Stocks Surge on Geithner Pick

U.S. stocks surged Friday after word leaked that President-Elect Barack Obama plans to nominate New York Federal Reserve President Timothy J. Geithner as his nominee for U.S. Treasury Secretary.

There were other news items affecting the market Friday, including more fretting about the fates of Citigroup (C) and the U.S. auto industry. But major market indexes remained flat until reports of the Geithner pick arrived, sparking a rebound from Thursday's plunge to an 11-year low.

On Friday, the Dow Jones industrial average jumped 494.13 points, or 6.54%, to 8,046.42. The broad S&P 500 index gained 47.59 points, or 6.32%, to 800.03. And, the tech-heavy Nasdaq composite rose 68.23 points, or 5.18%, at 1,384.35.

On Thursday, by contrast, the Dow had plunged 444.99 points, and the S&P 500 closed at 752.44 -- its lowest level since April 1997. Friday's rally brings the S&P 500 back above its October 2002 lows.

Several market observers said Friday's reaction to the Geithner pick demonstrates a thirst for stronger leadership from Washington.

"There is a void of market confidence," says Bill Larkin, fixed income portfolio manager at Cabot Money Management.

In recent days, as stocks tumbled to levels not seen since the 1990s, many market commentators partly blamed confusing signals coming from Washington. Congress spent the week arguing but failing to agree on a bailout plan for General Motors (GM), Ford (F) and Chrysler. And, current Treasury Secretary Henry Paulson was criticized for shifts in the financial bailout plan.

Stocks rallied on the Geithner pick because "he's the right man at the right time," says Peter Cardillo, chief market economist at Avalon Partners. As president of the New York Fed, Geithner was involved in Paulson's efforts to prop up the financial system, but there's hope he can also improve on the current administration's efforts. Geithner also served as a Treasury undersecretary during the Clinton administration and helped respond to the Asian economic crisis in 1997.

"He has a lot of experience and certainly he knows the canyons of the financial markets," Cardillo says.

"I expect [Geithner] will treat the current situation with the urgency that it deserves," says Ward McCarthy, principal at Stone & McCarthy Research Associates. "I also expect him to be far more creative than Treasury Secretary Paulson."

Financial markets may be reassured Obama didn't choose a fresh newcomer who wouldn't understand the players in the crisis and couldn't hit the ground running, Larkin says. The pick "had to be someone who is currently in the system."

It's expected that Obama will name several key members of his economic team next week. Reports Friday said New Mexico Gov. Bill Richardson is Obama’s pick for commerce secretary.
Trading in stocks was active Friday, a day that November stock options expired. Bonds prices and the dollar index fell Friday, while gold and crude oil futures moved higher.

Also in the headlines, Congress headed home for Thanksgiving, leaving U.S. automakers still struggling for California loans to keep going. General Motors (GM) Friday extended its holiday shutdown and said it would make more production cuts.

Shares of Citigroup (C) fell almost 20% Friday, following Thursday's drop of 26%, its worst one-day percentage decline ever. Initially Citi stock was buoyed Friday by a Wall Street Journal report that Citi was weighing the possibility of auctioning off pieces of the financial giant or even selling the company outright. But chief executive Vikrum Pandit said on Friday he does not want to sell Citi's Smith Barney brokerage unit or break up the troubled bank, based on several news organizations' accounts of a Friday morning conference call with Pandit's staff.

Though the Geithner pick lifted the market's mood, investors have been continually reminded of the weak state of the economy both in the U.S. and globally.

On Friday, European stock markets fell, with major indexes in London, Frankfurt and Paris down 2% or more. Asian markets finished mixed, with Tokyo stocks rising 2.70% and Hong Kong gaining 2.93%, but Shanghai falling 0.72%.

In a speech Friday, a Fed official warned the U.S. economy could stay weak for quite a while. "We likely are in for a protracted period of poor economic performance," Charles Evans, president of the Federal Reserve Bank of Chicago, said.

On Friday, President Bush signed into law an extension of jobless benefits. Earlier in the year, Bush expressed doubts about further benefit extensions, but he came to support the legislation as new figures showed new claims for jobless aid had reached a 16-year high. In what could be its last vote of the year, the Senate approved a measure Thursday that would provide up to three months of extra benefits for those whose unemployment benefits have run out or are about to expire. The House passed the bill in October.

There were no significant economic reports released Friday.

In other U.S. markets Friday, the 10-year Treasury note slipped 1-20/32 to 104-22/32 for a yield of 3.2%, while the 30-year Treasury bond dropped 4-06/32 to 114-12/32 for a yield of 3.69%.

December West Texas Intermediate crude oil futures hovered around the $50-per-barrel mark on Friday, ending up 96 cents at $50.38 per barrel.

December gold futures rose almost 7% to 800.50 per ounce.

What Five Key Stock Market Signals Are Telling Us Now

As U.S. stocks hit new 11-year lows on Nov. 20, many investors say they just don't know what's ahead.

There's a general lack of clarity on a wide range of issues—the state of the U.S. and global economies, problems in the credit markets, the plans of the federal government, and the fate of hedge funds that are being forced to sell off assets. Unfortunately, much of the fog of the financial crisis will not be cleared up anytime soon.

However, there are several key signals that traders, strategists, and fund managers typically watch closely in times of uncertainty. Given the unprecedented environment, it's not clear if any will be a reliable guide this time, but these signals do give investors something to monitor for clues to the road ahead.

Here's a review of five of those signals and what they're saying now:
1. Technical Signals

Technical strategists analyze and predict market activity based on previous market moves. This week, the stock market failed a key test: The broad Standard & Poor's 500-stock index not only fell below its October 2008 lows, but the big-cap benchmark also blasted below its lows during the nasty bear market of 2002.

On the morning of Nov. 20, the S&P 500 briefly tested these 2002 lows in the morning but then rebounded. But late in the day, stocks sank and the S&P 500 closed at 752.44. That's below the index's October 2002 low of 768.63 and the lowest level for the index since April 1997.

The 2002 lows are "a major support level," says Dave Rovelli, equity trader at Canaccord Adams.

Richard Sparks of Schaeffer's Investment Research says "you could see a cascade of selling" if stocks stay way below those prior lows. Before stocks fell to this level, people could "feel comfortable that that is a basement that the market might not go below."
2. Reports from Washington

Michael Yoshikami of YCMNET Advisors criticizes "a general lack of clarity from the Administration [and] federal agencies on what's happening and what the path out is."

On Nov. 20, Democratic congressional leaders said they would delay a vote on a bill to help the U.S. auto industry—efforts some Republicans have opposed—until December. U.S. Treasury Secretary Henry Paulson has raised eyebrows by changing the focus of the financial package a few times. Bush Administration officials are on their way out of office, but President-elect Barack Obama hasn't yet chosen his economic team, whose members would have no real power until Jan. 20 even if they were in place.

This flow of news from Washington is rattling investors, many market watchers say. "No one really has a good idea what the plan really is," says Bruce Bittles, chief investment strategist at R.W. Baird.

Chad Deakins, portfolio manager at RidgeWorth International Equity Fund (SCIIX), says he doesn't expect any clear signals from Washington until Obama takes office. "Until the new Administration comes to the White House and sets a tone and direction, it's hard to see strong upside in the equity markets," Deakins says.

Car Loan in Florida

Economic Woes Weigh on Stocks

U.S. stocks were indicated to open lower Thursday as major index futures fell in premarket trading, following a steep slide in the previous session. on Globex. A report that showed weekly initial jobless Claims rose 15,000 to 478,000 added to arguments the U.S. economy is sliding into a steep recession that is becoming global.

Former Fderal Reserve Chairman Alan Greenspan is seen calling for more financial regulation at a House hearing Thursday on housing and the financial crisis. Meanwhile, the Bush administration is considering a $40 billion program to forestall housing foreclosures, according to a press report.

The dollar index was up at a two-year high as the worsening global economic outlook is prompting investors to liquidate risky assets. Bonds were also higher. Gold futures continued their descent. Oil futures were of before Friday's OPEC meeting.

European stocks were lower Thursday. In Asia, markets suffered more selling, with Tokyo stocks falling 2.46%, Hong Kong down 3.55%, and Shanghai lower by 1.07%.

U.S. stocks fell to their lowest levels in more than five years Wednesday amid worries about a serious economic slowdown not only in the U.S. but worldwide. On Wednesday, the Dow Jones Industrial Average tumbled 514.45 points, or 5.69%, to 8,519.21. The broad S&P 500 shed 58.27 points, or 6.1%, to 896.78. The tech-heavy Nasdaq composite fell 80.93 points, or 4.77%, to end at 1,615.75.

Lawmakers have called key players from the past and present to congressional hearings in an effort to find out what caused the biggest financial crisis since the 1930s and determine how the government plans to get the nation out of the mess. Former Fed Chairman Alan Greenspan, the star witness today before the House Oversight and Government Reform Committee, faces questions about actions the government took or didn't take that might have contributed to the boom in subprime mortgages and the subsequent housing market collapse that has led to the loss of billions of dollars in investments, according to AP.

Greenspan, who was succeeded in 2006 by Ben Bernanke, was likely to find himself defending actions he took that are being blamed for contributing to the current crisis. Critics charge that he left interest rates too low in the early part of this decade, spurring an unsustainable housing boom, while also refusing to exercise the Fed's powers to impose greater regulations on the issuance of new types of mortgages, including subprime loans. It was the collapse of these mortgages and rising defaults a year ago that triggered the current crisis.

Greenspan recently described the current episode as the type of wrenching financial crisis that comes along only once in a century. He has defended the use of derivatives, so-named because their value is derived from the value of an underlying asset. He said they were useful in helping to spread risks.

Greenspan called for tighter regulation of financial companies, distancing himself from the free-market culture that he helped to create. Firms that bundle loans into securities for sale should be required to keep part of those securities, Greenspan said in prepared testimony to the House Committee on Oversight and Government Reform. Bloomberg reported on his testimony. Other rules should address fraud and settlement of trades, he said. Greenspan's office released the text ahead of the hearing scheduled for 10 a.m. EDT in Washington.

Paul Volcker, Greenspan's predecessor, said at a New York conference Wednesday that "We are really going to have to rebuild this system from the ground up." Volcker said the creation of complex financial products "instead of spreading the risk and creating transparency" wound up concentrating risk and "opaqueness." Volcker, 81, said the current crisis is more complex than any other in U.S. history.

House Financial Services Committee Chairman Barney Frank called this week for a freeze on executive bonuses and other stronger regulation of Wall Street, following passage of a $700 billion rescue plan for financial institutions. Frank said in a hearing in February that Greenspan "erred" in "his view that regulation was almost never required." Greenspan "often told us" that there were two options: "I can either deflate the entire economy or I can let the problems continue," Frank said. SEC Chairman Christopher Cox and former Treasury Secretary John Snow are also scheduled to appear at the House committee hearing today.

Meanwhile, Neel Kashkari, the interim head of the government's $700 billion rescue effort, and other government officials are scheduled to testify before the Senate Banking Committee about their plans for implementing the massive program. Lawmakers in particular want government officials to explain why the emphasis in the rescue package has switched from a program that initially was aimed at buying billions of dollars of troubled mortgage-related assets from banks as a way to spur them to resume more normal lending. A week ago, Treasury Secretary Henry Paulson announced that the program now would have as a major component the purchase by the government of $250 billion in stock in hundreds of U.S. banks, including $125 billion that would go to nine of the largest institutions.

Paulson has said that the fast-moving nature of the crisis convinced him that money needed to get out more quickly as a way to encourage banks to start lending again. But questions have been raised about whether the huge infusion of government money will actually spur more lending, especially after several banks have said they planned to employ the new capital to help finance purchases of weaker rivals.

The Bush administration is weighing a roughly $40 billion proposal to help forestall housing foreclosures, one of a series of ideas under consideration to address the root causes of the financial crisis according to a Wall Street Journal report. FDIC Chairman Sheila Bair is expected to suggest at a Senate Banking Committee hearing today the government give banks a financial incentive to turn troubled loans into more-affordable mortgages, the paper said citing a person familiar with her testimony.

In economic news Thursday, U.S. initial jobless claims jumped 15,000 to 478,000 in the week ended Oct. 18, from a revised 463,000 the week before (461,000 previously). The four-week moving average slipped to 480,250 versus 484,750.

U.S. foreclosure activity in September rose 21% from a year earlier but fell by double-digits from the prior month as some state laws slowed the foreclosure process, according to a monthly report by research firm RealtyTrac.

Goldman Sachs (GS) plans to cut about 3,260 jobs, a source familiar with the matter said. That represents about 10% of the total staff of the New York-based bank, the source said. Reuters said the bank has so far suffered the least damage in its peer group in the global financial crisis and it remains the leading adviser to mergers and initial public offerings worldwide. But its transition from an investment bank to a traditional bank holding company means the Federal Reserve will use its new regulatory authority to limit the bank's risk taking and encourage longer-maturity funding. Analysts expect Goldman to shrink businesses in prime brokerage and securitization.

The Swedish Central Bank -- the Riksbank -- lowered its repo rate by 50 bp to 3.75% at today's meeting, a larger cut than the 25 bp consensus forecast. The central bank said the repo rate is likely to be cut by another 50 bp over the next 6 months. The bank has cut rates by 100 bp this month after hiking 25 bp in September. The Riksbank revised down its rate path and now sees the repo rate bottoming around 3.2% by the end of 2009. The Bank revised down its GDP forecast to 1.2% and 0.1% for 2008 and 2009 respectively, from 1.4% and 0.8% in September, while CPI is now expected to average 2.1% next year, compared to a 3.2% forecast earlier.

In other U.S. markets Thursday, Treasury yields continue to roll downhill as the bounce in jobless claims will do little to cure the dark mood hanging over the equity market, says Action Economics. The 10-year yield was down 8 basis points from overnight highs and testing the 3.55% level.

The dollar index was up 0.24 to 85.68.

Energy futures, which were solidly higher overnight, turned mixed as stocks were indicated to open lower. December West Texas Intermediate crude oil futures, which hit a $68.50 high earlier, were up 19 cents to $66.94 per barrel. Volatile trading was expected as OPEC officials arrived in Vienna for Friday's special meeting. The cartel is expected to reduce production to stem a steep decline in prices the past three months, with the consensus forecast calling for a cut of 1 million barrels. But Iran is pushing for a 2 million barrel cut.

December gold futures were off $24.50 to $710.70 per ounce as the dollar index rose against sterling and the euro. Action Economics reports broad based deleveraging by Asian fund names and short term investors. The move was in line with losses in other base metals and commodities as fears over the global growth outlook continued to encourage selling pressure.

Among Thursday's stocks in the news, Amazon.com (AMZN) reported third-quarter EPS of 27 cents, vs. 19 cents one year earlier, on a 31% sales rise. The company sees fourth-quarter operating income between $145-$305 million (-46% to +13% year-over-year) on sales of $6-$7 billion (+6% to +23%). Amazon now expects 2008 operating income of $716-$876 million on sales of $18.46-$19.46 billion.

Amgen (AMGN) reported third-quarter adjusted EPS of $1.23, vs. $1.08 one year earlier, on a 7% total revenue rise. GAAP EPS was $1.09; reflecting write-offs of $590 million of acquired in-process R&D. Amgen raised its 2008 revenue guidance to $14.9-$15.2 billion from $14.6-$14.9 billion, and adjusted EPS to $4.45-$4.55 from $4.25-$4.45.

Potash Corp. (POT) reported third-quarter EPS of $3.93 vs. 75 cents one year earlier, on sharply higher sales. Using a locked in C$/US$ exchange rate of $1.10, Potash expects 2008 EPS to be at the low end of the company's previously provided guidance range, with possible variance of 2% in either direction.

Allstate Corp. (ALL) reported a third-quarter operating loss of 35 cents per share, vs. $1.54 operating EPS one year earlier, on a 19% revenue decline and $1.8 billion in catastrophe losses. Wall Street was looking for 72 cents EPS. The company suspended its $2 billion stock buyback plan.

United Parcel Service (UPS) posted third-quarter EPS of 96 cents, vs. $1.05 one year earlier, as higher operating expenses offset a 7.4% revenue rise. Wall Street was looking for 89 cents EPS in the third quarter. UPS said it anticipates a challenging environment for a number of quarters going forward, and believes the U.S. consumer will be very conservative with spending this year. UPS still expects 2008 EPS will be toward the lower end of the $3.50-$3.70 range provided mid-year.

Altria Group (MO) posted third-quarter adjusted EPS from operations of 46 cents, vs. 40 cents one year earlier, on a 5% revenue rise. The company reaffirmed its 2008 adjusted EPS from continuing operations guidance of $1.63-$1.67.

Dow Chemical (DOW) posted third-quarter EPS of 46 cents, vs. 42 cents one year earlier, on a 13% sales rise. The company posted 60 cents third quarter EPS excluding certain items. Wall Street was looking for 57 cents. Dow says it's well positioned to weather this increasingly difficult economic downturn, as it has a strong balance sheet, and is accelerating its focus on what it can control, namely costs and capital, asset restructuring, and other interventions.

Starwood Hotels & Resorts (HOT) posted third-quarter EPS before special items of 71 cents, vs. 68 cents one year earlier, on flat revenues. The company notes margins at Starwood branded same-store owned hotels worldwide and in North America decreased 208 and 151 basis points, respectively, vs. the year-earlier quarter. The company sees EPS before special items of 36-42 cents for the fourth quarter and $2.07-$2.13 for 2008. It said that given significant uncertainty in the global economy, it is very difficult to provide any definitive guidance looking out four quarters, but Starwood did forecast $1.55 2009 EPS.

Xerox Corp. (XRX) posted third-quarter EPS of 29 cents, vs. 27 cents one year earlier, on a 2% revenue rise. The company said it will take a pre-tax restructuring charge of approximately $400 million, or 31 cents a share, in the fourth quarter to accelerate its cost-reduction activities on a global basis. Excluding the charge, Xerox sees fourth-quarter non-GAAP EPS of 34-36 cents. The company believes operational efficiencies it will gain from restructuring actions in the fourth quarter will position it to deliver double-digit EPS growth in 2009.

Eli Lilly (LLY) posted third-quarter pro forma non-GAAP EPS of $1.04, vs. 91 cents one year earlier, on a 14% sales rise. Lilly posted a 43-cent third-quarter loss per share when including $1.477 billion in charges related to pending Zyprexa investigations. Excluding significant items, the company raised its its 2008 pro forma non-GAAP EPS guidance to $3.97-$4.02 from $3.85-$4.00.

Focus Stock: General Mills, a Top Pick for Tough Times

In a difficult economic environment, we expect General Mills (GIS; recent price, $65)—the name behind well-known brands like Cheerios, Betty Crocker, and Green Giant—to benefit from a shift toward cost-conscious consumers eating more at home. This should particularly help the packaged food giant's product categories such as cereal and soup, which offer relatively inexpensive per-serving costs to consumers. We expect that the company's marketing support of its diversified portfolio of brands will help General Mills to withstand competition from lower-priced private-label competitors.

Given concerns about economic weakness ahead, we expect this stock to benefit from investors seeking defensive or lower-risk shares. Also, we look for the company's important U.S. retail segment to benefit from consumers eating more at home. We believe the company has opportunities to bolster longer-term profit margins through a focus on such areas as manufacturing and spending efficiency, global sourcing, and sales mix. We look for the company to generate future free cash flow, with at least a portion being used for dividends and stock repurchases. Also, we see as positive the company's S&P Quality Ranking of A-, which reflects a solid record of historical stability and/or growth of earnings and dividends.

Based on our 12-month target price of $78, General Mills shares have prospective upside of about 20% from recent levels. Factoring in the stock's recent indicated dividend yield of about 2.7%, we have a 5 STARS (strong buy) recommendation on the shares.
COMPANY PROFILE

General Mills is the second-largest U.S. producer of ready-to-eat breakfast cereals, and a leading producer of other well-known packaged consumer foods. The U.S. Retail segment, which accounted for 66% of net sales in fiscal 2008 (May), consists of cereals, meals, refrigerated and frozen dough products, baking products, snacks, yogurt, and organic foods. The bakeries and food service segment (15%) consists of products marketed to retail and wholesale bakeries and offered to commercial and noncommercial food service sectors throughout the U.S. and Canada, such as restaurants and businesses and school cafeterias. The international segment (19%) includes retail business and U.S. and food service business outside of the U.S. and Canada.

Major cereal brands include Cheerios, Wheaties, Lucky Charms, Total, and Chex cereals. Other consumer packaged food products include baking mixes (e.g., Betty Crocker, Bisquick); dry dinners; Progresso soups, Green Giant canned and frozen vegetables; snacks; Pillsbury refrigerated and frozen dough products, frozen pizza; Yoplait and Colombo yogurt; Haagen-Dazs ice cream; and Cascadian Farm and Muir Glen organic products. Some products may be marketed under licensing arrangements with other parties. General Mills also has a grain merchandising operation that holds inventories carried at fair market value, and uses derivatives to hedge its net inventory position and minimize its market exposures.

During fiscal 2008, Wal-Mart Stores (WMT) (or affiliates) accounted for 19% of General Mills' consolidated net sales.

General Mills' joint ventures include a 50% equity interest in Cereal Partners Worldwide (CPW), a joint venture with Nestlé that manufactures and markets cereal products outside the U.S. and Canada; and 50% equity interests in some Asian-related joint ventures for the manufacture, distribution, and marketing of Haagen-Dazs frozen ice cream products and novelties.

Unconsolidated joint ventures, which are reflected in General Mills' financial statements on an equity accounting basis, contributed an aggregate of after-tax income of $111 million in fiscal 2008, up from $73 million in after-tax income in fiscal 2007. This includes a net benefit of $8.2 million from restructuring, impairment, and other exit-related items in fiscal 2008, vs. a negative impact of $8.2 million in fiscal 2007. In July 2006, the company's CPW joint venture acquired the Uncle Tobys cereal business in Australia for about $385 million. General Mills funded 50% of the purchase price.
CORPORATE STRATEGY

We see longer-term growth opportunities, including new products and international expansion. We expect efforts will be made to expand gross margins in the U.S. retail business, including opportunities for increasing the mix of higher-margin products, trade spending efficiency, discontinuing less attractive products, investment in technology, and global sourcing. In the international business, we expect General Mills to seek profit improvement in emerging markets and a leveraging of its infrastructure.

In September 2008, General Mills sold its Pop Secret microwave popcorn business to Diamond Foods, (DMND) for a price that was expected to be $190 million, subject to adjustment. General Mills said that it expected to receive pretax cash proceeds, net of transaction-related costs, of about $160 million. Also, General Mills said that it expected to have a pretax gain of about $130 million on the sale in the fiscal 2009 second quarter.

Also during the first quarter of fiscal 2009, General Mills acquired Humm Foods, the maker of Larabar fruit and nut energy bars. In the transaction, General Mills issued 0.9 million shares of common stock, valued at $55 million.
FINANCIAL TRENDS

In the first quarter of fiscal 2009, General Mills repurchased 8.2 million shares of common stock for an aggregate purchase price of $519.2 million. In all of fiscal 2008, General Mills repurchased about 23.6 million shares of its common stock for $1.368 billion.

In fiscal 2008, General Mills had costs related to restructuring, impairment and other exit costs totaling $21 million (pretax), and another $18 million of associated costs. In fiscal 2007, the company had $39 million of restructuring, impairment, and other exit costs. Also, in recent years, there have also been other restructuring expenses related to a joint venture in Britain.

In fiscal 2008, General Mills reported earnings per s hare of $3.71, which included a $0.10 a share net benefit related to mark-to-market valuation of certain commodity positions, and a $0.09 per share benefit from reduction of a tax reserve. If these two items are excluded, fiscal 2008 EPS totaled $3.52. Also, fiscal 2008's second quarter included an asset sale gain of about $0.02 a share.
FINANCIAL OUTLOOK

In fiscal 2009, we look for net sales to advance about 11% from the $13.7 billion reported for fiscal 2008, with higher pricing, and bolstered by investments in consumer marketing and product innovation. We also expect sales to receive a boost from a 53rd week in the fiscal year.

We expect margin pressure from ingredient costs, but we think operating margins will receive support from a combination of productivity gains and higher prices.

Also, we think General Mills could benefit, over time, from declines in commodity costs. However, because the company does a significant amount of commodity cost hedging, we do not expect General Mills' manufacturing margins to fully benefit from declines in agricultural commodity prices that have occurred over the past several months.

Excluding some special items, such as impact from mark-to-market valuations related to commodity positions, and an expected gain from the sale of General Mills' Pop Secret microwave popcorn business, we look for fiscal 2009 EPS of $3.90, up from $3.52 for fiscal 2008. In fiscal 2009's first quarter, General Mills had a negative impact of $0.17 a share from mark-to-market valuation of certain commodity positions.

Included in our EPS estimate for fiscal 2009 are expenses related to restructuring, impairment, and other exit costs. In fiscal 2010, we estimate EPS of $4.20.
VALUATION

Our 12-month target price of $78 reflects about an 11% premium over the price-earnings ratio we project, on average, for other food stocks. We believe this valuation is merited by the stock's defensive appeal in a relatively weak economic environment, the company's impressive group of brands, its growth prospects, and its ability to generate cash.

General Mills shares recently had an indicated dividend yield of 2.7%. The quarterly dividend has been raised twice in 2008.
CORPORATE GOVERNANCE

Overall, we have a favorable view of the company's corporate governance practices.

The chief executive officer and chairman positions at General Mills are both held by Kendall Powell, who joined the company in 1979. We would prefer to see the chairman and CEO positions separated, and held by two different people, but we do not anticipate the current management structure being a major problem.

We like that stockholders elect all directors annually. Also, the board has adopted criteria for independence based on those established by the New York Stock Exchange, and all board committees are composed entirely of independent, non-employee directors.
INVESTMENT RISKS

Risks to our recommendation and target price include competitive pressures, disappointing consumer acceptance of new products, higher-than-expected commodity cost inflation, and an inability to achieve sales and earnings growth forecasts.

Also, a strengthening U.S. dollar could have a negative impact on the foreign currency translation of General Mills' foreign sales and profits.

Arbeter: The Key Ingredient for a Stock Rally

We continue to see mounting technical evidence that a major market low is near as there was more unprecedented readings from a sentiment and market internal basis last week. However, the most important piece of the market forecasting puzzle is still lacking, and that is major price gains on strong volume on a more consistent basis. Clearly, there is tremendous fear about stocks, credit markets, and the economy, and there is also strong evidence that things are washed out from an internal viewpoint, but we still need to see institutions stepping up to the plate and swinging.

From a sentiment standpoint, we believe we need to see extreme levels of fear considering the horrendous news flow, and that is just what we have been witnessing. The weekly readings from Investor’s Intelligence were pretty staggering: only 22.4% bulls and a whopping 52.9% bears. This is the lowest percentage of bulls since late 1988, and one of the lowest readings in the history of the data, which goes all the way back to the late 1960’s. It is also the highest percentage of bearish sentiment since December 1994, just before the market took off. The difference between bulls and bears is a staggering 30.5 percentage points favoring the bears, the most one-sided that newsletter writers have been since December 1988, which was also not a bad time to be putting funds back into stocks. Bulls divided by bears has fallen to 42%, also the lowest and most bearish since late 1988.

We can slice and dice the data all we want, but the clear conclusion is that newsletter writers are extremely bearish, and many times, that has been a good, but early sign, that stocks may be near the bottom.

Taking a look at other sentiment polls shows similar levels of fear and anxiety. The Consensus poll measures the attitudes and positions of an extensive mix of both brokerage house analysts and independent advisory services (they have several hundred contributors). The data covers a broad spectrum of approaches to the market, including fundamental, technical and cyclical. Just a week ago, bullish sentiment on the Consensus poll fell to 21%, matching the level last seen in May 2002. The American Association of Individual Investor’s poll showed only 31.5% bulls and a whopping 60.8% bears. This was the greatest percentage of bears since October 1990, right near the bottom of that bear market.

In our view, the lack of upside follow through on a price basis is keeping many sentiment indicators at extreme pessimistic levels. We need sentiment to begin improve, but many times this does not occur until we start seeing some strong price gains in the market. It’s like a big circle, but once it happens, the upside reversal can be quite powerful, because everyone is caught on the wrong side of fence.

One way to forecast whether fear is peaking is to look at chart formations and near-term price action of the volatility indexes. First, slopes of the indexes (VIX, VXO, VXN, and QQV) got very steep going into the bear market low on October 10. Many times, after an index or stock has been in a powerful uptrend, the last rally can be described as asymptotic. Stock prices were going straight down, forcing option premiums through the roof, and sending volatility indexes to the moon. To illustrate, the 10-day price rate-of-change (ROC) on the VIX (ending 10/10) was 101%, the highest since September 2001, and was the second highest in the history of the data. Whether prices are moving up or down, this kind of slope is simply unsustainable.

Secondly, the volatility indexes have become extremely overbought on both a daily and weekly basis. This does not automatically mean that these indexes have to start pulling back immediately, but it does suggest that we have seen a peak in momentum, and that a top may not be far behind (and a market bottom is near). Third, there have been some days recently where the indexes have closed well off their highs, tracing out candlestick formations known as an inverted hammer. These patterns have long upper shadows, and after a big move to the upside, suggest that the trend is faltering. The VXO has traced out an island reversal, gapping higher on October 10, and then closing below the gap. This is also a potential sign of a top. In our view, it would be very bullish for stocks if the volatility indexes started to correct, and would be a sign that fear is finally starting to dissipate.

From an internal standpoint, things are just plain ugly. The percentage of NYSE stocks hitting new 52-week lows soared to 88% on October 10, an all-time high. The same reading on the Nasdaq rose to 49% last Friday, and incredibly, wiped out levels seen during the great technology bear market in 2001 and 2002. The NYSE down volume/up volume ratio hit 44:1 on October 15, one of the worst readings in the last forty years. Stocks have been thrown out with indiscriminate selling, and while this is somewhat rare, we think it creates opportunities as there appears to be a real disconnect between stock prices and their fundamentals.

Oil remains in a major decline but has dropped to an area of long-term support. There is a layer of chart support between $55 and $77. In addition, a long-term trendline sits in the low $70's. This trendline has supported the market since 2001, so it is of major importance. Prices are extremely oversold, with prices 27% below the 65-week exponential average, the greatest since early 2002. The next support from a Fibonacci standpoint is a 61.6% retracement that targets the mid $60's. If the mid-60's level is taken out, we would seriously question whether crude oil is still in a secular bull market.

Shorter term, we think there is the potential for a positive momentum divergence on the daily chart, many times seen near market lows. Steepness of decline recently suggests panic selling. Sentiment has fallen to an extreme bearish level not seen since 2003. Overall, we think a bottom is near but that it could take many months of basing before things can reverse to the upside.

Stocks Trade Lower

U.S. stocks were lower in slow trading Tuesday afternoon amid some profit taking after There was some volatility tied to a mixed bag of earnings reports, including some disappointing tech-sector results. Investor Kirk Kerkorian also liquidated the bulk of his Ford Motor Co. (F) holdings. Energy stocks were lower as oil futures skidded on economic slowdown worries and an expected increase in U.S. petroleum inventories.

Traders were also keeping an eye on credit default swap (CDS) settlements for Lehman Brothers' and WaMu.

S&P MarketScope notes that many advisers say equity prices are unusually attractive and many hedge funds, believing the market is at a bottom, are becoming fully invested in stocks. But other observers remain bearish.

Many market players say the market has discounted a recession, notes S&P MarketScope. But some economists say this recession will be steeper and longer than many anticipated, as the U.S. financial crisis -- and economic slowdown -- have become global.

Bond prices were sharply higher amid the weakness in equities. The U.S. dollar index was surging. Gold futures were lower, while oil futures fell.

At around 3:10 p.m. ET Tuesday, the Dow Jones industrial average was lower by 38.23 points at 9,227.20. The S&P 500 index fell 6.84 points to 978.56. The tech-heavy Nasdaq composite index shed 32.11 points to 1,737.92.

On the New York Stock Exchange, 18 stocks fell in price for every 13 that gained. The ratio on the Nasdaq was 17-10 negative.

Lehman Brothers' credit default swaps worth hundreds of billions of dollars came due Tuesday. According to the Depository Trust & Clearing Corporation, the liquidation process for forward open commitments involving Lehman's CDS settlements has been completed. The FICC announced that "no loss allocations will be imposed on MBSD member firms as a result of the liquidations of these forward trades."

"So it looks as though there was no major fallout from the settlement to member firms," wrote Action Economics analysts in a website posting Tuesday. "We'll have to wait to see if there was a broader market impact, however."

The New York Times reported Monday that New York State and federal prosecutors are investigating trading in credit-default swaps, the insurance like securities that have come under close scrutiny for their role in the financial crisis.

Kirk Kerkorian's Tracinda Corp on Monday sold 7.3 million Ford shares at an average $2.43 price, and intends to further reduce its remaining 135.5 million shares (6.09% of the total outstanding).

Fedspeak is due from Minneapolis Fed President Gary Stern on "Policy and the Economy in the Wake of the Shock" but the dinner speech will be well after the market close and won't be a factor this session, says Action Economics.

Treasury Secretary Henry Paulson will discuss "China and the Global Economy" before a U.S.-China Annual Gala in New York City Tuesday evening.

On Tuesday, the Fed announced the creation of the Money Market Investor Funding Facility (MMIFF), which will support a private-sector initiative designed to provide liquidity to U.S. money market investors. Under the MMIFF, the New York Fed will provide senior secured funding to a series of special purpose vehicles to facilitate an industry-supported private-sector initiative to finance the purchase of eligible assets from eligible investors. Eligible assets will include U.S. dollar-denominated certificates of deposit and commercial paper issued by highly rated financial institutions and having remaining maturities of 90 days or less. Eligible investors will include U.S. money market mutual funds and over time may include other U.S. money market investors.

The Fed said "short-term debt markets have been under considerable strain in recent weeks as money market mutual funds and other investors have had difficulty selling assets to satisfy redemption requests and meet portfolio rebalancing needs. By facilitating the sales of money market instruments in the secondary market, the MMIFF should improve the liquidity position of money market investors, thus increasing their ability to meet any further redemption requests and their willingness to invest in money market instruments. Improved money market conditions will enhance the ability of banks and other financial intermediaries to accommodate the credit needs of businesses and households."

Reuters reports the interbank cost of borrowing dollars, euros and sterling fell across all maturites on Tuesday, the British Bankers' Association's daily fixing showed. Dollar overnight rates were fixed below the Federal Reserve's 1.5% target for its federal funds rate, and overnight euros were fixed further below the European Central Bank's 3.75% target. The spread of three-month London interbank offered rates over OIS rates for all three currencies narrowed.

U.S. ICSC-UBS chain store sales index fell 1.6% in the week ended October 18, after a 0.7% increase the week before. On a weekly, year-over-year basis, sales slowed to a 0.9% rate versus 1.0% previously. The month-to-date, year-over-year pace was steady at 0.6%. The ongoing turmoil in the financial markets and the jagged moves in stocks has tempered consumption, even as gas prices have fallen sharply, notes Action Economics.

There are no other significant economic reports scheduled for release Tuesday.

In markets outside the U.S. Tuesday, London stocks fell 1.24%, Frankfurt stocks fell 1.05%, but Paris stocks rose 0.78%. Tokyo stocks rose 3.34%, Hong Kong stocks fell 1.84%, and Shanghai stocks fell 0.78%.

Treasuries were higher after a subdued, fairly normal overnight trade. The 10-year note was higher in price at 102-15/32 for a yield of 3.705%, while the 30-year bond was higher at 105-07/32 for a yield of 4.195%.

The U.S. dollar index was up 1.19 to 84.16 amid reports global banks are picking up the U.S. currency for their funding needs. Reuters says Bernanke's conditional endorsement of a second U.S. economic stimulus plan boosted the buck even though the concept would require the Washington issuing more debt.

After dipping to lows of $69.77 earlier in the session, November West Texas Intermediate crude oil futures traded at $70.68 Tuesday afternoon, down $3.57 per barrel on the day.

Among Tuesday's stocks in the news, Texas Instruments (TXN) reported third-quarter earnings per share (EPS) of 43 cents, vs. 54 cents one year earlier, on a 7.4% revenue decline. The company said revenue was weak because consumers and corporations reduced their spending. TI expects fourth quarter revenue to decline substantially based on weak order trends. The company will reduce annual expenses by more than $200 million in its Wireless business, especially in its cellular baseband operation, and is pursuing the sale of the merchant portion of this operation. Deutsche Bank reportedly downgraded the shares to hold from buy.

American Express (AXP) posted better-than-expected third-quarter EPS from continuing operations of 74 cents, vs. 94 cents one year earlier, as slowing growth in Cardmember spending, moderating lending volumes, and significant additions to loan loss reserves offset a 3% revenue rise. Wall Street was looking for EPS of 59 cents. AmEx said it will reduce operating costs and staffing levels, and will record a related charge in the fourth quarter.

DuPont (DD) posted third-quarter EPS of 56 cents, vs. 59 cents (excluding items) one year earlier, as higher costs and expenses offset a 9.3% sales rise. DuPont sees fourth-quarter EPS of 20-25 cents, which reflects continuing hurricane-related business interruption impacts of about 10 cents and expected weakening demand in North American and Western European markets. The company cut its $3.45-$3.55 2008 EPS guidance to $3.25-$3.30.

3M Co. (MMM) posted third-quarter EPS of $1.42, vs. $1.29 one year earlier (both excluding special items), on a 6.2% revenue rise. The company sees $5.40-$5.48 2008 EPS (excluding special items).

Caterpillar (CAT) reported third-quarter EPS of $1.39, vs. $1.40 one year earlier, as slightly higher operating expenses offset a 13% revenue rise. The company continues to expect 2008 sales and revenue to be more than $50 billion and EPS of about $6.00. It expects 2009 sales and revenue to be flat with 2008. Overall, Caterpillar says it expects world economic growth will slow from 3.8% in 2007 to 2.8% in 2008.

Pfizer (PFE) reported third-quarter adjusted EPS of 62 cents, vs. 58 cents one year earlier, on a 2% rise in adjusted revenues. Based on year-to-date performance, and the outlook for the remainder of 2008, Pfizer raised the lower end of its 2008 revenue guidance range to $48 billion-$49 billion from $47 billion-$49 billion.

Freeport-McMoRan Copper & Gold (FCX) reported third-quarter EPS of $1.31, vs. $1.87 one year earlier, on an 8.9% revenue decline amid lower copper prices. The company said it is revising its operating plans to target reductions in costs, defer or eliminate capital projects, defer exploration expenditures and potentially curtail production at high-cost operations given weaken industry and economic conditions.

Fifth Third Bancorp (FITB) post ed a third-quarter loss per share of 14 cents, vs. 61 cents EPS one year earlier, as higher credit costs and market valuation adjustments offset a 41% rise in net interest income.

Stocks: The Lost Earnings Season

For stock investors, this earnings season is turning into the lost quarter.

This month, companies began unveiling their results from the 2008 third quarter, which included July, August, and September. And the next couple of weeks will be especially busy, with 136 members of the large-cap Standard & Poor's 500-stock index reporting earnings during the week of Oct. 20, and another 114 firms the following week.

Investors are watching earnings results closely, desperate for some insight into an economy at a crucial tipping point. "We're really trying to get a handle on to what degree the economy is beginning to falter," says Robert Bacarella, portfolio manager at Monetta Mutual Funds.
Outlook is Hazy

But the problem, many professional investors say, is that the earnings outlook is just too hazy to provide much useful information this quarter. At the very moment when investors are desperate for certainty, companies' financial results from July and August—before the worst of the credit crunch hit—seem irrelevant.

Instead, many investors are listening to executives give their quarterly updates on future business conditions. However, many company management teams seem as confused as investors. Their statements are vague, and they don't sound confident in past predictions.

Credit problems and financial turmoil have been on investors' minds for more than a year, but credit shocks started hitting the economy in full force in the second half of September. Those troubles, which started with the failures of Lehman Brothers (LEH) and the bailout of insurer American International Group (AIG), have certainly shown up in early third quarter results.
Merrill Results Disappointing

According to Thomson Reuters, third quarter earnings for the S&P 500 are expected to fall 9.1% from a year ago. That includes both actual results from the 82 companies that have reported, and analyst estimates for the remaining companies.

Three weeks ago, on Oct. 1, analysts were predicting S&P 500 earnings would fall only 4.8% from a year ago. Financial firms are partly to blame for the falling estimates. For example, Merrill Lynch (MER) on Oct. 16 reported a loss of $5.56 per share, while analysts were expecting a $5.22-per-share loss.

The stock market usually looks ahead, trying to predict future earnings. So firms' profits or losses from the summer— before the financial crisis heated up—will generally be ignored.
Conference Calls Give Clues

However, says David Chalupnik, head of equities at U.S. Bancorp Asset Management (USB), financial earnings are an exception. He's watching bank earnings very closely to make sure, when it comes to credit losses, "they don't blow up." So far, they haven't. "Expectations are very low," Chalupnik says.

More financial earnings arrive soon from financial outfits National City (NCC) and Fifth Third Bancorp (FITB), both on Oct. 21.

For most other sectors, the focus is not on quarterly financial results, but on what executives say in conference calls after the numbers are released. Chief executives and chief financial officers are being quizzed on what they expect for the fourth quarter and especially from 2009. "People are really mostly focused on next year," says John Thornton, portfolio manager at the Stephens Small Cap growth and Mid Cap Growth Funds.
Credit Crunch Sinking In

However, so far execs aren't giving investors what they want. "They're vague," Bacarella says. They're saying, "'It's very hard for us to forecast,'" he adds. "They themselves are not sure."

Companies are only beginning to feel the impact of the credit crunch and a slowing U.S. and global economy. "Management teams are going to be pretty cautious and pretty hazy," Thornton says.

According to Thomson Reuters, industry analysts currently expect 2009 earnings for the S&P 500 to rise almost 20% from 2008 levels. For Chalupnik, this is "wildly optimistic." He expects earnings to fall next year as the U.S. slips into recession. Many other investors seem to agree: The S&P 500 is down more than 20% in the past month.
Energy Outfits Feeling the Pain

Financial firms aren't the only area of concern for equity investors. Earnings at energy and material firms are expected to suffer from the fall in commodity prices. "People are very nervous about energy fundamentals," Thornton says. On the other hand, a firm like DuPont (DD), due to report earnings on Oct. 21, could benefit from lower oil prices because its costs for raw materials will fall but could suffer from a U.S. recession.

Tech firm executives should be worried that a U.S. recession slows spending on technology by corporations. Apple (APPL) is due to report earnings on Oct. 21, while Microsoft (MSFT) reports on Oct. 23.

Expectations for consumer firms "have dropped off a cliff," Chalupnik says. September U.S. retail sales fell 1.2%, twice the decline economists were expecting. Earnings are due from Coach (COH) on Oct. 21, from Amazon.com (AMZN) on Oct. 22, and from RadioShack Corporation (RSH) on Oct. 23.
Eyeing Export Sales

It's not just the U.S. economy and American consumers that are raising concerns. Investors are scrutinizing earnings releases for clues as to the direction of the world economy.

For years, industrial firms like Caterpillar (CAT), which reports Oct. 21, and Ingersoll Rand (IR), due Oct. 24, have profited from brisk product sales abroad. "People are going to be looking for signs of how much international is really slowing," Thornton says.

Everywhere investors turn, they seem to find big uncertainties. "It's going to be rough for the next two quarters," says Peter Cardillo, chief market economist at Avalon Partners. "The economy is under pressure."

How are profits being affected by the credit crunch, falling commodity prices, weak business and consumer spending, and a slowing world economy? Third-quarter results may only provide the faintest of clues. But those clues will still be seized upon by investors desperate for answers.

Short-Sellers: Unfairly Targeted in the Market Crisis?

As the panicked selling in equities markets around the world has accelerated over the past two weeks, there have been several attempts to slow the process, including the temporary suspension of trading on stock exchanges from Moscow to Milan. In the U.S., the Securities & Exchange Commission banned short-selling—bets that shares of certain companies would fall—on a list of more than 800 financial stocks whose balance sheets have exposure to risky mortgage-backed securities and other distressed products.

When the ban, which lasted 13 trading days, was lifted on Oct. 9, it signaled a return to business as usual for the financial sector. Shares of Morgan Stanley (MS), one of the last-standing investment banks, which recently became a bank holding company subject to tighter government regulation, sold off with a vengeance, finishing almost 26% lower on Oct. 9 and dropping an additional 24% on Oct. 10. Insurance stocks such as Prudential Financial (PRU) and Hartford Financial Services Group (HIG) were also among the biggest losers on Oct. 9.

Whether the ban had the intended effect remains open to debate, given the 21.5% drop in the Standard & Poor's 500-stock index from the market close on Sept. 19, before the ban took effect, through its last day, Oct. 8. And the nearly 33% plunge during the same period in the KBW Bank Index (BKX), which has a much closer correlation with the 800 names traders were prohibited from shorting, is enough to make one think regulators were trying to pin blame for the extended sell-off in financial stocks on the wrong people.
Cover for the SEC?

Some market strategists think the ban was nothing but political cover for the SEC to show it was paying attention. In reality, the regulator has been behind the curve in reining in dubious financial reporting practices by the major financial institutions, which helped create the current crisis. By preventing short-selling for two and a half weeks, the SEC disrupted "a legitimate way for investors to convey information to the market" about the pricing of stocks, says Gerald Buetow, managing director of Portfolio Management Consultants, the investment arm of Envestnet . If anything, the ban on selling short seems to have exacerbated market volatility by depressing trades in the options market and forcing investors who couldn't hedge their long stock positions to take offsetting options to sell their stocks.

The market-makers who provide much of the liquidity in the options market curtailed their selling of options on financial stocks during the ban because they couldn't cover themselves by selling short, says Peter Bottini, executive vice-president for trading at optionsXpress (OXPS) in Chicago. He thought they would jump right back in after the ban ended, but that hasn't occurred. That's probably because the key liquidity providers tend to be the options desks at the larger banks, whose shortage of cash isn't allowing them to play that role right now. That's one driver, he believes, of the unprecedented volatility in the equities market at the end of this week. The Chicago Board Options Exchange Volatility Index (VIX) soared 20%, to a record-high 76.94 on Oct. 10 before sliding back to close just under 70.

For those who are determined to drive down the price of a stock, there are far more effective and less costly ways to do so than by selling short, says Buetow at Portfolio Management Consultants.

"If you're a big player, you'd go into the derivatives market because you can do it with far more anonymity," as well as by being able to use more credit than cash to put on a much larger number of positions, he says.
Averting Government Regulation

Perhaps most toxic among those derivatives are credit default swaps, the contracts that investors buy as insurance against a bank or other financial institution defaulting on the debt the investor has bought. What's quickly become apparent with the cascade of corporate bailouts and bankruptcy filings over the past month is that none of the financial firms selling credit default swaps has adequate capital reserves to cover these insurance policies if the companies whose debt they guaranteed fail. By calling them swaps instead of insurance, the investment banks that created them were able to avert government regulation.

The widening of bid-ask spreads on credit default swaps shows that the market is pricing in a bigger chance of companies' defaulting on their debt, and that's prompting portfolio managers to dump those stocks. "That's what drove the sell-off, not short-sales," says Buetow. "Those spreads [on the CDSs] in hindsight are turning out to be pretty accurate. For the financial institutions, spreads widened as much as they did because people started understanding how weak their balance sheets were and saw a bigger chance of default."

George Feiger, chairman of Contango Capital Advisors, a subsidiary of Zions Bancorp (ZION) in San Francisco, describes the relentless selling over the past two weeks as a spiral of doom, where each effort to get cash forces down asset prices, triggers margin calls for other players, and precipitates further selling. "If this spiral of doom wasn't happening, you wouldn't make any money being a short-seller," says Feiger. Those who blame the short-sellers for the sell-off are "mistaking the symptom for the disease."
OTC Derivatives on the Way Out

To ensure this doesn't recur in the future, more transparency needs to be introduced to credit default swaps and other over-the-counter derivatives products that have been free to operate without regulatory oversight, market strategists say. The Federal Reserve is working with CME Group (CME), the owner of the Chicago Mercantile Exchange, and others to create an electronic trading platform for credit default swaps, which would provide pricing information and eliminate counterparty risk by taking on that role. "Over-the-counter derivatives markets are essentially finished," says Feiger. "Who can trust anybody else?...Exchange-traded derivatives have the exchange as the counterparty, and the exchange has every incentive to mark to market immediately and to collect margin [collateral] immediately."

The real lesson of the financial crisis is that there has never been an effective mechanism for settling derivatives trades in bulk, he adds.

He believes the Federal Reserve and its partners will be able to get exchange-traded credit default swaps up and running within the next few weeks, since the International Swaps & Derivatives Association (ISDA) standardized CDS contracts last year. The creation of an exchange won't make the unwinding of all the existing swaps contracts any less painful, however, he adds.

The auction on Oct. 10 of more than $400 billion worth of Lehman Brothers' credit default swaps has revealed a little of how the market will value these products. The Lehman swaps ended up being pricing at 8.625 cents on the dollar, below the initial estimate of 9.75 cents on the dollar earlier that morning and well below the 12 to 13 cents originally expected. "Conversely, payout of the insurance on those contracts will be 91.375% by AIG, JPMorgan (JPM), Goldman Sachs (GS), Wachovia (WB), and RBS (RBS), among others," Action Economics said. If some of those institutions aren't able to come up with the cash required to settle those contracts this weekend, it could trigger a fresh wave of liquidation sales, much like Lehman's bankruptcy did.

Michael Wallace, global market strategist at Action Economics, sees the auction as the ultimate mark-to-market mechanism, revealing what buyers are truly willing to pay for these products. "It's discomfiting to see what these assets are returning, but the silver lining is we're seeing what these assets are returning," he says. "It's part of the cleanup, the transparency, you need to start to establish some normalcy again."

Jim Dunigan, chief investment officer at PNC Wealth Management (PNC) in Philadelphia, says he's not sure greater transparency around the pricing of derivatives contracts will reduce short-selling, but it would bring some structure and boundaries to the derivatives market.

Dow Jumps 938 Points after Historic Weekend

U.S. stocks, hammered recently in one of the worst sell-offs ever, were soaring Monday afternoon as global central banks and governments moved over the weekend to shape a rescue plan for troubled banks and economies.

Treasury futures were skidding, indicating bond yields were rising in reaction to the central bank movements that appear to have relieved panic that prevailed last week. The bond market, U.S. banks and government offices were closed Monday for the Columbus Day holiday.

The dollar index was lower as the euro and pound sterling rallied on central banks' moves to inject huge amounts of cash into their banking systems. Gold futures were plunging on hedge fund selling. Oil futures were higher on hopes banking efforts will revive global economies and boost demand.

At the close (as of 4:10 p.m. ET) Monday, the Dow Jones industrial average soared 938.89 points, or 11.11%, to 9,390.08 -- the biggest point gain ever and finally ending an eight-day losing streak. The S&P 500 index climbed 104.06 points, or 11.57%, to 1,003.28. The Nasdaq composite index rose 194.74 points, or 11.81%, to 1,844.25.

European indexes also rose sharply ater the Asian market surged overnight.

Governments across the world launched multi-billion dollar bailouts to shore up global banks. Britain called for a new Bretton Woods agreement to reshape the world financial system, according to Reuters. The slew of bank bailouts worth hundreds of billions of dollars were designed to stave off the world's worst financial crisis in nearly 80 years, accompanied by declining global economic growth and the threat of widespread recession.

"Only by global action can we fully restore the confidence that is needed and build the international financial order," said British Prime Minister Gordon Brown. He called on world leaders to create a new "financial architecture" to reflect the global reach of economics and banking, in much the same way that the current international economic system was set up at a conference in Bretton Woods, New Hampshire, in 1944.

After meetings of the G-7 and International Monetary Fund in Washington this past weekend, Western financial leaders sought to assure panicky bankers and money managers in no uncertain terms that all of the measures needed to halt a worldwide meltdown are in motion.

While short on the details many market analysts had hoped for, the broad brushstrokes of forceful, coordinated action by Western governments were unveiled: No more Lehman Brothers-like failures of major financial institutions will be allowed. All bank deposits will be guaranteed. The banking systems of the G-7 nations will be flooded with almost unlimited liquidity. And if all that fails, any other tool—regardless of how economically unorthodox—will be used if needed.

Also, five central banks -- including the U.S. Federal Reserve and the European Central Bank -- unveiled new measures to thaw frozen credit markets and bolster funding to banks. They joined the Bank of England, the European Central Bank and the Swiss National Bank in saying they would provide unlimited U.S. dollar funds to financial institutions. The Bank of Japan said it was considering similar measures.

According to a Wall Street Journal report, the Fed will begin providing unlimited dollar funding under its swap facilities with three major European central banks to ease strains in the financial markets. The European Central Bank, the Bank of England and the Swiss National Bank said in a joint statement that the terms of their respective currency swap arrangements with the Fed have been altered "to accommodate whatever quantity of U.S. dollar funding is demanded."

Treasury Secretary Henry Paulson has called the top U.S. banking heads to a meeting today in Washington, people familiar with the matter said. The 3 p.m. meeting is being called while most of the banking chiefs are in Washington for meetings of the World Bank and the International Monetary Fund.

Invited to attend were banking executives including Ken Lewis, CEO of Bank of America (BAC), Jamie Dimon, CEO of J.P. Morgan Chase (WMI), Lloyd Blankfein, CEO of Goldman Sachs Group (GS); John Mack, CEO of Morgan Stanley (MS); and Vikram Pandit, CEO of Citigroup (C). While details of the meeting are unclear, one person familiar with the matter said Paulson is expected to discuss details of his new plan to take equity stakes in financial firms, among other points.

Neel Kashkari, the U.S. Treasury official overseeing the $700 billion rescue of the financial system, said government equity injections will be aimed at "healthy" firms, according to Bloomberg. "We are designing a standardized program to purchase equity in a broad array of financial institutions," Kashkari, who heads the department's Troubled Asset Relief Program, said in a speech in Washington. "The equity purchase program will be voluntary and designed with attractive terms to encourage participation from healthy institutions." The Treasury will "attack" bad debt clogging financial markets from "multiple directions," Kashkari said.

Three firms are finalists to be the Treasury's "master custodian," to be announced within 24 hours to serve as the program's prime contractor, Kashkari said. The Treasury has tapped law firm Simpson Thacher & Bartlett LLP and investment consultants Chicago-based Ennis Knupp & Associates for roles in the program. More selections are expected in coming days, he said. Kashkari said Fed Chairman Bernanke will lead TARP's oversight board.

In Paris, European leaders agreed to a unified plan that would inject billions of euros into their banks and guarantee bank debt for periods up to five years. President Nicolas Sarkozy of France, who led the talks, said governments would announce concrete rescue plans tailored to their national circumstances today simultaneously, the New York Times reported. Leaders of the 15 countries that use the euro did not put a price tag on any of their promises -- contrary to Britain, where last week Prime Minister Gordon Brown announced $255 billion in government funds and other measures to stabilize its banks, or the United States, where a $700 billion bailout plan will now be used partly to infuse banks with fresh capital.

The rescue measures in Europe echo those announced last week by the British government, which confirmed Monday that it is injecting a total of 37 billion pounds (US$63 billion) into three leading banks -- Royal Bank of Scotland PLC (RBS), Lloyds TSB PLC (LYG) and HBOS PLC -- in return for equity stakes. Taxpayers will own about 60% of RBS and 40 percent of the merged Lloyds TSB and HBOS. The merger has been renegotiated Monday too, so the amount of Lloyds TSB shares that HBOS shareholders will receive is lower.

Mitsubishi UFJ Financial Group (MTU) closed a $9 billion investment in Morgan Stanley (MS) that gives the Japanese company a 21% interest. Under revised terms, Mitsubishi UFJ has acquired $7.8 billion of convertible preferred stock with a 10% dividend and a conversion price of $25.25 a share, and $1.2 billion of non-convertible preferred stock with a 10% dividend. Previously, Mitsubishi UFJ was getting a mix of preferred and common shares.

Morgan and Mitsubishi UFJ had worked Sunday to finish the pact, as both sides pushed to keep the general terms of the deal intact and the U.S. government signaled it was prepared to protect the Japanese investment, people familiar with the matter said. The U.S. government was involved with the talks but isn't contemplating a direct investment alongside Mitsubishi UFJ, one person familiar with the talks said.

Among other stocks in the news Monday, Waste Management (WMI) sees third quarter EPS of 62 cents on revenue of $3.53 billion. Adjusting for certain items, it sees EPS of 62-63 cents, noting the low end of the range, 62 cents, exceeds the Wall Street consensus estimate of 60 cents. Additionally, Waste Management said it is withdrawing its proposal to acquire all of the outstanding shares of Republic Services (RSG) for $37 per share, due to the current state of the financial markets.

Tesoro (TSO) said it expects third quarter EPS of $1.70-$1.90, which includes an approximately 29 cents after-tax last-in-first-out (LIFO) benefit. Tesoro also said Bruce Smith, its chairman, president and CEO, will file a Form 4 with the SEC reporting that Goldman Sachs (GS) sold 251,100 Tesoro shares owned by him. Tesoro notes the shares were sold in accordance with an existing margin agreement to meet a margin call. Depending on the direction of Tesoro's common stock price, further sales may be required.

Marshal & Illsley (MI) agreed to acquire a majority equity interest in Taplin, Canida & Habacht, a institutional fixed income money manger with $7.5 billion of assets under management as of Sept. 30, 2008.

Vishay Intertechnology (VSH) terminates its offer to acquire all of the outstanding shares of International Rectifier (IRF) for $23.00 per share in cash and will be returning tendered shares to their holders.

Abbott Laboratories (ABT) set up to a $5 billion share buyback. Separately, it announced that data from 30 patients in its ABSORB clinical trial demonstrated that ABT's bioabsorbable drug eluting stent successfully treated coronary artery disease and was absorbed into the walls of treated arteries within two years, leaving behind blood vessels that appeared to move and function similar to unstented arteries.

The board of General Motors (GM) board gave a cool reception to the idea of acquiring Chrysler LLC after GM's top management discussed the matter at a meeting last week, people familiar with the matter said, according to the Wall Street Journal.

Banco Santander (STD) issued a statement confirming it is in talks to acquire Sovereign Bancorp (SOV), but noted it is not currently possible to know whether such conversations will lead to an agreement or not.

Bernstein upgraded Apple Inc. (AAPL) to outperform from market perform.

Lear Corp. (LEA) lowered its 2008 sales outlook from $15 billion to about $14 billion, and now sees income before interest, other expense, income taxes, restructuring costs and other special items down about 20% from previous guidance of $500-$600 million. The company cited volatile industry and general economic conditions.

Limited Brands (LTD) set a $250 million stock buyback.

Stocks: What to Watch for in the Recession

Eventually, the crisis will end. That has investors contemplating what a post-crisis stock market might look like.

Predictions of a serious economic downturn are everywhere, and not just for the U.S. but for the entire globe. If the credit crunch lasts long enough, it could be the first truly deep economic pullback in a generation or longer.

Asked about the future, many professional investors and fund managers say they're far too preoccupied with the current crisis to make any long-term bets. That's why they many refuse to buy stocks—the unprecedented global credit crunch has made solid predictions all but impossible.

"I'm going to wait until the dust settles," says William Rutherford, president of Rutherford Investment Management.
Glimpsing the Future

Still, investors will eventually have to picture what the new economic order will look like.

Arguably, a credit crunch or recession makes all of us losers. But even in a severe recession, some businesses survive and prosper—even if only on a relative basis, and even if they take years to muddle through.

"There's always going to be a winner out there," says Ryan Crane, chief investment officer at Stephens Investment Management Group.

Here are five trends that may emerge whenever the crisis finally ends:

1. The strong eat the weak.

In the financial sector, failing banks and brokerage houses have already been gobbled up by safer (if not exactly strong) rivals. Bank of America (BAC) bought up mortgage giant Countrywide Financial and Merrill Lynch (MER). JPMorgan Chase (JPM) absorbed Bear Stearns and Washington Mutual. Citigroup (C) and Wells Fargo (WFC) battled over buying Wachovia (WB).

If the economic downturn is bad enough, expect the same trend to hit other industries, as strong players either buy or take market share from companies in financial trouble.

2. Fast-growing companies might not get the funding they need.

The credit crunch is cutting off the financing that helps businesses grow and create new jobs, says Michele Gambera, chief economist at Ibbotson Associates, a unit of Morningstar (MORN). Companies can't float issues on the stock market or sell bonds—investors won't buy them. And they can't borrow from banks, which are too panicked to lend.

If those conditions persist, it means trouble for new growth companies. "Who is going to make the next Google (GOOG) if there is no money to borrow to build the next Google campus?" Gambera asks.

3. Cash is king.

In a credit-starved economy, the advantage goes to companies with strong cash flow. Gambera cites cigarette maker Altria Group (MO) as a company famous for its strong cash generation.

A healthy balance sheet—without much debt—will also be crucial. "Given the fact that credit markets have totally deteriorated, it's a question of survival," says Gary Wolfer, chief economist at Univest Wealth Management (UVSP).

He believes survivors could include consumer staples and health-care companies that sell products their customers need and that generate lots of cash in the process. He cites Procter & Gamble (PG) and Johnson & Johnson (JNJ).

4. Don't bet on the U.S. consumer.

Wolfer predicts "an awful Christmas" for retailers. But for consumer-oriented companies, the problems aren't just short term.

For a generation, the U.S. has created a "quadruple deficit," Gambera says: a government deficit and a trade deficit, along with heavy borrowing by the financial sector and, finally, by U.S. households. Few expect Americans' reliance on credit cards and cheap home mortgages to continue.

In fact, many commentators see a fundamental shift in the U.S. economy, away from a reliance on both debt and the overstretched American consumer. "The era of the consumer-based U.S. economy is coming to an end," Wolfer says. "Our whole economy is going to be much more export-driven."

5. Don't bet on the global infrastructure boom, either.

Wolfer and others may be pinning their long-term hopes for the U.S. on exports. But there are lots of worries about one force driving global demand for U.S. goods: the building boom in many emerging economies around the world.

In a global slowdown, many are betting that demand for capital equipment, commodities, and energy are going to fall off.

Emerging economies, such as China and India, may not slip into recession, but their rapid growth will probably slow, says Chad Deakins, portfolio manager of the RidgeWorth International Equity Fund. "There are going to be different problems each country is going to have to address, [problems that will] distract them from plans to build infrastructure," he says.

Five years from now, however, Deakins expect emerging countries to start building again. "There are a lot of people in the world who want a higher standard of living and are willing to work for it," he says. "That's capitalism."

Can Buffett Rescue the Market?

Warren Buffett warned several years ago about a financial crisis like the one currently engulfing Wall Street. But now that it's here, the investing wizard has decided he might as well profit from it.

The legendary investor's Berkshire Hathaway (BRKA) is making a $3 billion investment in General Electric (GE). The deal was announced Oct. 1, one week after Buffett bet $5 billion on investment bank Goldman Sachs (GS).

For a U.S. stock market that has lost more than a fifth of its value this year, the deals represent a rare vote of confidence. Buffett warned of the dangers of complex financial products and too much debt—two of the main causes for the market frenzy. But despite those long-standing misgivings, Buffett is now confident enough to invest in two companies near the eye of the financial storm. "When you have the world's most successful investor stepping up and taking meaningful positions [in companies like GE and Goldman Sachs], it signals confidence not only in those companies, but the system itself," says Matt Kaufler, portfolio manager of the Touchstone Value Opportunities Fund.

Buffett's role in the crisis is similar to the roles that wealthy bankers and industrialists have played in previous crises, says Robert Bruner, the dean of the University of Virginia Darden Graduate School of Business Administration and the co-author of a book on the Panic of 1907. In that crisis, financier J.P. Morgan, with help from other bankers and investors like John D. Rockefeller, put up money to bail out banks and ease the economic panic. In a time of crisis, key figures can help "create a tipping point in favor of recovery," Bruner says.
Buffett's No Morgan

Yet no one thinks Buffett can stem the crisis the same way Morgan did 100 years ago.

In fact, in the short term, Buffett's Goldman and GE deals might merely emphasize the current difficulties. Who could have predicted just a year ago that Goldman Sachs or General Electric, two premier U.S. enterprises, would need Buffett's cash on such a large scale?

Along with Buffett's $3 billion investment in preferred shares, GE will offer common shares publicly to raise $12 billion. That cash is needed to prop up GE's financial units. Buffett's shares will get an attractive dividend of 10%. Buffett will also get warrants to buy another $3 billion of common stock at $22.25 per share; a year ago, GE's stock was trading above $42. (More on the GE deal here.)
Not Charitable Investments

Buffett's Goldman Sachs investment offered him similarly attractive terms. Buffett told CNBC on Oct. 1: "These markets are offering us opportunities which weren't available six months or a year ago. So we're putting money to work."

These are "iconic American companies," says Richard Sylla, of New York University's Stern School of Business. "[Buffett is] getting a chance to buy them cheap."

Buffett is able to exploit the current environment in ways most investors simply can't. "He's not making these investments out of charity," Bruner says.
Rich With Cash

While others are overwhelmed by large losses or stuck with high levels of debt, Buffett has billions of dollars in cash to deploy. "When crises like this happen, it's he who has the cash who can take advantage of it," says Robert Miles, a Buffett expert and author of the book The Warren Buffett CEO. Miles says historically Buffett has done his best when the broader market has done its worst.

This is not the first market meltdown that Buffett has successfully foreseen. Buffett was skeptical of Internet and other technology stocks in the late 1990s and early 2000s. Berkshire Hathaway shares suffered during the tech boom as a result, but Buffett was proven right when the tech bubble burst from 2000 to 2002.

In recent weeks, as the federal government has proposed a $700 billion bailout plan, analysts have frequently quoted Buffett's warning in 2002 that highly complex financial products like derivatives are "financial weapons of mass destruction."
Creating a "Halo Effect"

Buffett's record is what gives him such credibility at a time when nearly all other major financial players have stumbled. "His gravitas carries a halo effect" for the companies he invests in, Bruner says. "It's a vote of confidence" in General Electric and Goldman Sachs.

Standard & Poor's Rating Services on Oct. 1 said the Berkshire Hathaway investment was a "positive development" for the ratings on General Electric's debt.

Buffett's reputation—and the fact that he has billions to invest at a time—are exactly why he's able to get such attractive terms for his investments, analysts say.
Not Available to the Average Investor

Yet it's hard to predict how much Buffett's buying spree might prop up investor confidence in the broader market, and whether, like Morgan's dealmaking a century ago, it can help ease the current financial crisis.

After all, the bargains available to Buffett aren't necessarily available to the average investor, who can't get a 10% dividend on their GE shares. Also, analysts say, few other investors have so much cash to invest. "For some people, I think it's reassuring to see him allocating capital," Kaufler says. But, "some are so shell-shocked by the last 30 days, they're going to stay in their bunker."

Who knows? Buffett may have a few more surprising —and highly profitable —moves in mind as the financial crisis drags on.

The Consumer and the Stock Market Storm

Only two months ago, the idea of crude oil falling below $100 a barrel and sharp drop in agricultural commodity prices would have seemed like a godsend to cash-strapped consumers. Gasoline and food prices have been slow to adjust to falling commodity prices, but that's probably not what is uppermost in consumers' minds right now. They may be more worried about their access to credit—and the health of the bank they stash their savings in—as the U.S. financial crisis has escalated in recent weeks.

With the defeat of the $700 billion financial rescue plan in the House of Representatives on Sept. 29, the fear now is that the longer the credit markets are forced to fester without a solution, the longer and deeper the economic recession the U.S. is likely soon to face. Congress is working on a revised version of the rescue bill, which is expected to pass within a week. But in a market environment where legendary institutions like Lehman Brothers disappear overnight, any financial-system rescue plan risks the patient expiring while waiting to be admitted to the emergency room.

Given the chill that has coursed through the credit system , with banks denying requests for mortgage, home improvement, small business, and car loans left and right, it's not inconceivable that credit cards could be next. That would leave consumers with no source of cash except for their weekly paychecks, which in many cases are already pre-spent. Still unknown is to what extent the stability of credit cards may be affected by a handful of big commercial banks going under, but certainly banks are becoming less willing to let consumers run up bigger balances on their cards, says David Lockwood, consumer insights director at London-based Mintel International Groupin Chicago.
High and Dry

"That could be the next little thing that impacts individual consumers," says Lockwood. "I don't have a sense of how quickly that could happen. It seems it could happen fairly soon." That, plus the more remote possibility of payroll checks stopping if companies that rely on short-term credit from banks to meet payroll requirements start getting turned down, would leave consumers high and dry.

Lockwood doesn't believe most consumers are even aware of the broader implications of the credit freeze or the reasons behind the legislative battle over a rescue plan, however. "They'll respond [to the failure of the rescue bill] like they do to all major financial and policy initiatives, which is with long glazed stares," he says. Consumers have no connection to what's going on except for how it might affect the security of their bank accounts, he adds.

That's not what Richard Curtin, director of Consumer Confidence Surveys at the University of Michigan's Survey Research Center, is seeing in recent respondent data, which interviewers collect throughout the month. According to Curtin, 150, or 10%, of the survey's 1,500 respondents over the past three months, have reported having trouble getting a loan.
Slump in Confidence

"In the last week, we found confidence in the economy and how [consumers] expected the economy to behave have declined significantly," he says. "There's some evidence consumers have paid attention to this and are concerned about this." Just how worried consumers are will be reflected in the October numbers that the University of Michigan releases next week.

T.J. Marta, economic and fixed income strategist for RBC Capital Markets (RY) in New York, worries that a negative feedback loop might be forming, where short-term funding problems at Wall Street firms start to spread to companies and municipalities, prompting them to cut their workforce, which would then compound the pressure on consumers whose stores of personal wealth and access to credit have already eroded. "Consumers begin to retrench. That feeds back into corporations investing less and even cutting back on employees, and then you've got yourself in the loop," he says. "It's like a forest fire, It has to burn itself out. It's very hard to short-circuit these things. My fear with this bailout is it could psychologically unhinge the credit markets that are already very fragile."

While some sentiment indicators show signs of consumer confidence bottoming, that doesn't necessarily promise a rebound to healthy levels anytime soon, says Marta. "We could stay at the bottom for quite a while depending on what goes on with the financial situation," he says.

Unlike the Michigan survey, the RBC Consumer Attitudes and Spending by Household (CASH) Index is based on surveys done over a three-day period once a month. The latest surveys were conducted during the weekend the Treasury stepped in to nationalize mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE), before Lehman Brothers filed for bankruptcy and American International Group (AIG) was saved by an $85 billion federal bailout — the events that triggered new alarms in the financial crisis. That suggests the October confidence reading could revert back to the all-time low hit in July or even worse.
Dropping the Shopping

Battered confidence may already be evident in one of the more important consumer-facing sectors: retailing. This year's back-to-school season was especially weak, with August sales at stores open at least one year up 1.7% from last year but unchanged from a year ago when Wal-Mart Stores' (WMT) strong results were excluded, the International Council of Shopping Centers said in a Sept. 4 release. The National Retail Federation reported a 1.1% increase in August sales but a 0.4% decline when including non-general merchandise categories such as autos, gas stations, and restaurants.

Sales have fallen off sharply over the past couple of weeks, as consumers have had to grapple with a torrent of financial developments, says Lizabeth Dunn, a retail analyst at Thomas Weisel Partners (TWPG) in New York. "They figured out their money market funds aren't as safe as they thought, and now they have to be worry about which banks they have their money in," she says. "It's very unsettling." Continuing evaporation of home equity and further weakening on the jobs front are also causing turmoil for the average household, she adds.

The latest pullback in spending is "squarely tied to what's going on in the financial market," she says. Still, she doesn't think the recent drop-off in spending will turn into a new trend. Men's and children's segments have held up better than the women's segment, which has been harder hit because women's purchases tend to be more discretionary, while buying for kids and men is based more on necessity, she says. "You're seeing people on a broad scale delaying purchases. You delay home improvements and car purchases," she says. "If your normal replenishment cycle is every year, now maybe its every two years."
Stressed-Out Consumers

While Lockwood at Mintel doubts that consumer purchasing habits have changed with the escalation of events in the financial arena, he does believe that consumers are already as stressed as they can be. Still, the focus for most people is changes in prices and what happens in the financial markets "has no meaning for people until it gets down to the wallet level, and that's not likely to happen anytime soon," he says.

Even where people may still be shopping, they are falling increasingly behind in paying their bills. High-end department store chain Nordstrom's (JWN) latest data on its securitized credit-card receivables for August showed total delinquencies climbed 0.71% from a year ago, to 2.83% of total receivables, and were up 0.28% from July, according to a Sept. 15 research note by Credit Suisse (CS). Those were the largest upticks, on both a monthly and year-on-year basis since the data became publicly available in May 2007. Nordstrom is one of the few retailers that still owns the receivables of its credit-card business, which contributed 2% to the company's total earnings before taxes last year, analyst Michael Exstein said in the note.

Retailers' earnings in August implied a decline in the two-year trend for comparable sales, says Dunn at Thomas Weisel, who also says she's hearing that business has worsened in the last two weeks. So far, only one of the companies she covers — Cache (CACH)— has actually cut its profit outlook, but she cautions that not much should be read into that since Cache is a relatively small company.

Smaller retailers, such as Lululemon Athletica (LULU) and Urban Outfitters (URBN) continue to attract new customers and perform well. But as for bigger, more established retail names, "there aren't really any I see that are bucking the trend," she says.

You can bet that if consumers lose sleep in the next few weeks amid new developments in the bailout drama and financial crisis, the outfits that depend on their business will not be getting much rest either.

Stocks Turn Mixed

Earlier gains faded as the government's $700 billion financial rescue package ran into resistance in Congress

Major U.S. stock indexes revered earlier gains to trade mixed Tuesday afternoon, one day after a broad sell-off. The market's focus on Tuesday: The Senate Banking Committee's hearing on the Bush administration's $700 billion financial rescue plan, featuring testimony from Treasury Secretary Henry Paulson, Federal Reserve Chairman Chairman Ben Bernanke, and Securities and Exchange Commission Chairman Christopher Cox.

On Tuesday around 3:05 p.m. ET, the blue-chip Dow Jones industrial average declined 10.99 points, or 0.1%, to 11,004.70, weighed down by a drop in General Electric (GE). The broader S&P 500 index edged lower by 0.38 points, or 0.03%, to 1,206.71. The tech-heavy Nasdaq composite index added 7.37 points, or 0.34%, to 2,186.53 as Google (GOOG) and other tech stocks eked out gains.

On the New York Stock Exchange, 20 stocks were lower in price for every 11 that posted gains, The ratio on the Nasdaq was 16-11 negative. GOOG and other tech stocks eked out gains while a drop in GE hurt the DJIA.

Bonds were mixed. The dollar index edged higher. Gold and oil futures closed lower.

Initial stock-market gains gave way to nervousness Tuesday after Paulson's plan ran into much second-guessing from lawmakers.

Chairman Bernanke made a strong emotional case for addressing the financial sector problems, reports Action Economics. He painted a bleak picture for the U.S. economy if the Treasury's plan is not effected quickly. The markets are not serving the necessary functions of the economy, he noted, and if liquidity isn't restored, more jobs will be lost, the unemployment rate will rise, the housing market will see more foreclosures, and GDP will contract.

Bernanke also explained that the $700 billion price tag for the rescue plan is not an expenditure of that size, but a purchase of assets, and he believes most, if not all the value could be recovered, and taxpayers will get 'good value" for the money spent.

"This was the most forceful we've seen the Fed chief in Congressional testimony," wrote Action Economics analysts in a website posting Tuesday.

Treasury Secretary Paulson also made a strong case for the TARP plan, repots Action Economics. noting that until the housing sector stabilizes, there is no way for the financial system to recover. He expressed anger and shock about the situation, but the main problem when he took over was the flawed regulatory system which was structured for another era. Paulson noted that thousands of banking institutions may participate in the bailout, including foreign banks. He is arguing for flexibility in the Treasury's approach to these reverse auctions, though Congress is balking at just that sort of 'blank check."

Paulson also did not favor a plan to enact the $700 billion financial system rescue in phases proposed by Sen. Charles Schumer (D-N.Y.), saying a return of confidence was needed in the financial sector.

Paulson said he did not know if U.S. credit rating would be hurt by the measure. He also said the rescue plan will not put the taxpayer on the hook because "they're already on the hook."

In his prepared remarks, Bernanke said that financial markets are under severe stress and urged immediate action to buy up hundreds of billions of dollars worth of tainted mortgage assets. "Despite the efforts of the Federal Reserve, the Treasury, and other agencies, global financial markets remain under extraordinary stress," Bernanke said in prepared remarks.

"Action by Congress is urgently required to stabilize the situation and avert what could otherwise be very serious consequences for our financial markets and our economy," he said. "In this regard, the Federal Reserve supports the Treasury's proposal to buy illiquid assets from financial institutions. Purchasing impaired assets will create liquidity and promote price discovery in the markets for these assets, while reducing investor uncertainty about the current value and prospects of financial institutions. More generally, removing these assets from institutions' balance sheets will help to restore confidence in our financial markets and enable banks and other institutions to raise capital and to expand credit to support economic growth.

Amid rising concerns that the plan givesgovernment a blank check, Democrats want an oversight board that would include the chairmen of the Fed, FDIC, and SEC to limit the Treasury's powers.

Both Barrack Obama and John McCain say more oversight of the Treasury is needed. Reports some Republicans oppose the plan Treasury Secretary Paulson laid out. President Bush will discuss the financial crisis at a UN General Assembly meeting in New York today.

Financial stocks remained in the spotlight Tuesday. The Wall Street Journal reported that Toronto-Dominion Bank (TD) is is among the companies now weighing a bid for Seattle thrift Washington Mutual (WM), according to people familiar with the situation. In addition to Toronto-Dominion, potential suitors include Citigroup (C), JPMorgan Chase (JPM), Wells Fargo (WFC), and Banco Santander (STD), according to people familiar with the situation.

Citigroup named Mike Corbat as CEO of its Global Wealth Management unit (GWM) and Edward Kelly as Head of Global Banking for the Institutional Clients Group (ICG). The company also confirmed that Sallie Krawcheck has decided to leave the firm to pursue other opportunities and will remain as Chairman of GWM through the end of the year.

Oppenheimer analyst Meredith Whitney cut her earnings estimates on Wachovia Corp. (WB), Citigroup, Bank of America (BAC), and Wells Fargo.

November West Texas Intermediate crude oil futures were off $2.32 to $107.05 per barrel Tuesday afternoon on profit taking from Monday's short squeeze that drove the expiring October contract $25 higher. The Commodities Futures Trading Commission is investigating Monday's trading. Tuesday's selling is blamed by some as fear the global economy will fall into a recession for several reasons, including the U.S. financial crisis that is spreading. Some speculators bought yesterday on the argument the Bush administration's $700 billion rescue plan would bolster the U.S. economy and increase demand for commodities. Some believe a slowdown could drive commodities higher on safe haven buying.

December gold futures fell Tuesday on profit taking from Monday's flight to safety surge. But the yellow metal could see more buying due to the uncertainties surrounding the U.S. government's bailout plans and the impact on the real economy, which are weighing on the equity markets, notes S&P MarketScope.

Among Tuesday's stocks in the news, Bristol-Myers Squibb (BMY) increased its offer to buy ImClone Systems (IMCL) to $62 a share from its initial offer of $60 a share. Bristol-Myers intends to commence a tender offer, valued at about $4.7 billion, for all outstanding ImCLone shares it does not already own.

Merrill Lynch reportedly downgraded shares of General Electric Co. (GE) to neutral from buy.

Circuit City Stores (CC) expects to deliver second quarter results that are slightly better than the previously provided range of a loss from continuing operations before income taxes of $170-$185 million, before any unusual/non-cash charges. The company also said Philip J. Schoonover, chairman, president and CEO, has agreed to step down from those positions, effective immediately. Schoonover has also resigned as a director.

3Com Corp. (COMS) posted first-quarter non-GAAP earnings per share of 11 cents, vs. 3 cents one year earlier, on a 7% revenue rise.

Union Pacific (UNP) raised its $1.10-$1.20 third quarter EPS view to $1.28-$1.33. The company said lower diesel fuel costs and strong operating efficiency will more than offset the impact of recent hurricanes and lower shipment volumes. The company noted that widespread commercial power outages associated with Hurricane Ike have impacted its operations and limited the ability of its customers to resume production. Union Pacific's new EPS view includes a reduction of about 10 cents as a result of the hurricanes, primarily Ike.

Dollar Thrifty Automotive Group (DTG) announced that results in the third quarter continue to be affected by challenges in the areas of revenue per day and vehicle depreciation costs. The company said results are also expected to be affected by the bankruptcy of one of its tour operators. In light of performance to date, Dollar Thrifty said it's seeking an amendment to its senior secured credit facility.

DuPont (DD) named Ellen J. Kullman president and a director of the company effective Oct. 1 and CEO effective Jan. 1, 2009. DuPont says Charles O. Holliday, Jr., chairman & CEO, will serve as chairman of the company and as a member of the board until Kullman's expected succession as chairman.

European stock indexes finished solidly lower Tuesday. In London, the FTSE 100 index fell 1.91% to 5,136.12. In Paris, the CAC 40 index dropped 1.98% to 4,139.82. Germany's DAX index shed 0.64% to 6,068.53.

Japanese markets were closed for a holiday Tuesday. In Honmg Kong, the Hang Seng index plunged 3.87% to 18,872.85.

Treasury market

On Tuesday, the 10-year note was higher at 101-15/32 for a yield of 3.824%, while the 30-year bond rose to 101-13/32 for a yield of 4.418% amid worries the Treasury's financial system rescue plan will be delayed by congressional wrangling over details.