Morning Update

Economic Clouds Obscure

A deepening recession, a worse-than-expected quarter from Alcoa, and soft guidance from CSX Corp. are forcing stocks lower in early action as worries about the economic outlook grow, while oil prices continue to weaken and commodities are extending losses. But shares are off the lows of the session. Against the backdrop of the poor economic climate, Fed Chairman Ben Bernanke is speaking before a group in London and detailing some of the tools it still has in its arsenal. Elsewhere, Sony may be set to report is first annual operating loss in over a decade, while Treasuries are slightly higher, and global markets remain under pressure. The trade gap substantially narrowed.

As of 8:37 a.m. ET, the March S&P 500 Index Globex futures contract is 2 points below fair value, the Nasdaq 100 Index is 1 point above fair value, and the DJIA is 42 points below fair value. Crude oil is down $0.28 to $37.31 per barrel, and gold is up $2.00 at $823.00.

Citing an "historic decline in metal prices" and weak end markets, Dow member Alcoa (AA $10) posted a 4Q loss ex-items of $0.28 per share, well below the Reuters estimate of a $0.09 per share loss and the bottom of the range of analysts' estimates of a $0.20 per share loss. Revenues fell $1.3 billion to $5.7 billion. The number one aluminum producer in the US said results were driven by a 35% drop in aluminum prices from a year ago and a 56% drop in prices from July. Alcoa also blamed softening demand, particularly from the automotive, commercial transportation, and building and construction sectors.

CSX Corp. (CSX $32) announced that it expects to earn $0.90 per share in 4Q, below the consensus view of $0.99, and revenues of $2.7 billion, just shy of expectations. Higher yields and fuel surcharges were unable to offset "significantly lower volumes," the railroad said.

Fed still has options

In a speech in London, Fed Chairman Ben Bernanke said fiscal actions must be focused on aiding the financial system, while how governments respond will probably determine how strong and how quickly the economy may recover. Although the timing of a worldwide rebound is "highly uncertain," Bernanke said the Fed still retains tools to support activity. The Fed's approach differs from Japan's easing earlier in the decade, he said, while communication tools can be used to influence expectations. Moreover, the Fed is still looking at purchasing longer-term Treasury securities. Bernanke added that market conditions will dictate when the Fed will end credit programs, and reducing the central bank's balance sheet will not be difficult. A question and answer session will follow his prepared remarks.

Trade gap narrows substantially

The trade deficit fell from $56.7 billion in October to $40.4 billion in November, well below the Bloomberg estimate of $51.0 billion. Exports fell 5.8% to $142.8 billion and imports dropped 12.0% to $183.3 billion. A decline in the nation's bill for crude oil to $17.5 billion from $29.8 billion was a big contributor to the smaller trade gap. Treasuries were little affected and are slightly higher.

Europe adding to losses

Germany provided more details for its 50 billion euro stimulus plan, but a weak start to the 4Q earnings season and lingering worries that the weak economic climate will not abate anytime soon are hampering European shares. After a big loss in Citigroup's (C $6) shares yesterday, banks are having trouble this afternoon in Europe amid worries about future write-downs, while further weakness in oil and raw materials prices, courtesy of global uncertainty, is putting added pressure on the energy and commodity groups. Elsewhere, European Central Bank President Jean-Claude Trichet defended recent actions and said the single currency has helped to cushion the downturn, but he added that the eurozone economy faces challenges. He did not comment on Thursday's meeting and rate decision but most analysts are looking for a 50 bp cut in the key rate to 2.0%.

Earnings woes hound Tokyo

Traders returned from a three-day weekend in Japan and had their first chance to react to Friday's jobs report in the US, while local media reports that Sony (SNE $23) may post a $1.1 billion annual operating loss - its first in 14 years - sent its shares down almost 9% and the benchmark Nikkei 225 Index down 4.8%. The downturn in global demand and the stronger yen are the primary culprits that are hindering results at the world's second largest maker of consumer electronics. Previously, the company had expected a small profit. Sony did not comment. In addition, shares of Toshiba (TOSBF $5) fell over 8% after announcing it is considering cutting its fiscal 2009 outlook.

Despite weakness in Asia, South Korean shares managed to finish higher. Hynix Semiconductor pushed ahead on expectations that chip prices may have bottomed, but steelmaker Posco (PXK $69) fell after saying it sees faltering demand but denied a January loss is in the offing. India's Infosys Technologies (INFY $26) closed higher after posting stronger-than-expected earnings but it cut revenue guidance in dollar terms.