned their ability to act and believe that a rate hike before a rate cut is not a foregone conclusion. However the region’s economy has proved to be resilient despite the triple threat of a strong currency, a slowdown in the US economy and tight monetary policy. In the week ahead, there are only a few pieces of potentially market moving European economic data, namely Eurozone retail PMI, German unemployment, German retail sales and manufacturing PMI. The lack of big event risk suggests that the movements of the Euro will be largely driven by US economic data. Meanwhile Switzerland will be releasing their UBS consumption index, the KoF, and manufacturing PMI. A sharp drop in retail sales suggest that consumption may slow as well but for the time being, the Swiss franc is acting just like the Japanese Yen, meaning that Franc is moving with equities.

Visit the Euro Currency Room for resources dedicated specifically to the Euro.

Beer Maker Deal Gives the British Pound More Reason to Rally
In yesterday’s Daily Fundamentals, we indicated that our technical and sentiment based indicators pointed to further gains in the British pound. The sterling did rally today which is quite a testament to the strength of the currency because nearly all of the other major currency pairs weakened against the dollar. The move was largely due to Carlsberg and Heineken’s purchase of Scottish & Newcastle PLC for GBP7.8 billion. In the week ahead, the UK will be releasing a number of housing market related data in addition to manufacturing PMI. In general, we do not expect any of these numbers to be pound bullish.

Visit the British Pound Currency Room for resources dedicated specifically to the Euro.

Australian, New Zealand and Canadian Dollars: Any More Room for Recovery?
After Monday’s massive sell-off, the Australian, New Zealand and Canadian dollars have recovered nearly all of their losses this week. With commodity prices rebounding and the Federal Reserve expected to cut interest rates again on January 30th, there is a decent chance that these currencies will extend their gains in the coming week. However that would be more of a dollar story because economic data from the Commodity Bloc was mixed. Canadian consumer prices were weaker than expected last month, giving the Bank of Canada all the more reason to continue lowering interest rates. Australia’s conference board index of leading indicators dropped from 1.1 percent to 0.8 percent and RBNZ central bank Governor Bollard warned that the New Zealand is still overvalued. In the week ahead, the economic data due for release from these 3 countries are important, but likely to be overshadowed by the big US event risks.

Tell us what you think on the Canadian dollar Forum.

AUDNZD Range Still Presenting A Strong Trade

This is our third recommendation for an AUDNZD range trade this week. The first setup played out nicely, though our restrictions on excess risk prevented us from participating in the profitable move. The second setup was stopped on a large upper wick on a false break. Through all of this though, the pair’s range has remained. Therefore, we will stick with this strong technical formation and will tailor our strategy to align our trade with the market’s direction.

Trading Tip – This is our third recommendation for an AUDNZD range trade this week. The first setup played out nicely, though our restrictions on excess risk prevented us from participating in the profitable move. The second setup was stopped on a large upper wick on a false break. Through all of this though, the pair’s range has remained. Therefore, we will stick with this strong technical formation and will tailor our strategy to align our trade with the market’s direction. Considering our range, it is clear that resistance can come at a number of different levels as volatility has pushed the ceiling on this channel a number of times. On the other hand, while highs have been bouncing higher, the range low has held consistently around 1.1325/40. As such, we will only take a long position on a test of the range low. Our entry level is somewhat higher than the extreme to account for the recent trend of higher lows. To limit risk, we will look to close out any open orders before the US GDP report and FOMC announcement as this may cause a spike in volatility for high yielding currencies.

Event Risk Australia and New Zealand

Australia – The Aussie calendar is devoid of top-tier economic event risk, but large surprises out of second-tier reports could just as easily force intraday volatility across AUD pairs. Notables on the ledger will include an NAB Business Confidence report on the 29th, followed by HIA New Home Sales on the 30th and AiG Performance of Manufacturing on the 31st. Of course, limited event risk does not mean that the AUD will remain rangebound in the days ahead. Clearly volatile markets have made for sharp price movements in the AUDNZD, and we can likely expect further volatility in upcoming trade.

New Zealand – Kiwi economic event risk is similarly devoid of top-tier economic event risk in the days ahead, but traders should watch out for surprises out of Building Permits results on the 29th and a Trade Balance release on the 30th. Both reports have shown themselves capable of forcing notable intraday volatility across NZD pairs, and recently choppy price action could potentially exacerbate moves on the economic data. That said, economic event risk will likely take a backseat to broader financial market volatility. Yet it is difficult to predict whether or not the AUD or NZD would lose more on further equity market duress.

Economy front and center in State of Union

Bush will lobby for stimulus plan and may call for more measures to ease housing crunch and cut corporate tax rates. Major new economic initiatives are not likely.

NEW YORK (CNNMoney.com) -- The state of the slowing economy and how to energize it - now and beyond - will be a focal point of President Bush's State of the Union address on Monday.

Bush, in his last year of office, is unlikely to make any new economic proposals like he has in past addresses. Last year, for instance, he called for a change in how the government taxes money used to buy health insurance, and he asked Congress to set a goal of reducing American gasoline consumption by 20 percent over 10 years.

"I think there will be a pretty significant emphasis on what they're doing in the immediate term to shore up the economy," said Scott Hodge, president of the Tax Foundation, a research group advocating for a simpler tax code and lower taxes. "There's so much anxiety in the markets and in business. I think he'd want to assure people they've taken the appropriate actions."

This year, before discussing the war in Iraq, Bush is expected to promote and call for swift passage of the $150 billion economic stimulus package brokered between House leaders and Treasury Secretary Henry Paulson.

The stimulus deal may face some resistance in the Senate. Some Democratic senators are unhappy that their House colleagues gave up on the party's push to extend unemployment benefits in addition to offering consumer rebates and business tax breaks.

The economic proposal, announced last week, also includes two housing measures intended to make it easier for consumers to obtain mortgages or refinance expensive subprime loans.

Beyond the stimulus plan. Bush may use the State of the Union address to push for other measures intended to ease the housing downturn, some experts said.

"Look for a pitch for tax-related provisions, such as opening the door for states to use tax-free bonds to help homeowners refinance out of unaffordable subprime [adjustable-rate mortgages]," said Jaret Seiberg, senior vice president at the Stanford Group, a Washington policy research firm.

Seiberg added that he believes Bush may endorse a real estate industry plan to offer $5,000 tax credits to first-time home buyers.

The president will also use the stimulus package as a launching-off point to call once again on lawmakers to permanently extend the tax cuts he engineered in 2001 and 2003 that will otherwise expire in three years. White House Press Secretary Dana Perino said Bush will factor an extension into his 2009 proposed budget, which will be released Feb. 4.

The administration had originally wanted such measures included in the stimulus plan. Proponents and critics of making the tax cuts permanent acknowledged that adding them to a short-term stimulus package could delay its passage because of the fierce disagreement between Democrats and Republicans over the issue.

Critics questioned how much such a move would stimulate the economy in the short-term. Proponents, however, said investors and businesses would feel more confident making investments today if they knew what their tax bill will be tomorrow.

"The best thing we can do to deal with uncertainty in the economy is make the tax cuts we passed permanent," Bush said in a speech to congressional Republicans on Friday.

Giving business a hand. One measure the president may push for is lower corporate tax rates - a campaign led by Treasury Secretary Henry Paulson.

The stimulus proposal announced Thursday also includes tax breaks for businesses to spur them to invest in plants and equipment.

"I'm surprised how readily the House agreed to the business tax breaks in the stimulus package. That may empower proponents of lower corporate taxes," said Greg Valliere, chief political strategist at the Stanford Group.

Right now the top income tax rate for corporations is 35 percent. Proponents of lowering it say it puts the United States at a competitive disadvantage since the majority of economically developed countries have lower corporate tax rates. U.S. companies benefit from bigger tax breaks but have to spend time and money to take advantage of them.

"[Bush] could try to put out a marker," said Hodge of the Tax Foundation.

At a conference of CEOs last summer, Paulson asked panelists whether they'd like to see the corporate tax rate lowered to 27 percent from 35 percent and preferences such as the research and development credit eliminated.

Rep. Charles Rangel, D-N.Y., chairman of the House Ways and Means Committee, last fall proposed a major tax overhaul that included lower corporate tax rates. There is little consensus, however, between Democrats and Republicans about how low corporate tax rates should be.

But Bush is not likely to do more than lay out the big picture of his agenda on Monday. "I expect broad statements and no specifics," said Clint Stretch, managing principal of tax policy at Deloitte Tax. More telling, he said, will be the president's 2009 budget proposal. To top of page

Oil prices: OPEC's high wire act

NEW YORK (CNNMoney.com) -- High oil prices are a drag on the economy, but OPEC isn't likely to raise production at its special meeting next week. But experts say the cartel is on track to meet worldwide demand - and keep prices from rising further - in the long run.

In the short run, OPEC's special meeting set for next Friday will be under the microscope to see how the cartel will address high oil prices amid a stalling economy in the United States.

But it's a tough call for OPEC. They clearly don't want high oil prices to kill the world economy since that would also cut demand for oil. But if production is increased and the economy stalls anyway, oil prices could collapse.

That's exactly what happened in 1997, when OPEC boosted production at a fall meeting in Jakarta, only to have the Asian financial crisis erode demand for crude the next year. Analysts say the so-called "Ghost of Jakarta" still haunts OPEC thinking - between the end of 1997 and the end of 1998, crude prices went from $20 to $10 a barrel.

"The general sense is they are not going to do anything," said Ann-Louise Hittle, an oil analyst with the energy consultants Wood Mackenzie. "With the economy being weak, prices could come down anyway."

OPEC will also likely maintain its long-stated belief that refining problems, a falling dollar, and speculative investing are the main culprits behind high oil prices - not a lack of crude.

But despite all the doubts about a short term boost in production, one factor may convince OPEC to open the spigot: Sources say a major arms deal between the Saudis and the U.S. is up for approval before U.S. lawmakers the week after next. It's possible the Saudis will throw U.S. politicians a bone - many of them are up for re-election amid fears of a recession - in exchange for an easy pass on the weapons.
The bad boys of oil

In the long run, the outlook for the world's oil consumers is a bit more upbeat.

Over the next two decades, the world will need to ramp up oil production from 85 million barrels a day currently, to about 117 million barrels a day, according to the Energy Information Administration. Nearly two-thirds of that new production is expected to come from OPEC.

There have been well-publicized concerns some oil-rich states are tapping the profits from their nationalized oil companies and using the money not for re-investment in oil production, but to fund social programs like roads, schools and healthcare. The concern isn't that poor people are getting services, it's that the world won't have enough oil.

But experts say that's mostly unfounded.

"I don't have any concerns with OPEC making good decisions," said Rick Chimblo, a former head of exploration at Saudi Aramco who now does development work for Genoil, a Canadian oil technology company. "They are spending money. They aren't some group of mystic states, they're planning for the future and running it like a business."

Chimblo said OPEC is adding 6 million barrels a day of refining capacity by 2011 in the Middle East alone. The gasoline could be used to satisfy growing demand in the region as well as exported to the U.S., where a new refinery hasn't been built in decades.

Wood Mackenzie's Hittle said the Saudis are making heavy investments in five new projects, which should boost production from 11 million barrels a day currently to 12.5 million by the end of 2009, and that's including the offset from the fairly quick rates of production declines the Saudi's are seeing in some of their older oil fields.

'It's extremely important the Saudis make these investments, otherwise there won't be enough oil," she said.

Saudi Arabia has been the most aggressive in investing in new production, according to Falah Al Jibury, an energy analyst who has advised several OPEC nations.

But it's not just the Saudis who are expected to boost production. Angola and Algeria are adding production as fast as possible. And Iraq and Nigeria could both bump up output by about a million barrels a day in relative short order if the security situation improves.

Venezuela's oil production under left-leaning Hugo Chavez has already fallen and analysts believe it's likely to fall further as he directs oil money into social programs rather than new production, unless additional investments are made.

But, as Hittle pointed out, chastising a country for investing in education or healthcare for its poor instead of providing U.S. motorists with the cheapest gas possible is a fairly biased way of looking at the world of oil.

"Each country has the right to make its own investment decisions," she said. To top of page

The Fed plays follow the leader

Some critics argue the Fed is too worried about market woes; others say central bank can't buck investor expectation by leaving rates unchanged.

NEW YORK (CNNMoney.com) -- Economist Milton Friedman once famously claimed a computer could handle the rate-setting duties of a central bank. In the last month it has appeared to many critics that the financial markets have taken on that role.

The Federal Reserve slashed rates by three-quarters of a percentage point, or 75 basis points, on Tuesday, just eight days ahead of its regularly scheduled meeting, suggesting that it was responding to problems that couldn't wait.

But those immediate concerns were apparently found in the financial markets more than in the economy, which is the normal focus of the Fed's attention.

"While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households," said the Fed's statement that accompanied its surprise move, an unusual acknowledgement that the policymakers were following the markets' declines.

Now investors who a week ago were expecting only 75 basis points of cuts by the end of this month are expecting additional cuts at Wednesday's meeting. Fed funds futures on the Chicago Board of Trade are pricing in a 100 percent chance of a quarter-point, or 25 basis point cut, and a 66 percent chance of a half-point, or 50 basis point cut, on top of the emergency move.
The dark side of interest rate cuts

And some Fed watchers say if the Fed delivers a cut, it'll be a sign that Chairman Ben Bernanke and the rest of the Open Market Committee are being bullied by the markets.

"The action this week raises more questions than it answered," said Barry Ritholtz, CEO of Fusion IQ, a quantitative research firm. "The Fed's mandate is to maintain price stability and promote economic growth, not backstop the equity markets. That's not their responsibility, but it seems to be what they're doing."

Setting the stage for "substantive" move. Bernanke had signaled the Fed's willingness to make additional cuts in a Jan. 10 speech, in which he promised the Fed was "ready to take substantive additional action as needed to support growth."

But while those comments got a lot of attention, there was far less attention paid to his comments that tied problems in financial markets to the Fed's broader goals of economic growth.

"Adverse economic or financial news has the potential to increase financial strains and to lead to further constraints on the supply of credit to households and businesses," he said.

The next day, Fed Gov. Frederick Mishkin, a close ally of Bernanke who had written an economic textbook with him before either joined the Fed, gave a speech in which he argued that the Fed needed to be prepared to respond quickly to changes in financial markets.

"Timely action is crucial when an episode of financial instability becomes sufficiently severe to threaten the core macroeconomic objectives of the central bank," he said.

Those comments raised hopes that the Fed would cut rates ahead of the two-day meeting on Jan. 29 and 30. But some of those hopes started to retreat when there was no cut by Friday Jan. 18, as many Fed watchers assumed there would be no emergency move the week before a regularly scheduled meeting.

"Suckered'" by SocGen But the following Monday, as U.S. markets were closed for the Martin Luther King, Jr. holiday, most major markets around the globe saw a sharp sell-off.

By late Monday, as futures were suggesting the Dow could open hundreds of points lower the next morning, Bernanke called an emergency meeting to get agreement on the cut that would be announced the next morning, the steepest cut since 1984 and the first emergency Fed move since it cut rates a week after the Sept. 11 terrorist attack.

Still, while markets seemed to get some support from the cut, there was growing criticism from many economists that the Fed was overreacting to the markets.

That criticism became even louder Thursday when it was revealed that French bank Societe Generale (SCGLY) was busy unwinding billions in improper trades made by one of its futures traders.

The $7 billion loss SocGen reported Thursday was itself helping to feed the global sell-off on Monday. Ritholtz said he believes the Fed was "suckered" by the market problems tied to SocGen. Others say even if that wasn't the case, the perception is bad for the central bank.

"It looks like the Fed wasn't reacting to economic moves but market movements, and we've since learned that much of the volatility is due to a rogue trader," said David Kelly, chief market strategist for JPMorgan Funds.

Too much, too late? Kelly is one of those economists who believes the Fed should have already cut rates further than it has due to economic conditions. But he and some other economists who believe that that further Fed rate cuts are justified argue the way the Fed is reacting to market problems is a problem in and of itself.

"The issue here is less what's been done but how it's been presented," said Lou Crandall, chief economist for Wrightson ICAP. "The presentation is a problem right now because of the perception that the Fed is following rather than leading."

The Fed does not automatically follow fed fund futures in its decision making process. Futures didn't do a good job forecasting monetary policy in much of 2007. As recently as the December meeting, the Fed bucked markets by delivering a quarter-point cut when many investors were betting on a half-point move.

But even some of the harshest critics of the Fed say it has no choice but to go ahead and give the markets what it wants at Wednesday's meeting, given what it has done leading up to the meeting.

"If they do less than that, there will be a widespread sense of disappointment or worse throughout the market and that's a headache the policymakers don't need at this point," said Tom Schlesinger, executive director of the Financial Markets Center, a think tank that focuses on the Fed.

Even Ritholtz agrees that the market would have a "hissy fit" if the Fed doesn't deliver another half-point cut on Wednesday and that the Fed can't afford to let that happen.

"At a certain point, the Fed has to break the markets from their addiction from cheap money. But this is probably not the time they need to do that," he said. To top of page

Pharma earnings up, but pipelines weak

Big Pharma, biotech earnings stronger-than-expected for the most part, but analysts want more innovation, acquisitions.

NEW YORK (CNNMoney.com) -- U.S.-based drugmakers and biotechs have made a stronger-than-expected showing for the fourth quarter so far, as global sales got a boost from the weak dollar.

But going forward, there isn't much to get excited about, as pipelines have been relatively weak, said Miller Tabak analyst Les Funtleyder.

"There's nothing innovative going on this quarter," said Funtleyder. "It's hard to get investors enthusiastic when they don't see growth drivers."

Pfizer and Johnson & Johnson, the two biggest drug companies in terms of annual sales, and Abbott Laboratories, all beat analysts' forecasts for earnings and sales. All three cited the weak U.S. dollar as a key factor in driving companywide performance.

Pfizer (PFE, Fortune 500), based in New York, was the only one to report a decline in sales and earnings. This stemmed from the drugmaker's sale in 2006 of its consumer health unit to Johnson & Johnson.
Wyeth mulls cutting 10 percent of staff

Despite earnings that beat the street, sales rose just 4 percent in the fourth quarter. Barbara Ryan, analyst for Deutsche Bank North America, said that cost-cutting and "strong financial management" could continue to drive Pfizer earnings over the next few years. But the pharma giant isn't likely to get a big boost in earnings and sales unless it makes strategic acquisitions that reduce dependence on its declining cholesterol-cutting blockbuster Lipitor.

New Brunswick, N.J.-based Johnson & Johnson (JNJ, Fortune 500), which makes drugs, consumer products and medical devices reported that net income jumped 7 percent in the fourth quarter to $2.5 billion, or 88 cents a share, without charges. Sales climbed 17 percent to $16 billion for the quarter, said J&J. This beat analyst projections of 86 cents earnings per share and sales of $15.4 billion.

Abbott (ABT, Fortune 500), a maker of drugs and medical devices based in the Chicago area, reported that net income without charges surged 26 percent in the fourth quarter to $1.45 billion, or 93 cents per share. Sales climbed 16 percent to $7.2 billion. These exceeded analyst estimates of 92 cents per share without charges and $7 billion for sales.

As for biotechs, results from leading companies Amgen, Genentech and Gilead were mixed. Amgen was the only one of these companies that managed to beat analysts' fourth-quarter forecasts.

Amgen (AMGN, Fortune 500) said that sales slipped 2 percent in the fourth quarter to $3.7 billion, while analysts had projected an 8 percent drop to $3.5 billion. The company, based in Thousand Oaks, Calif., said that adjusted net profit edged up 3 percent to nearly $1.1 billion, or $1 per share, compared to the analyst forecast of 97 cents per share.
Drugmaker's prospect for Alzheimer's gold

Amgen's stock rose 5 percent Friday, the day after it reported results. Funtleyder said investors may have realized they've been too bullish the company's anti-anemia drugs Aranesp and Epogen, which have gotten tougher warning labels from the Food and Drug Administration because of health concerns. This has also affected Johnson & Johnson's Procrit, which is a member of the same drug class.

Genentech (DNA) reported a 12 percent jump in net profit without charges to more than $700 million, or 69 cents per share. The biotech, based in South San Francisco, Calif., said sales went up 7 percent to $2.2 billion for the quarter. Sales were in line with analysts' expectations, but the company beat the earnings-per-share forecast of 67 cents.

Gilead Sciences (GILD), a biotech based in Foster City, Calif., said net profit rose to more than $400 million, or 44 cents per share, in the fourth quarter of 2007. This is compared with a loss during the same period in 2006, because of its purchase of Myogen.

Gilead's sales were driven by its fast-growing HIV drugs, jumping 22 percent in the quarter to $1.1 billion. To top of page

Super Bowl ads: $2.7 million and worth it

The big game will showcase the most expensive commercials of the year. And despite the cost, experts say Super Bowl ads are still a good buy.

NEW YORK (CNNMoney.com) -- One week from Sunday, the titans of American advertising will take to the field and go head-to-head in an epic battle of marketing muscle to determine who will be the king of commercials.

Oh, and there will be a football game too.

As most sports fans already know, Super Bowl XLII is game day for the Giants and Patriots, but it is also the biggest advertising event of the year.

Last year, the big game was the highest rated TV show in the U.S. with more than 93 million people tuning in, according to Nielsen. And this year, with two teams from huge markets competing, the Super Bowl could draw even more viewers.

Not surprisingly, companies like Anheuser-Busch (BUD, Fortune 500), General Motors (GM, Fortune 500) and Pepsi (PEP, Fortune 500) are spending millions of dollars to get their marketing message to this massive audience.

The average cost for a 30 second spot during this year's game is $2.7 million, according to Fox, the News Corp (NWS, Fortune 500).-owned network that will broadcast the Super Bowl. That's up slightly from last year when the going rate was $2.6 million and more than double the 1997 price of $1.2 million.

However, the ever-increasing price tag has not hurt demand for Super Bowl spots, according to Lou D'Ermilio, senior vice president of communications at Fox Sports.

D'Ermilio said last week that Fox had only one available spot left for the game and that the Super Bowl was 90 percent sold out by the first week of November.

Great bang for the buck. So what makes a Super Bowl spot worth such a sizeable investment?

"It's all about value," said Michael Pavone, president of brand consulting firm Pavone, the group behind spotbowl.com, a Web site that analyzes Super Bowl advertising.

"There's no other venue that gives your brand that kind of instant Americana," Pavone said of the Super Bowl.

In recent years, Super Bowl commercials have become a cultural phenomena, with more than half of the audience tuning in just to see the ads, according to Pavone.

What's more, the popularity of Super Bowl spots makes anticipation of the ads almost as valuable as the commercial itself.

"The Super Bowl is a good spend because you get the chance to create a lot of buzz ahead of the game," said Tim Calkins, a clinical professor of marketing at Northwestern University's Kellogg School of management.

Expect more interactive tie-ins. To that end, the Internet has played an increasingly important role in Super Bowl advertising, with many companies leveraging their spots to drive viewers to their Web sites before and after the game.

"I suspect that there will be a trend towards interactive ads," said Rick Gentile, a professor of sport management and director of Seton Hall Sports Poll. "The web will rear its head somehow," he added.

But the buzz doesn't have to end once the game is over. Steve McKee, president of McKee Wallwork Cleveland Advertising, points out that with a spot in the Super Bowl, advertisers can see big benefits the day after the game.

Last year, Super Bowl advertisers saw a collective 50 percent increase in Web traffic on the day after the big game, according to the Nielsen Company, a global information and media firm.

Oscar jitters fuel Super Bowl prices? Another factor fueling demand for Super Bowl spots this year that hasn't played a role in previous Super Bowls is the fallout from the ongoing writer's strike.

Since the strike could cause a cancellation of the Oscars, one of the other major advertising events of the year, many marketers are looking at the Super Bowl as the single biggest opportunity of the year.

"Everyone is nervous about the Oscars, which makes the Super Bowl even more important," Calkins said.
Ohio State beats LSU...

Recession fears weigh on marketers The faltering U.S. economy has caused at least one company to express concern over the viability of its Super Bowl spot.

Hyundai Motor Co (HYMT.F), said last week it was reviewing its decision to advertise in the Super Bowl based on signs that consumers are becoming more wary of spending. The company ultimately decided to stick with its plans and will have two spots during the game.

But athletic apparel maker Under Armour Inc. (UA) upset investors last week when it announced a new brand campaign -- including a 60-second Super Bowl spot -- and said that marketing expenses will represent as much as 13 percent of the company's 2008 net revenues.

This prompted a Wachovia Capital Markets analyst to downgrade the stock due to concerns that the company was spending too much during a time of economic weakness. Shares tanked 24 percent over the next two days before more favorable research reports from Goldman Sachs and Susquehanna helped the stock recover.

An ad you can't refuse Investors may be concerned about the cost of a Super Bowl spot for a relatively small firm like Under Armour. But for larger companies, such as German automaker Audi AG, a subsidiary of Volkswagen Group (VLKA.Y), buying a 60-second ad to tout its latest high-end sports car is not a problem.

The highly publicized ad, which reimagines the classic mobster film "The Godfather," is designed to represent Audi as a "new force in luxury," according to an Audi press release.

Scott Keogh, chief marketing officer for Audi of America, thinks advertising in the Super Bowl is still a "great value" despite recent declines in consumer spending.

"Strategically, it made perfect sense," Keogh said about the company's decision to buy the spot. "Audi is known as an insider brand and the Super Bowl is a great way to let a broader segment of America know about it," he said.
Online golf game handicaps productivity

Skipping the big game One notable absence from this year's roster of Super Bowl advertisers is insurance company Nationwide.

Nationwide has run Super Bowl spots in the past featuring offbeat celebrities like Kevin Federline and Fabio. The company has maintained that last year's K-Fed spot was a financial success for the company.

So why isn't Nationwide in the game this year?

"It wasn't a financial decision," said Steven Schreibman, Nationwide's vice president of advertising.

Schreibman said he would have liked to advertise during this year's Super Bowl but none of the concepts he looked at were "timely" enough for the company's Life Comes at You Fast campaign.

"Viewer's expectations are higher," following the success of last year's spot, Schreibman said, adding that "I know we could have topped it."

Instead, Schreibman said Nationwide will focus on advertising opportunities available through its new seven-year sponsorship of the NASCAR Nationwide Series.

A new twist. Finally, while many Super Bowl ads are predictable in their juvenile and over-the-top humor, PepsiCo (PEP, Fortune 500) is taking a novel approach with its 60-second pre-game "silent ad," which will feature dialogue in American Sign Language and written subtitles.

The ad stars two actual Pepsi employees who are deaf and is designed to bring awareness of the American deaf community to a wider audience, according to a Pepsi press release.

"This ground-breaking ad will heighten cultural awareness by millions of viewers during Super Bowl Sunday," said Bobbie Beth Scoggins, president of the National Association of the Deaf, which consulted with Pepsi on the ad. To top of page

In Davos, Gates calls for 'creative capitalism'

DAVOS, SWITZERLAND (Fortune) -- "In many crucial areas, the world is getting better...but it's not getting better fast enough, and it's not getting better for everyone," Bill Gates said in Davos on Thursday as he called for a more concerted global drive toward what he calls "Creative Capitalism." He said that companies, especially the biggest ones, can improve the lot of the world's least privileged by better aligning their self-interest with the good of society.

"There are two great forces - self interest and caring for others," he said. But he noted that "profits are not always possible when business tries to serve the very poor." However, he noted the power of "recognition which enhances a company's reputation," calling it a way to more strongly appeal to customers and attract better employees. Thus indirectly, he insisted, companies can concretely benefit by doing good.

He spoke of what he believes is the growing global movement for corporate social responsibility. But businesses, government and nonprofits need to work together better to "stretch the reach of market forces," so more companies can make a profit doing work that will "improve the world." (That phrase is included in the tagline that defines the purpose of the World Economic Forum.)

He noted that many of today's most high-tech products have relatively low marginal costs of production. That's true of software of the type that Microsoft makes but also many drugs for disease - once they have been invented, producing additional copies doesn't cost very much. As a result, companies that are willing to apply variable pricing models to different markets can help the world without impairing their profits.

He spoke highly of C.K. Prahalad's book The Fortune at the Bottom of the Pyramid, noting a Dutch company described there which gave away the rights to a cholera vaccine in the developing world even as it retained them for the developed one. The result was a drug now distributed in poor countries for under $1 per dose.

He also spoke approvingly of a new U.S. law that offers expedited review for unrelated drugs a company might have in the pipeline if it develops a new treatment for an important disease of the developing world. "This priority review could be worth hundreds of millions of dollars" to companies, he said.

Rock star Bono also figured in the speech, as Gates described a late-night drinking session the two men had here in Davos a couple years ago. "After a few drinks," he said, Bono became expansive describing his idea for how people could show their support for causes they care about just by buying products. So was the Red campaign born, which Microsoft (MSFT, Fortune 500) and Dell (DELL, Fortune 500) recently announced they would support with a new line of laptop computers.

Since the launch of Red, Gates said, over $50 million has been raised for the Global Fund to Fight AIDS and Malaria, and as a result over two million people now receive life-saving drugs.

"This is a worldwide movement, and we all have the ability and responsibility to accelerate it," Gates said. He asked everyone listening to personally dedicate themselves to one project of creative capitalism in the next year, to "stretch the role of market forces."

During a question and answer period, Gates said that he felt the atmosphere had changed. Previously, non-governmental organizations viewed many corporate social responsibility initiatives with suspicion. And he agreed that many efforts have been little more than window dressing. But, he added, it is in the largest companies where the tradeoff between recognition and near-term profits is now "net positive," "so they should lead the way."

The standing-room audience in the World Economic Forum's largest hall greeted Gates' speech with tepid applause. The merely polite reception may reflect both that for many in the audience the ideas he articulated did not generally come as a big surprise. And other audience members may simply still believe, as the World Economic Forum founder Klaus Schwab commented, characterizing a common objection, that "the business of business is business."

Schwab himself clearly endorsed the speech. The Forum seldom gives such a stage to a single speaker who is not a head of state.

Gates leaves Microsoft this coming summer. Here he got perhaps the world's most prominent business podium to articulate the path he and his billions will follow over coming decades. To top of page

U.S. Stocks Drop on Credit Concern; JPMorgan, Citigroup Retreat

Jan. 25 (Bloomberg) -- U.S. stocks dropped for the first time in three days, led by financial companies, on concern banks will be saddled with more credit-market losses and the Federal Reserve won't cut interest rates enough to stimulate growth.

JPMorgan Chase & Co. and Citigroup Inc. led banks lower after an analyst said Fortis, Belgium's biggest financial services company, faces additional writedowns from mortgage- backed securities. Speculation that subprime-infected investment losses are worsening helped erase a morning rally fueled by better-than-expected earnings at Microsoft Corp. and Caterpillar Inc.

The Standard & Poor's 500 Index and Dow Jones Industrial Average still posted their first weekly gains of 2008 as a government stimulus plan and the Fed's surprise 0.75 percentage- point rate cut helped the market rebound from its worst-ever start to a year. The S&P 500 decreased 21.46, or 1.6 percent, to 1,330.61. The Dow Jones Industrial Average lost 171.44, or 1.4 percent, to 12,207.17. The Nasdaq Composite Index slumped 34.72, or 1.5 percent, to 2,326.2.

``There's going to be more issues with regard to writedowns,'' said Peter Sorrentino, who helps oversee $12 billion as senior portfolio manager at Huntington Asset Management in Cincinnati. ``We've got more classes of debt securities that are going to become questionable as this consumer malaise drags on for a while.''

Today's declines capped a week in which the market's benchmark gauge of volatility reached a five-year high and the Dow posted its biggest intraday swing since 2002. The S&P 500 added 0.4 percent this week, trimming its 2008 loss to 9.4 percent. The Dow gained 0.9 percent in the week and is down 8 percent this year.

'Blowing Up'

Financial companies in the S&P 500 lost 2.5 percent as a group today for the biggest drop among 10 industries. Yesterday's announcement of a $7.2 billion loss by Societe General SA on unauthorized trades spurred speculation that institutions face more losses after banks wrote down $133 billion stemming from last year's collapse of the U.S. subprime mortgage industry.

``I've heard like three different rumors about a hedge fund blowing up,'' said Thomas Garcia, head of trading at Thornburg Investment Management, which oversees $53 billion in Santa Fe, New Mexico. ``We also have the Fed meeting on Tuesday and nobody really knows what they're going to do.''

Fed Watch

Futures contracts show a 78 percent chance that the Federal Reserve will cut its benchmark interest rate by 0.5 percentage point to 3 percent when policy makers hold their next scheduled meeting on Jan. 30-31. The rest of the bets are for a quarter- point reduction.

JPMorgan, the third-biggest U.S. bank by assets, slipped $1.32 to $43.64. Citigroup, the largest, declined 69 cents to $26.64. Fortis should revise its outlook to ``take into account writedowns on its super senior subprime collateralized debt obligations,'' Jaap Meijer, a London-based analyst at Dresdner Kleinwort, wrote in a research note.

Freddie Mac slipped $2.42, or 7.6 percent, to $29.58. Fannie Mae tumbled $2.39, or 7 percent, to $31.80. Senate Banking Committee Chairman Christopher Dodd pledged to speed legislation creating a tougher regulator for the two biggest providers of money for home loans. The declines were the two steepest in the S&P 500.

Financial companies are expected to drag S&P 500 members to their worst earnings season since 2001. Analysts estimate the index's average profit fell 18 percent in the fourth quarter from a year ago, according to projections compiled by Bloomberg today. Financial earnings are forecast to fall 100 percent.

The Fed lowered its target for the overnight lending rate between banks by 0.75 percentage point on Jan. 22 after an unscheduled meeting, its first emergency action since 2001 and the biggest single reduction since it began using the rate as the principal tool of monetary policy in 1990.

'Sell Strength'

``A big part of the market wants to sell strength until we get more Fed ease and some stimulus,'' said Brian Rauscher, director of portfolio strategy at Brown Brothers Harriman & Co. in New York. The firm oversees $44 billion in client assets.

European banks have tumbled this week on concern they may report more writedowns linked to U.S. subprime mortgages. In addition to Societe Generale's loss from bets placed secretly by a trader, the French bank also took 2.05 billion euros in writedowns related to credit markets. Citigroup today downgraded the shares to ``sell' from ``buy.''

WestLB AG, Germany's third-biggest state-owned lender, and Bayerische Landesbank, the second-largest, also announced plans to assign lower values to their investments this week.

Schering-Plough Corp. and Merck & Co. dropped today after the U.S. Food and Drug Administration said it will take about six months to review new information about their cholesterol medications. Schering-Plough fell $1.15, or 5.7 percent, to $19.02. Merck lost $1.77, or 3.6 percent, to $47.79.

Microsoft, Caterpillar

Microsoft fell 31 cents to $32.94 after rising as much as 5.3 percent. The world's biggest software company said profit in the year ending June 30 will be $1.85 to $1.88 a share, on sales of $59.9 billion to $60.5 billion. Analysts on average estimated earnings of $1.81 and sales of $59.4 billion. Microsoft boosted its profit projections for the fiscal year ending June 30.

Caterpillar advanced 68 cents to $65.93. The company said sales in Europe and Asia lifted earnings, offsetting a U.S. slowdown in construction and mining demand. Profit increased to $975 million, or $1.50 a share, from $1.32 a year earlier, and exceeded the average analyst estimate by 1 cent.

Honeywell

Honeywell International Inc. added $2.05 to $58.25. The biggest maker of aircraft controls said fourth-quarter earnings rose 18 percent on demand for airplane parts, thermostats and security systems. Net income climbed to $689 million from $585 million, the company said last night.

More than two stocks dropped for every one that rose on the New York Stock Exchange. Some 1.9 billion shares changed hands, 17 percent more than the three-month daily average.

The Russell 2000 Index, a benchmark for companies with a median market value of $521.3 million, dropped 0.6 percent to 688.6. The Dow Jones Wilshire 5000 Index, the broadest measure of U.S. shares, fell 1.4 percent to 13,423.62. Based on its decline, the value of stocks decreased by $231 billion.

U.S. stocks yesterday posted their biggest two-day rally since November after Xerox Corp. and Lockheed Martin Corp. reported profit that topped analysts' estimates and lawmakers agreed on a plan to pay tax rebates to families.

U.S. Treasury Notes Advance as Drop in Stocks Increases Demand

Jan. 25 (Bloomberg) -- Treasury notes gained, posting their sixth straight weekly advance, as a decline in stocks fueled concern that the U.S. economy will fall into recession.

Traders pushed U.S. government debt to the best start to a year in two decades on speculation the Federal Reserve will cut interest rates by as much as a half-percentage point Jan. 30. Volatility in Treasuries reached the highest in a decade this week as policy makers slashed their target in an emergency move, while stocks had the longest slide since 2002.

``Yields at these levels reflect safe-haven flows,'' said Jane Caron, chief economic strategist in Burlington, Vermont, at Dwight Asset Management Co., which oversees $68 billion of fixed-income assets. ``Treasuries are being used as a parking place for cash worldwide until there's a better sense of global financial-market direction.''

The two-year note yield fell 13 basis points, or 0.13 percentage point, to 2.19 percent at 4:27 p.m. in New York, according to bond broker Cantor Fitzgerald LP. The 3 1/4 percent note due December 2009 rose about 1/4, or $2.50 per $1,000 face value, to 101 31/32. The yield fell 16 basis points from Jan. 18, and the note's six-week gain is the longest since the period to Nov. 30.

The 10-year note yield dropped 14 basis points today to 3.57 percent. The yield touched 3.29 percent this week, the lowest since June 2003, as investors sought shelter from falling stocks. The note's rally is the longest since 2006.

`Move Quickly'

The Standard & Poor's 500 index fell 1.6 percent today. The index surged the past two days, halting a five-day losing streak that fueled speculation the Fed would lower its benchmark rate as much as 0.75 percentage point to 2.75 percent next week. Policy makers lowered the rate by 75 basis points on Jan. 22, the first move between meetings since 2001.

Yields on two-year notes, those most sensitive to expectations about monetary policy, were 138 basis points below 10-year yields, close to the biggest gap since November 2004.

``The bond market is priced for economic weakness or, I'd argue, recession,'' said Gary Pollack, who helps oversee $12 billion as head of fixed-income trading at Deutsche Bank AG's Private Wealth Management unit in New York. ``For the Fed's movement to have any impact on the real economy, they have to move quickly.'' He spoke in an interview on Bloomberg Radio.

Economists in a Bloomberg survey published Jan. 9 lowered their median forecast for growth this quarter to 1.1 percent, from 1.5 percent in December.

`Only Attraction'

Treasuries have returned 2.34 percent this month, the best start to a year since at least 1987, according to indexes compiled by Merrill Lynch & Co. Bonds surged on concern that the U.S. housing slump and $133 billion of losses on mortgage- related investments at the world's biggest banks and securities firms will undermine the economy.

``Safety is at a premium,'' said Brant Carter, managing director of fixed-income retail trading for government and agency bonds in Memphis, Tennessee, at Morgan Keegan Inc. ``The preservation of capital is the only attraction to bonds.''

Traders see a 76 percent chance the central bank will lower its benchmark overnight lending rate by 50 basis points to 3 percent on Jan. 30, compared with 42 percent earlier today, futures on the Chicago Board of Trade show. There's a 24 percent chance of a quarter-point cut.

President George W. Bush and House lawmakers yesterday agreed on a $150 billion stimulus package aimed at supporting the economy. About $100 billion would pay for tax rebates to about 117 million families and $50 billion would go toward tax breaks for businesses.

`Triple-Digit Volatility'

Sales of new homes in the U.S. dropped 0.3 percent in December from a 12-year low the previous month, according to a survey by Bloomberg News before the government releases the report on Jan. 28.

Measures to stimulate the economy may stoke inflation, increasing the appeal of Treasury Inflation-Protected Securities, said John Cerra, who manages $13 billion of bonds at TIAA-CREF in New York. ``A Fed that's likely to be stimulating the economy, a government that's involved in a fiscal policy sending checks to people -- it seems to me at some level TIPS are at very low breakevens,'' he said.

Ten-year TIPS yielded 2.22 percentage points less than similar-maturity notes, down 7 basis points from yesterday. The so-called breakeven rate, which reflects investors' inflation expectations over the next decade, fell to a five-year low of 2.04 percentage points on Jan. 22.

Merrill Lynch & Co.'s MOVE index, which measures volatility on Treasury options, climbed to 171.7 yesterday. That's the highest since October 1998, when the Fed cut interest rates between meetings, responding to financial-market turmoil after the collapse of hedge fund Long-Term Capital Management LP.

In another sign of how turbulent trading has been this week, the five-day historical yield volatility on the 3 5/8 percent coupon Treasury maturing in December 2012 reached 132.7 yesterday, from 30.4 on Jan. 10.

``I don't remember triple-digit volatility,'' said Cerra. ``It's really beyond my 23 years of experience.''

Citigroup Awards Vikram Pandit $26.7 Million in Stock (Update1)

Jan. 25 (Bloomberg) -- Citigroup Inc., the U.S. bank that last week posted a record loss, gave new Chief Executive Officer Vikram Pandit $26.7 million in stock and said executive committee Chairman Robert Rubin elected to forgo a stock bonus.

Pandit, who took over for ousted CEO Charles ``Chuck'' Prince in December, got 1.09 million shares on Jan. 22, New York- based Citigroup said in a regulatory filing. Pandit will receive no cash bonus, company spokesman Michael Hanretta said. Last year, Prince got $10.7 million in stock in addition to a $13.2 million cash bonus, for a combined $23.9 million.

Citigroup last week said it was cutting about 4,200 jobs and curbing year-end bonuses for top executives after $18.1 billion in writedowns on subprime mortgages and bonds led to a fourth- quarter loss. Rubin, a former U.S. Treasury secretary who joined Citigroup in 1999, told the board's compensation committee that he didn't want a stock bonus, Hanretta said.

``He felt that at this stage in his career, and in his circumstances, that a retention equity grant this year was not necessary, and that the grants were better awarded to others at different stages in their careers,'' Hanretta said.

Last year, Rubin got $6.81 million in stock on top of an $8.4 million cash bonus.

Wall Street and bank executives typically receive year-end bonuses in a combination of stock and cash. Citigroup this year increased the proportion of bonuses awarded in stock to put more emphasis on executive retention and long-term gains in the share price, Hanretta said. Most of the highest-paid executives had their cash bonuses cut in half, he said, declining to comment on grants to specific individuals.

Stock Options

Pandit also got options on 3 million Citigroup shares, with strike prices ranging from $24.40 to $36.60.

The filings didn't disclose the executives' cash bonuses. Some of those awards will be published in the company's annual shareholder letter later this year. The stock awards vest over four years, meaning they become eligible for sale by the executives in annual increments of 25 percent.

Citigroup shares closed at $24.40 the day the bonuses were awarded. That figure was less than half the $54.77 closing price on bonus day last year, forcing Citigroup to quadruple the number of shares awarded to executives whose stock bonuses it wanted to double. Today, Citigroup fell 69 cents to $26.64 in composite trading on the New York Stock Exchange at 4:14 p.m.

Neither Rubin nor director Richard Parsons, who chairs the board's compensation committee, was available for comment, Hanretta said.

Chairman Win Bischoff got $4.67 million in stock, double the year-earlier amount.

Krawcheck's Award

Sallie Krawcheck, head of Citigroup's wealth-management division, got $8.43 million in stock, a 79 percent increase over the prior year.

Vice Chairman Stephen Volk got $8.29 million in stock, an 81 percent jump. Vice Chairman Lewis Kaden got $4 million, a 22 percent increase. Ajay Banga, head of the bank's international- consumer division, was awarded $6.01 million in stock, up 93 percent. Steven Freiberg, who oversees the U.S. consumer division, received $4.36 million in stock, a 40 percent increase.

Chief Financial Officer Gary Crittenden, who joined Citigroup last year from American Express Co., got a $9.21 million stock bonus.

Michael Klein, who oversees investment banking, got a $12.8 million stock bonus. His bonus for the prior year wasn't disclosed.

Japan's Notes Complete Biggest Drop in 19 Months as Stocks Gain

Jan. 26 (Bloomberg) -- Japan's five-year bonds fell, staging the biggest loss in 19 months, after stocks jumped and the inflation rate doubled to the fastest in almost a decade.

The notes had the steepest weekly decline since September, as exporters gained on confidence a U.S. stimulus package and an emergency Federal Reserve interest-rate cut earlier this week will halt a slowdown in Japan's largest overseas market. A report yesterday showed Japan's core consumer prices, which exclude fresh food, rose 0.8 percent last month from a year earlier, tempering speculation the central bank will lower rates.

``This is the end of the panicky phase,'' Takashi Nishimura, an analyst at Mitsubishi UFJ Securities in Tokyo, said yesterday. ``The JGB market is mainly influenced by the recovery of stock markets, which means bonds will fall.''

The yield on the 0.9 percent note maturing in December 2012 climbed 9.5 basis points to 0.91 percent yesterday, the biggest increase since June 2006, at Japan Bond Trading Co., the nation's largest interdealer debt broker. The price fell 0.446 yen to 99.953 yen. The yield has added 5 basis points this week. A basis point is 0.01 percentage point.

The yield on the 10-year benchmark bond has increased 9 basis points to 1.48 percent in the same period, the biggest weekly gain in yields since December.

Ten-year bond futures for March delivery lost 0.90 yesterday to 137.36 at the afternoon close at the Tokyo Stock Exchange and the Nikkei 225 Stock Average jumped 4.1 percent. The S&P 500 Index advanced 1 percent on Jan. 24.

The risk of companies and governments in the Asia-Pacific region defaulting on their debt fell this week, erasing earlier increases to record highs.

Rising Energy Costs

There is about a 9 percent probability the BOJ will lower its benchmark 0.5 percent interest rate by a quarter-percentage point at its March meeting, according to Bloomberg calculations using Credit Suisse Group prices for overnight interest-rate swaps. The odds fell from around 20 percent on Jan. 23.

``Shorter-end debt dropped at a faster pace because some people reduced bets on a BOJ rate cut,'' said Daisuke Uno, chief fixed-income and currency strategist at Sumitomo Mitsui Banking Corp. in Tokyo. ``The inflation data won't change the long-term economic outlook, so losses in longer debt were limited.''

Ten-year yield will fall to 1.25 percent by the end of March and 1 percent by the end of June, Uno said.

Breakeven Rate

The difference in yields between five- and 20-year debt narrowed to about 1.24 basis points yesterday, compared with the closing spread of 1.27 percentage points on Jan. 24, according to data compiled by Bloomberg. The yield on the 20-year security gained 6.5 basis points to 2.15 percent.

The extra yield paid by 10-year conventional government debt compared with similar-maturity inflation-linked bonds was little changed at about 30 basis points yesterday from Jan. 24, according to data compiled by Bloomberg.

The so-called breakeven inflation rate reflects investors' expectations for average annual increases in consumer prices over the next decade.

The Markit iTraxx Japan index fell 8 basis points to 59 basis points, Morgan Stanley prices show. The contracts declined from 91 basis points earlier this week, the highest since the credit-default swap indexes started in September 2004.

``The strong pessimistic view over the global economic outlook, which boosted bonds recently, has eased,'' said Hajime Takata, chief bond strategist in Tokyo at Mizuho Securities Co.

Ten-year yields may rise to 1.44 percent by the end of March, according to the weighted average forecast of a Bloomberg News survey of economists and analysts. The estimate puts a heavier weighting on more recent forecasts.

Credit-default swaps, financial instruments based on bonds or loans, were conceived to protect bondholders by paying the buyer face value in exchange for the underlying securities should the borrower default. A decrease in the price indicates improving investor perceptions of credit quality and an increase suggests deterioration.

Northern Rock Crisis Blamed on FSA `Failure,' U.K. Panel Says

Jan. 26 (Bloomberg) -- The U.K. Financial Services Authority failed in its supervision of Northern Rock Plc, and the Bank of England should have done more to soothe money markets before a run on the lender, a panel of lawmakers said.

``The FSA appears to have systematically failed in its duty as a regulator to ensure Northern Rock would not pose such a systemic risk,'' Parliament's Treasury Committee said today in a report. ``This failure contributed significantly to the difficulties, and risks to the public purse, that have followed.''

The lawmakers said the Bank of England ``should have adopted a more proactive response'' to the seizing up of money markets in August, which led to Northern Rock's funding difficulties. The panel called for a new position at the central bank to take charge of the U.K.'s financial stability.

The report puts most blame on the regulator and less on the central bank and the Treasury for the panic at Northern Rock, the first run on a British bank in 140 years. Prime Minister Gordon Brown has faced criticism from bankers and economists for designing the so-called ``tripartite'' three-pronged system of financial oversight when he was chancellor in 1997.

``Planning must begin immediately so that on any future occasion it is known who will speak for the authorities and that their message is clear and reassuring,'' John McFall, chairman of the Treasury Committee, said in a statement.

`Disastrous' Run

Simon Hayes, an economist at Barclays Capital who formerly worked at the central bank, said that the bank crisis was ``disastrous'' for the U.K.'s reputation.

``The sheer ignominy generated by Northern Rock should be enough to ensure that all three institutions are on their toes from now on,'' he said. ``That matters more than the details of who gets what responsibilities.''

The Financial Services Authority said in a statement that it had already acknowledged that there were ``clearly'' failings in the supervision of Northern Rock.

``We are already addressing these,'' the statement said. ``We intend to study carefully the committee's report and will respond more fully in due course.''

No government official has yet resigned for the bank crisis, which led to former policy maker Richard Lambert likening Britain to a ``banana republic,'' and a government rescue which has cost 25 billion pounds ($49 billion) in loans.

Verdict on Gieve

Today's report didn't criticize anyone by name. In September, McFall rounded on Bank of England Deputy Governor John Gieve, saying he wasn't doing his job and seemed ``pretty laid back.'' Gieve defended himself, saying: ``I do not think I was asleep at the wheel.''

Michael Fallon, the ranking opposition Conservative member of the panel, stopped short of calling for the resignation of Gieve, a former official at the Home Office and the Treasury.

``The deputy governor, from now on, should be someone with senior banking experience,'' Fallon said in an interview. ``You can't have someone like Gieve, a civil servant specifically without banking experience.''

The panel recommended the creation of a new post of Bank of England Deputy Governor and Head of Financial Stability, who would be an adviser to the Treasury and not serve on the bank's rate-setting committee. The official would have powers to send inspectors into financial institutions, and in ``more extreme circumstances,'' to order temporary government control.

The proposal contrasts with Chancellor of the Exchequer Alistair Darling's plans to increase the FSA's powers for fixing failing banks, and echoes the opposition Conservative Party's call for more financial oversight by the Bank of England.

Darling will present his proposals to Parliament this week. Brown will meet with officials from France, Germany and Italy on Jan. 29 to agree to measures on the assessment of risks to financial markets.

Intel Stock Hammered on Economy Fears

SAN FRANCISCO -

Shares of Intel Corp. fell more than 12 percent Wednesday, a day after the world's largest chip maker reported disappointing fourth-quarter results that investors saw as a sign the company is more vulnerable to U.S. economic pressures than many investors had believed.

Intel executives on Tuesday tried to assure Wall Street that the U.S. economy is not to blame for its financial misstep. Still, the Santa Clara-based company's shares lost $2.81, or 12.4 percent, to $19.88 Wednesday.

"You hear all of the pundits saying the world is going to go to a trash basket and you worry," Intel Chief Executive Paul Otellini said in a conference call with analysts. "It may be a self-fulfilling prophecy. At this point we don't see anything on the horizon. Our customers don't see anything on the horizon."

Otellini noted that three-quarters of Intel's business comes from outside the U.S. and that the PC business appears to be healthy. The company blamed the shortfall on lower-than-expected sales of a type of flash memory found in music players, cameras and other digital gadgets.

Intel was also harmed by microprocessor prices staying flat despite an acceleration in sales during the quarter.

Otellini said, however, that it would be "imprudent" to brush off the economic pressures facing the U.S., and Intel's latest financial guidance reflected that caution.

As the No. 1 maker of the microprocessors that act as the brains of personal computers, Intel's financial results are a valuable gauge of technology spending and PC demand.

With investors already worried about a possible recession and its effects on tech companies, Intel's miss injected further uncertainty into a jittery market. Investors flocked to technology stocks late last year as a safe haven when the mortgage and credit crisis worsened, but they have since retreated.

"The stock is reacting as hard as it is because the market was expecting Intel to be at the tail of the dog - not really seeing the weakness we're seeing in retail yet," said Doug Freedman, an analyst with American Technology Research. "But the numbers at the top line suggest they are absolutely seeing this weakness."

Intel posted profit of $2.27 billion, or 38 cents per share, for the three months ended Dec. 29. That compares with net income of $1.5 billion, or 26 cents per share, during the same period a year earlier.

Analysts polled by Thomson Financial were expecting profit of 40 cents per share.

The company struggled with higher-than-exected charges of $234 million resulting from the proposed spinoff of a division that makes NOR flash memory. NOR flash has been losing ground to NAND flash memory for use in portable electronic devices.

Intel said those charges - for expected losses - reduced profit by 2.5 cents per share.

Revenues also came in lower than expected.

Intel said it rang up $10.71 billion in sales during the latest quarter, an 11 percent improvement from $9.69 billion in the period a year earlier. But that was about $130 million short of what analysts expected.

"The estimates may have gotten a little ahead of where we are, but I'm very pleased with the progress the company made over the course of the quarter," Intel Chief Financial Officer Stacy Smith said in an interview. "We start 2008 exceptionally well positioned."

Intel's gross profit margin, a key figure scrutinized by analysts to gauge how well a company is managing its pricing and manufacturing costs, came in at 58.1 percent of revenues, an increase over the third quarter.

The increase was driven by higher sales and lower costs of producing chips.

Intel is ahead of its rival Advanced Micro Devices Inc. in moving to the latest generation of chip technology, which helped Intel drive down the cost of producing its chips while making them more powerful.

For the full fiscal year, Intel reported net income of $6.98 billion, or $1.18 per share, up 38 percent from 2006. Annual revenue rose 8 percent to $38.33 billion.

In the first quarter, Intel expects revenue between $9.4 billion and $10 billion, in the lower end of the range analysts were expecting. Gross profit margin is expected to be 56 percent of revenues, plus or minus a couple percentage points.

US STOCKS-Market ends lower on Intel disappointment

NEW YORK, Jan 16 (Reuters) -U.S. stocks fell on Wednesday, after Intel Corp (INTC.O) posted both a disappointing profit and outlook, driving the S&P 500 to its lowest closing level in 14 months.

The poor results from Intel, the world's largest chip maker, came on the heels of poor retail sales data on Tuesday, dismal banking results and a slew of indicators showing the U.S. economy may be on the brink of a recession.

Investors also unloaded Apple Inc's (AAPL.O) shares for a second day, after the maker of the iPod failed to inspire with new products at its Macworld convention.

But stocks traded on a roller-coaster ride on Wednesday, with the Dow rising and falling by as much as 100 points, as investors bought up beaten-down bank stocks, after JPMorgan Chase & Co (JPM.N) posted a profit despite turmoil in the credit market.

The results from the No. 3 U.S. bank, though worse than expected, provided comparative relief from the gloom cast by Citigroup's (C.N) record quarterly loss on Tuesday. A smaller-than-expected profit decline by Wells Fargo & Co (WFC.N), the No 2. U.S. mortgage lender, also helped.

"Intel made the market queasy," said Peter Kenny, managing director at Knight Equity Markets in Jersey City, New Jersey. "Investors were looking for confirmation that companies with overseas exposure will do well -- and Intel didn't provide that."

The Dow Jones industrial average .DJI was down 34.95 points, or 0.28 percent, at 12,466.16. The Standard & Poor's 500 Index .SPX was down 7.75 points, or 0.56 percent, at 1,373.20. The Nasdaq Composite Index .IXIC was down 23.00 points, or 0.95 percent, at 2,394.59.

Dollar Plummets Against Euro on US Retail Sales, but can Dow Sell-off Prevent Further Dollar Losses?

A dismal US Advance Retail Sales report sunk the US dollar near fresh all-time lows against the euro, but a late Dow Jones Industrial Average tumble allowed the dollar to regain ground against the single currency through later forex trading. Indeed, Advance Retail Sales fell significantly below consensus forecasts through the critical December holiday spending period—making 2007 the worst year for Retail Sales since 2003. The disappointing report on domestic consumer spending confirmed traders’ worst fears and the US dollar sold off accordingly. The euro subsequently fell just short of all-time highs at $1.4925, but poor continuation doomed the currency to a swift reversal on a later Dow sell-off. The risk-sensitive single currency may be hard-pressed to forge fresh heights against the US dollar against sharp drops in the Dow and other major stock markets, but the dollar may likewise find it difficult to force a substantive rebound in the face of fast-falling interest rate differentials against major forex counterparts.

US Advance Retail Sales saw their worst December performance in four years, dimming outlook for domestic consumer spending and increasing the odds of a recession in the broader economy. It appears that ongoing housing market trouble doomed consumption to further contractions after a strongly positive result through November, and forecasts for domestic expansion adjusted accordingly. A simultaneous Producer Price Index report showed that prices rose less than expected through the same period, and traders sent domestic bond and money market yields lower in anticipation of further Federal Reserve interest rate cuts.

Do you think that the Federal Reserve will cut by 25, 50, or 0 basis points on January 31? Have your say on the DailyFX Forex forum.

Federal Funds Rate futures continue to show an approximate 50 percent chance that the Fed will cut rates by a whopping 75 basis points through the month of January. As we continue to argue at DailyFX, such speculation is largely unfounded as a 0.75 percent rate cut would send a clear signal of panic to financial markets and the broader economy. Yet such rate cut forecasts will continue to weigh on the US dollar and may prevent any worthwhile rebounds through short-term currency trading.

Written by David Rodríguez, Currency Analyst

EURUSD Looks Ready to Challenge All Time Highs

Strategy: Bullish against 1.4633, Targeting 1.5223

Breaking through the 1.4710 (61.8% of the latest bear wave correction) seems to be just the first step in a new EUR/USD upswing. With 1.50 so tantalizingly close there seems to be simply too much interest not to run it. Like many of my fellow traders, I am positioning for a break above November’s record high. But, unlike the others, I have a more precise objective in mind than just targeting the universally watched 1.50 level. The 138.2% Fibonacci extension of the 11/23 to 12/21 bear wave offers a first target of 1.5223.

 

EUR/USD

Strategy: Bullish against 1.4633, Targeting 1.5223

Breaking through the 1.4710 (61.8% of the latest bear wave correction) seems to be just the first step in a new EUR/USD upswing. With 1.50 so tantalizingly close there seems to be simply too much interest not to run it. Like many of my fellow traders, I am positioning for a break above November’s record high. But, unlike the others, I have a more precise objective in mind than just targeting the universally watched 1.50 level. The 138.2% Fibonacci extension of the 11/23 to 12/21 bear wave offers a first target of 1.5223.

GBP/USD

Strategy: Flat, awaiting direction from price around 1.9525

Has there been a currency less loved than the pound in the past few moths? The unit has seen a nearly uninterrupted drop from 2.1000 to 1.9500. But, tempting as it may be to follow the trend, my Fib analyses suggests that caution is in order. Cable has not conclusively cleared the 61.8% zone of the 1.8517 - 2.1164 bull wave which may be using the influence of the even 1.95 level to build a bottom. Admittedly, this is an unusual place to pull a Fib retracement with so many viable peaks; but wave happens to pull up the bottom of a thick confluence of levels between 1.96 and 1.95. So for now it’s best to wait and let the price action guide us.

USD/JPY

Strategy: Flat, watching 107.20 as the time fib cycle approaches

Is USDJPY setting up for a double bottom? According to my Fibonacci time analysis, it may do just that. Today’s daily candle marks the next Fib time cycle in the sequence from 11/26's swing low. This sequence has already proven itself to me as the cycle on 12/24 marked the turning point for the pair’s December rally. While market-wide dollar selling has already led USDJPY to drop below the November swing low at 107.20, it will be important to monitor today’s and tomorrow’s closes for clues as to whether USDJPY’s downside momentum can truly be sustained. Until the path is clear, I will remain flat.

USD/CHF

Strategy: Flat, waiting for a fib time cycle and double bottom at 1.0855 to clear

The Swissie represents an interesting conundrum for Fibonacci fans. On the surface the pair appears to be headed lower. But, don’t jump to conclusions so fast my friends. USDCHF now finds itself at a crossroad for both time and price as it must first clear a potential double bottom at 1.0885 while a Fib time cycle ominously passes. Until price confirms a direction, we’ll just have to wait and see.

 

USD/CAD

Strategy: Bullish against 1.0000, Targeting 1.0455

Having barreled through the 38.2% level of the immense 1.11871 - 0.9050 bear wave, USDCAD looks ready to extend its already considerable retracement. As seems typical in this pair, few obstacles seem to stand in the pair’s way. I remain bullish the pair though a break beyond the broad swing high from 12/14 at 1.0250 will be necessary for my target of 1.0455 - the 50% Fib of the above mentioned, multi-year decline. The nearby risk for my outlook is set back at parity.

 

AUD/USD

Strategy: Bullish against 0.8874, Targeting 0.9075

Can the Aussie re-test its multi-decade highs? My Fib analysis says yes.  AUDUSD has yet to clear fib congestion between 0.9071 and 0.8973, but the rising trend favors a break to the top side. Recently, the pair failed to hold onto a break above the 50% Fib level of the 0.9401 - 0.8554 bear wave; yet I will maintain my bullish bias until risk at the 38.2% Fib of the aforementioned wave at 0.8874 gives way. My ultimate target is merely looking for a double touch of the 23-year high from early November, which is just short of 0.94. However, meeting this objective will depend on whether spot can overtake the 0.9071 in the current upswing.

NZD/USD

Strategy: Bullish against 0.7645, Targeting 0.8150

The kiwi much like the Aussie looks primed to go higher. My Fib analysis shows that if it can clear the range at 0.7834, the next stop on the express train is 0.8150 (138.2% projection of the recent consolidation between 7363-7834.  It has tried to break out twice before, but as they say third time is the charm, so I am bullish here against 0.7645 risk.