Dow falls 294 as Wall Street boos Fed's rate cut

The Federal Reserve cut interest rates today, but stocks plunged after Wall Street jeered the cuts as too little and possibly too late to keep the economy from sliding into a recession.

The central bank cut its federal funds rate -- the basis for everything from corporate and auto loans to credit cards -- from 4.5% to 4.25%. The Fed also cut its discount rate -- what the Fed charges banks for short-term loans -- from 5% to 4.75%.

At the close, the Dow Jones industrials were off about 294 points, 2.1%, to 13,433. The Nasdaq Composite Index was down nearly 67 points, or 2.45%, to 2,652, and the Standard & Poor's 500 Index was down 38 points, or 2.5%, to just under 1,478.

The big losses were the worst in a month and came after four days in a row of gains that pushed the Dow up 478 points. The Dow had fallen 361 points on Nov. 7.

The sell-off prompted a rally in bonds, where many investors flee when they want safety. The yield on the 10-year Treasury note fell to 3.99% from 4.15% on Monday.

Many economists and analysts had hoped the Fed rate-making body, the Federal Open Market Committee, would cut the fed funds rate to 4%. And they hoped the Fed would convey a sense of urgency about the condition of the economy.

That didn't happen, and investors concluded "that the Fed doesn't get it," Jeffrey Kleintop, chief market strategist at LPL Financial Services in Boston, told Bloomberg News. Investors are concerned "these little baby steps are not going to be sufficient to avoid a recession."

But the Fed's statement justified the 4.25% level, suggesting that the economy wasn't bad enough yet to push rates still lower. Offering a bigger cut would leave the U.S. vulnerable to an outbreak of inflation, it said.

• Video: After the Fed move, what next?

Still, the Fed conceded, "Recent developments, including the deterioration in financial market conditions, have increased the uncertainty surrounding the outlook for economic growth and inflation." The central bank promised to act as needed to foster "price stability and sustainable economic growth."

Just before the Fed decision was announced at 2:15 p.m. ET, the major averages were up slightly. Within seconds, however, they tumbled.

At the end of the day, 28 of the 30 Dow stocks were lower, along with 480 S&P 500 stocks and 93 Nasdaq-100 ($NDX.X) stocks. The only Dow winners: AT&T (T, news, msgs), up 4.1% to $39.46, and McDonald's (MCD, news, msgs) up 2% to $63.13. AT&T was also the top S&P 500 stock today.

There were few places to hide. Even glamour stocks like Google (GOOG, news, msgs), Research in Motion (RIMM, news, msgs) and Apple (AAPL, news, msgs) were battered. Google was off 2.7% to $699.30. Research in Motion fell 4.4% to $97.89, and Apple slid nearly 2.9% to $188.54.

Even General Electric (GE, news, msgs) couldn't catch a break. The industrial giant said it sees 2008 earnings jumping at least 10%, it boosted its dividend 11% to 31 cents a share, and it plans to buy back up to $15 billion of its shares over the next three years. Result: The stock was down 1.1% to $37.03.

The biggest losses were absorbed by financial stocks, which had risen sharply in recent days in expectation of a bigger rate cut. The Select Sector SPDR-Financial (XLF, news, msgs) exchange-traded fund, which is supposed to mirror the financial sector of the S&P 500, fell nearly 2.7% to $31.01 by 2:50 pm. ET.

Citigroup (C, news, msgs), which had been higher on news that it has named Vikram Pandit as its new CEO, was down 4.4% to $33.23. Countrywide Financial (CFC, news, msgs) dropped 9.4% to $11.33, and Washington Mutual (WM, news, msgs), which announced 3,100 job cuts a 73% cut in its dividend, fell 12.4% to $17.42.

Five of the 10 worst performers on the S&P 500 were homebuilders. Centex (CTX, news, msgs), Pulte (PHM, news, msgs), KB Home (KBH, news, msgs), Lennar (LEN, news, msgs) and D.R. Horton (DHI, news, msgs) each fell more than 10% on the day.

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While Wall Street traders can wring their hands and say the losses were the Feds fault, they had set themselves up for a market tumble. Between Nov. 26 and Monday, the Dow had jumped nearly 1,000 points, or about 8%, in anticipation of a big Fed rate cut. When the cut that many had sought didn't materialize, they sold.

The Fed's decision brought boos from many pundits, who complained the economy is weakening more rapidly than the Fed believes. The decision was not unanimous. Eric Rosengren, president of Federal Reserve Bank in Boston, said he would have preferred a half-point cut to 4%.

It is possible that the Fed will be forced to cut rates again, perhaps even before the FOMC's Jan. 29-30 meeting, the first of 2008.

"If things deteriorate, they will cut again," Stephen Cecchetti, an international economics professor at Brandeis University in Waltham, Mass., told Bloomberg News.

The discount-rate cut was the Fed's way of telling the global credit system that there will be plenty of money available to handle the normal credit needs of businesses functioning in the U.S. economy. But critics grumbled that the rate should have been cut to 4.5% or 4.25%. That would have encouraged more banks to borrow money from the Fed.

Domestic interest rates have been falling for months as it became clearer the economy is slowing amid a nasty combination of higher oil prices and a deepening housing slump. The yield on the 10-year Treasury note fell from 5.3% on June 13 to 4.1% on Monday. It fell again today. It was as low as 3.8% on Dec. 4.

At the same time, the three-month London interbank offered rate -- or Libor -- which is how many banks finance themselves -- is over 5.1%. The spread between the Libor yield and, say, the yield on the three-month Treasury is more than 2 percentage points. That's a signal that many investors are concerned about the health of banks.

Crude oil closed at $90.02 this afternoon, up nearly 2.5% from $87.86 on Monday and its first close above $90 since Thursday. Cold weather and power outages in the Midwest were cited for the price increase.

Higher energy prices limited the Fed's hit to energy stocks. The Amex Oil Index ($XOI.X) and the Amex Natural Gas Index ($XNG.X) were down 1.7% and 1.8%, respectively.

Did the Fed make a big mistake?

Wall Street sure thought so, because of signals that the economy is slowing faster than thought. Real-estate activity is falling. Christmas spending looks sluggish, and financial institutions are announcing big write-offs with distressing regularity.

While the Fed fears that sharply higher food and energy costs will affect the entire economy, critics say, the central bank is ignoring or not taking seriously enough another reality: Banks and other financial institutions have been adding stricter terms in order to lend money -- or have been refusing to lend money at all.

Plus, buyers of commercial paper -- short-term IOUs sold by large companies to finance their daily operations -- have been trimming their holdings, especially of commercial paper issued by real-estate-related companies, such as Countrywide Financial. Countrywide shares have fallen nearly 71% this year.

The housing market remains the biggest problem, and it may be getting worse. Countrywide and other lenders such as Washington Mutual are writing off billions, cutting staff and cutting their dividends to cope with a slump that's likely to last well into 2008.

UBS AG (UBS, news, msgs), one of Europe's biggest banks, said Monday it would write off upwards of $10 billion more because of bad loans in the United States -- and that sold 9% of itself to the government of Singapore and an Arab investor.

Suppliers of mortgage credit, such as Fannie Mae (FNM, news, msgs) and Freddie Mac (FRE, news, msgs), are adding new fees that lenders must pass on to anyone seeking a new mortgage or hoping to refinance an existing loan.

But some investors had been buying up shares in financial and home-building stocks, apparently in anticipation of a turnaround late next year. Builder D.R. Horton jumped 6.5% to $14.76 on Monday and was up 42% between a low of $10.41 on Nov. 27 and Monday's close. The shares, however, were off 11% today to $13.15.

Short hits from the markets -- 4 p.m. ET

	Tues.	Mon.	Chg.	Month chg.	YTD chg.
Treasurys
13-week Treasury bill	2.870%	2.970%	-0.100	-6.51%	-41.25%
5-year Treasury note yield	3.337%	3.539%	-0.202	-2.37%	-29.02%
10-year Treasury note yield	3.990%	4.149%	-0.159	0.45%	-15.29%
30-year Treasury bond yield	4.482%	4.615%	-0.133	1.79%	-6.97%
Currencies
U.S. Dollar Index	76.33	76.10	0.23	0.18%	-8.79%
British pound in U.S. dollars	$2.0350	$2.0475	-0.0125	-1.08%	3.85%
U.S. dollar in British pounds	£0.4914	£0.4884	0.0030	1.09%	-3.70%
Euro in U.S. dollars	1.4663	1.4728	-0.0065	0.04%	11.09%
U.S. dollar in euros	€ 0.6820	€ 0.6790	0.0030	-0.04%	-9.98%
U.S. dollar in yen	110.64	111.66	-1.02	-0.29%	-7.04%
U.S. dollar in Canadian dollars	$1.015	$1.006	0.009	1.55%	-12.89%
Canadian dollar in U.S. dollars	$0.986	$0.994	-0.008	-1.52%	14.93%
Commodities
Gold	$817.10	$813.50	$3.60	3.55%	28.07%
Copper	$3.0900	$3.0930	-$0.003	-2.97%	7.63%
Silver	$14.8650	$14.8650	$0.02	4.94%	14.80%
Crude oil (NYMEX) (per barrel)	$90.02	$87.86	$2.16	1.48%	47.45%

New boss coming at Citigroup

Citigroup named Vikram Pandit as its new chief executive officer, ending the bank's monthlong scramble to find a new leader after former CEO Charles Prince stepped down in November.

Citigroup also named Sir Win Bischoff, who had been acting CEO, as chairman. He succeeds Robert Rubin, who stepped into the job when Prince, who also served as chairman, resigned. Rubin, the former Treasury secretary, will remain chairman of the executive committee.

• Does Citigroup need a merger?

Pandit takes the helm at a time when Citigroup is struggling with challenges ranging from massive losses tied to the mortgage crisis to a lackluster consumer business. Pandit, a former Morgan Stanley (MS, news, msgs) executive, joined Citigroup earlier this year when the bank bought his fledgling hedge fund, Old Lane Partners, for some $800 million.

• Video: CNBC's Erin Burnett interviews Citigroup's new chief

Prince resigned Nov. 4 as Citigroup disclosed that it was facing up to $11 billion in new fourth-quarter losses tied to the bank's exposure to mortgage-related investments. Citigroup already had racked up about $6.4 billion in third-quarter write-downs, including about $1.6 billion stemming from subprime mortgages.

Boeing: 787 is on schedule

Aerospace giant Boeing (BA, news, msgs) said today that its schedule for the 787 Dreamliner remains on track and it doesn't see further delays in the much-ballyhooed airplane.

Officials reaffirmed the schedule in a conference call updating the 787 program's status, two months after it pushed back flight testing and initial deliveries of the aircraft by six months.

Many industry observers ultimately anticipate additional delays, which are common with new airplanes.

Scott Carson, head of Boeing's Seattle-based commercial airplane manufacturing division, acknowledged the company still is "ironing out significant supply-chain wrinkles" but said there are no revisions to the latest schedule.

Boeing shares were off nearly 4% to $89.33. Since hitting $106.65 on Oct. 1, shares have fallen more than 15%.

Energy prices -- New York close

	Tues.	Mon.	Chg.	Month chg.	YTD chg.
Crude oil (NYMEX) (per barrel)	$90.02	$87.86	$2.16	1.48%	47.45%
Heating oil (per gallon)	$2.5230	$2.4774	$0.0456	-0.26%	57.89%
Natural gas (per million BTU)	$7.0850	$7.0320	$0.0530	-2.97%	12.48%
Unleaded gasoline (per gallon)	$2.2914	$2.2501	$0.0413	1.43%	43.02%

AT&T boosts dividend

Telecom giant AT&T (T, news, msgs) was the Dow leader with a 5.5% gain to $40 after boosting guidance for 2008 and beyond. The company also increased its quarterly dividend by nearly 13% to 40 cents per share.

The stock was up 6.8% to $40.49 just before the Fed announcement.

Next year, AT&T said, it expects revenue growth in the mid-single-digit range and free cash flow before dividend between $16 billion and $17 billion.

The company also expects 2008 wireless margins in the low 40% range on earnings before interest, taxes, depreciation and amortization.

The dividend will be payable on Feb. 1, 2008, to shareholders of record on Jan. 10, 2008. AT&T also said it will buy back 400 million shares, which is about 7% of the company's total number of outstanding shares.

AT&T earnings guidance provided a boost for a number of tech stocks. Cisco Systems (CSCO, news, msgs), the big maker of networking equipment, was up 1.3% to $28.02. Juniper Networks (JNPR, news, msgs) jumped 3.9% to $32.61 and was the top Nasdaq-100 stock.

WaMu next on the subprime chopping block

Late Monday, Washington Mutual said it will cut 3,150 jobs and slash its dividend by 73% to 15 cents per share. The majority of the job cuts will be in the company's home-loan division. About 22% of the home-loan unit will be eliminated, and about 190 of its 336 home-loan sales offices will be closed.

Washington Mutual also had announced 1,000 job cuts in September.

The company said it is exiting the subprime-mortgage business and that it will raise $2.5 billion through the sale of convertible stock to try to weather the mess. WaMu also said it is setting aside between $1.5 billion and $1.6 billion to cover loan losses in the fourth quarter.

• Video: Is the bad news over?

WaMu originated more than $26 billion in subprime loans last year, according to industry publication Inside Mortgage Finance.

As of Monday's close, the stock had lost 54% since the beginning of the year.

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Fitch Ratings downgraded Washington Mutual's credit rating to "A-" from "A" on Monday, citing continued difficulty in the U.S. mortgage market.

Washington Mutual follows UBS (UBS, news, msgs), Merrill Lynch (MER, news, msgs) and Citigroup (C, news, msgs), among other big banks and financial-services companies that have been slammed recently by subprime-mortgage losses.

H&R Block reports huge loss

Tax-preparation company H&R Block (HRB, news, msgs) this morning said that it sees a preliminary fiscal-second-quarter loss of $502.3 million, or $1.55 per share -- far worse than the loss of $156.5 million, or 49 cents per share, the company reported in the same period last year.

• Video: Year-end moves for investors

Shares were down 3.3% to $19.30 on the day.

H&R Block said the majority of this quarter's loss comes from discontinued operations, including its Option One Mortgage division.

The company said it will delay its quarterly report, which was supposed to be released on Friday. H&R Block said it switched to a new auditor, Deloitte & Touche, in October, and that more time is needed to finish the work.

Texas Instruments narrows forecast

Shares of chip maker Texas Instruments (TXN, news, msgs) rose 0.8% to $32.93 this afternoon after the company late Monday narrowed its fourth-quarter forecast. The company said it expects between $3.5 billion and $3.66 billion in revenue this quarter; TI had previously forecast revenue between $3.4 billion and $3.68 billion.

Texas Instruments also said earnings would be between 50 cents and 54 cents per share, better than its previous estimate of between 48 cents and 54 cents per share.

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Analysts' consensus estimate is 51 cents per share on revenue of $3.56 billion. "It's a bit of a positive surprise," ThinkEquity Research analyst Robert Burleson told Reuters. "It's still a disappointing quarter. People will be looking for any insights they can get on order trends."

Is the job market fading?

If you're going to be looking for a job in the next three months, you might have some trouble.

A report from global staffing company Manpower said that only 22% of 14,000 companies surveyed plan to add jobs in the first quarter of 2008. The number of companies that expect to reduce staff rose to 12% from 11% a year ago.

The majority of employers polled in the survey -- 60% -- don't expect any change in hiring from January through next March.

The construction and education sectors could be the most difficult for job seekers, according to the survey.

By Charley Blaine and Elizabeth Strott