Wall St unease about credit squeeze remains

Wall Street stocks hit reverse gear this week after interest rate cuts and a central bank plan to help ease banks' funding problems failed to convince investors that the worst effects of the credit squeeze were over.

The spectre of inflation returned after both producer and consumer prices rose more than expected, threatening to limit the ability of the Federal Reserve to continue cutting interest rates to stave off a recession.

Energy and telecoms groups were among the best performers but financials again felt heavy selling pressure amid concerns about earnings as fourth quarter results season began.

At lunchtime on Friday the S&P 500 was down 0.5 per cent on the day at 1,481.30 points, 1.4 per cent lower for the week. The Dow Jones Industrial Average was heading for a 1.2 per cent decline over the week to 13,449.76 while the Nasdaq Composite was 1.5 per cent lower at 2,662.67. The Russell 2000 small cap index fell 2.3 per cent to 766.16 on the week, hurt by a rise in volatility. "The mindset of 'selling into strength' has come back into this market," said Quincy Krosby, chief investment strategist at The Hartford.

After two consecutive weeks of gains the major indices retreated amid widespread dissatisfaction with measures announced by the Federal Reserve and other central banks designed to help ease liquidity bottlenecks in financial markets.

Stocks plunged on Tuesday after the Federal Open Market Committee cut interest rates 25 basis points, less than many investors had hoped. "It made you wonder about their [the Fed's] sophistication and their ability to predict what the market reaction would be," Ms Krosby said.

Although equities posted a modest recovery the following day on news of a new term auction facility and foreign exchange swap lines, stocks failed to pare most of their losses with inter-bank lending rates remaining stubbornly high.

Investors displeased with the Fed's response were given a further jolt by data that showed a sharp spike in inflationary pressure.

An index of consumer prices rose 0.8 per cent last month, its biggest rise in more than two years. Core consumer prices, which exclude volatile food and energy inputs, rose 0.3 per cent, more than expected. The CPI data came a day after wholesale prices rose the most in 34 years.

The inflation data may restrict the Fed's ability to deliver the rate cuts the market wants and equities fell after the news.

Citigroup had another bad week after Vikram Pandit's appointment as chief executive failed to boost its flagging share price. Citi was forced to take $49bn in structured investment vehicle assets onto its balance sheet and although the shares rose on Friday they fell 8 per cent to $31.55 over the week.

Lehman Brothers kicked off the fourth-quarter earnings season for the big banks but its shares fell 0.7 per cent to $63.02 on the week, in spite of results that beat Wall Street's estimates.

Goldman Sachs, Morgan Stanley, and Bear Stearns report next week. Analysts expect further writedowns in the sector as the value of credit-related assets declines and loan losses increase.

Bank of America, down 5.9 per cent at $42.70, Wachovia, 9.1 per cent lower at $39.24, and PNC Financial Services, off 9.2 per cent at $65.56, all made negative noises about current quarter performance. Washington Mutual fell 17.7 per cent to $15.66 on the week after it announced a convertible stock offering to shore up its finances.

Investors sought safety in large-cap stocks with strong international sales. AT&T, rose 7.9 per cent to $41.47 on the week after the phone company increased its dividend and announced a large share buyback programme.

Honeywell put on 3.7 per cent to $60.69 after the diversified manufacturer's profit guidance pleased traders. 3M rose 1.3 per cent to $87.27 after it gave guidance for double-digit revenue growth next year.

Microsoft was a standout technology stock rising 3.6 per cent to $35.77 after an analyst at JPMorgan raised his 2008 profit estimates.

Retail stocks had a poor week in spite of November sales figures that were twice as high as economists had forecast. Office Depot fell 15.8 per cent to $14.71 after warning of a weak fourth quarter. The S&P retail index declined 6.5 per cent to 415.13 amid fears of a poor Christmas shopping period.

The biotechnology sector also had a poor week. Biogen Idec fell 20.7 per cent to $59.49 and Celgene lost 13.4 per cent to $49.68 as drug trial results disappointed. But, BioMarin Pharmaceutical soared 29.2 per cent to $36.15 after it won regulatory approval for a new drug.