Stocks sell off, face a difficult open

Stocks could be headed to a rocky open on Thursday after a late-day sell-off destroyed a rally built on the Federal Reserve's big rate cuts.

At the same time, fourth-quarter earnings from Amazon.com (AMZN, news, msgs) disappointed investors, who slammed the stock in after-hours trading. That could put pressure on technology stocks, especially Google (GOOG, news, msgs), which reports earnings after Thursday's close.

The Dow Jones industrials had been up as much as 201 points at about 3 p.m., thanks to the Fed's decision to cut its federal funds rate to 3% from 3.5%. Then, news broke of a downgrade of bond insurer Financial Guaranty Insurance, or FGIC.

The rally ended almost immediately, and the Dow finished the day down 37 points, or 0.3%, to 12,443. The Nasdaq Composite Index was down 9 points, or 0.4%, to 2,349, and the Standard & Poor's 500 Index was off 6 points to 1,356.

Futures trading suggests the S&P 500 could open down 12 points or so. The Dow could open down 90 points.

• Talk back: What's your view of the Fed's rate cut today?

Bond insurers typically insure the safety of municipal and corporate securities and have been a quiet but key player in the growth and collapse of the subprime mortgage market. Without bond insurance, securities backed by mortgages will be difficult if not impossible to sell. And if bond insurers are downgraded, their ability to attract new business is threatened.

Today's finish cast a pall on the market, which had seen the Fed's move as a key step to minimize the effects of a worsening economic slowdown precipitated by the housing slump.

The Commerce Department reported today that gross domestic product -- essentially a report card on the economy -- showed growth falling to 0.6% in the fourth quarter. That was the lowest growth rate since 2002 and far below the 4.9% growth of the previous quarter. Economists had expected 1.1% growth.

Its housing component, residential fixed investment, dropped by 24% in the fourth quarter from the third quarter, reducing overall GDP by 1.18 percentage points. Third-quarter investment had fallen by 21%, taking 1.08 percentage points out of GDP. The 24% drop was the worst since a 35% plunge during fourth-quarter 1981, The Wall Street Journal said.

FGIC couldn't raise new capital

Bond insurer FGIC was downgraded by Fitch Ratings after it failed to meet a deadline to raise new capital.

Fitch Ratings cut the company's rating to AA from AAA. The move may jeopardize the company's ability to get new business, Bloomberg News reported.

Shares of Ambac Financial (ABK, news, msgs) and MBIA (MBI, news, msgs) fell 14% to $11.13 and 16% to $13.38, respectively. They were the worst S&P 500 performers today.

FGIC is controlled by three companies: PMI Group, Cypress Group and private-equity giant Blackstone (BX, news, msgs). The former two are private companies. Blackstone shares were down 1.8% to $18.65 and unchanged in after-hours trading.

Amazon, Starbucks results disappoint

Shares of Amazon.com and Starbucks (SBUX, news, msgs) were both slumping in after-hours trading because of disappointing earnings reports.

Amazon was down 12% to $65.29 in after-hours trading despite beating Wall Street estimates for fourth-quarter revenue.

The stock had closed up 0.4% to $74.21 in regular Nasdaq trading.

The online retailer said net income more than doubled to $207 million, or 48 cents a share, on revenue of $5.7 billion. Wall Street had expected earnings of 48 cents on revenue of $5.36 billion. Revenue was up 42% from a year ago.

Starbucks, operator of those ubiquitous coffee shops, was down 1.4% to $18.96 after hours. It had closed down 3.8% to $19.22 in regular trading.

The company said it earned $208 million, or 28 cents a share, in its fiscal-first quarter, up slightly from $205 million, or 26 cents, a year ago. Revenue was $2.35 billion, 17% higher than a year ago. Wall Street had expected earnings of 28 cents a share on revenue of $2.76 billion.

Comparable store sales, which looks at results for stores open at least a year, were up just 1%.

Starbucks has said it will cut new-store openings from a projected 2,500 to 2,150 stores this year. It also plans to close around 100 under-performing stores in the United States.

Energy prices -- New York close

	Wed.	Tues.	Chg.	Month chg.	YTD chg.
Crude oil (NYMEX) (per barrel)	$92.33	$91.64	$0.69	-3.80%	-3.80%
Heating oil (per gallon)	$2.5424	$2.5328	$0.0096	-4.04%	-4.04%
Natural gas (per million BTU)	$8.0450	$7.9430	$0.1020	7.51%	7.51%
Unleaded gasoline (per gallon)	$2.3340	$2.3295	$0.0045	-6.30%	-6.30%

What the Fed's move means

The practical effect of the Fed's move is that business and some consumer loans will be cheaper as rates that move with bank prime rates move lower. The rate cut confirms a downward trend in interest rates since last summer.

Futures trading suggests a 60% chance the Fed could move rates lower again in March.

Cheaper credit should help businesses invest and expand. But a caveat: It can take upwards of six months for a rate to flow through the economic system.

The yield on the 10-year Treasury note ($TNX.X, news, msgs) has dropped from 5.3% in June 2007 to 3.7% now. That has pulled mortgage rates lower. The rate on a 30-year mortgage has fallen from around 6% in November to roughly 5.45% now, according to Bankrate.com. That assumes that a borrower will meet current qualification standards which have tightened up in recent months.

• Top Stocks blog: Why it's time to rescue big banks

The central bank said credit markets remain under "considerable stress." Worse, the Fed's statement said, credit has tightened further for some businesses and households. The housing slump is getting worse, it said, and there's new weakness in some labor markets.

The move came as the government readies a stimulus program to prevent the economy from falling into a recession.

With one exception, the members of the Federal Open Market Committee, the Fed's rate-making body, judged that protecting and promoting economic growth was more important than fighting inflation. The central bank "expects inflation to moderate in coming quarters."

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Today's rate cut was the second by the central bank in eight days. The first, which saw the Fed cut its fed funds rate to 3.5% from 4.25%, came after an emergency meeting on Jan. 21 as Asian and European markets were hit by panic selling.

The Fed also cut its discount rate -- the rate it charges member banks for short-term loans -- to 3.5% from 4% today.

The combined rate cuts were the largest in the shortest time since 1990, when the Fed established a policy of trying to control growth and inflation by targeting short-term interest rates.

A big question with today's rate cuts is what tools does the Fed have if today's cuts don't restore investor confidence. The FOMC isn't scheduled to meet again until March 18. Futures trading suggests a 60% the Fed will cut rates to 2.5% by April.

The central bank had disappointed investors with a rate cut of only 0.25% to 4.25% at its Dec. 11 meeting, sending the Dow down nearly 300 points in the next 105 minutes. By Jan. 22, the Dow had fallen nearly 18% from its all-time closing high of 14,164.53, set on Oct. 9.

Market volatility has increased in the last year as the size and complexity of a major housing slump in the United States grew from a minor annoyance into a global crisis.

Rapidly growing default rates on mortgages, particularly defaults of loans made to borrowers with limited or no credit histories, have gutted the value of securities backed by the loans that Wall Street sold to investors. Financial companies, including Merrill Lynch (MER, news, msgs) and Citigroup (C, news, msgs), have reported about $120 billion in losses so far.

Citigroup closed down 0.3% to $27.83. It had been up as much as 4.4% before the FGIC news hit. Merrill Lynch fell 2.1% to $56.24. Both stocks were trading lower in after-hours trading.

New-home sales have fallen 41% in the last year. Existing-home sales are off 31% from highs seen in 2005. Prices are falling in many markets as well; they are off 15% in the last year in the Miami area, according to the Standard & Poor's/Case-Shiller Index of home prices.

Few stock markets have been immune to the problems in the U.S. markets. Japan's Nikkei 225 Index ($N225) is off 24% since an Oct. 11 high. The iShares MSCI Emerging Markets Index Fund (EEM, news, msgs) is off 19% since peaking in late October.

A big, wild day

Given that the Fed was going to announce an interest rate move, today figured to be very busy and volatile. And it was.

At the close, 13 of the 30 Dow stocks were higher, led by Boeing (BA, news, msgs), up 2.4% to $82.87 on the strength of good earnings, and Walt Disney (DIS, news, msgs), up 2.1% to $29.41 on an analyst upgrade.

In addition, only 178 S&P 500 stocks were higher, along with 44 Nasdaq-100 Index ($NDX.X) stocks.

Volume was fairly heavy.

Crude oil moved higher, finishing at $92.33 a barrel in New York, up 69 cents. Crude has been moving more or less with the stock market and its expectations for a rate cut. Giants like ExxonMobil (XOM, news, msgs) and Chevron (CVX, news, msgs) moved higher, but most energy and, especially, oil services stocks were lower. Baker Hughes (BHI, news, msgs) fell 8.4% to $67.27 after missing Wall Street estimates.

Continued: Yahoo's disappointment, Boeing's good news

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