Stocks Sink on Inflation News

A big jump in November consumer prices weighed on investor sentiment Friday. Citi shares gained amid reports it will bail out seven SIVs

Stocks were broadly lower Friday on fears of higher inflation and as more bad news seeped out of the financial industry.

On Friday, the Dow Jones industrial average dropped 178.11 points, or 1.32%, to 13,339.85. The broader S&P 500 index was down 20.46 points, or 1.37%, to 1,467.95. The tech-heavy Nasdaq composite index fell 32.75 points, or 1.23%, to 2,635.74.

For every 25 stocks falling in price on the New York Stock Exchange, seven moved higher. At the Nasdaq, the ratio was 22 to 8 negative.

Traders have spent the last few days digesting action by the Federal Reserve, both a quarter-point cut in interest rates on Tuesday and a plan to add liquidity to the world financial system on Wednesday.

But if the Fed does boost liquidity, it will do so as inflation heats up. The U.S. consumer price index (CPI) surged 0.8% in November, while the core rate, excluding food and fuel, rose 0.3%. Markets expected tamer readings of 0.6% and 0.2%, respectively, according to S&P. A 5.7% jump in energy prices was the prime culprit. The stronger than expected data will be a major concern for Treasuries and restrict the Fed's

willingness to loosen, says S&P.

Bear Stearns economist John Ryding wrote he still expects the Fed to cut rates in January, but "higher inflation in 2008 will force the Fed to reverse course on rate cuts in the second half of the year." but Deutsche Bank economist Joseph LaVorgna said he was "not worried about a sustained rise in inflation." Energy prices should fall as economic growth moderates next year, he wrote.

In other economic news Friday, industrial production rose 0.3% in November, according to

the Federal Reserve Board. The market consensus was for a smaller 0.1% increase. October's production level was revised downward to 113.6 from 114.0 (0.3%), however, which will moderate the positive surprise in November.

Next week, the markets get a heavy dose of new economic data, including: Housing starts numbers on Tuesday; initial jobless claims and final, third-quarter gross domestic product growth on Thursday; and information on consumer sentiment and income and spending on Friday.

Citigroup (C), bruised by mounting losses, is bailing out seven affiliated investment entities, bringing $49 billion in assets onto its balance sheet and further denting its depleted capital base, according to a Wall Street Journal report. The bank said it would provide emergency support to the SIVs if it can't find buyers for their short- and medium-term debt.

SIVs, which often hold mortgage-backed securities, have come under intense scrutiny in the past several months as nervous investors have balked at buying the short-term debt known as commercial paper that provides critical funding to the vehicles. While Citigroup's action may ease uncertainty about the future of its SIVs, the Journal report speculated it may be the death knell for an industrywide effort to create a rescue fund for the struggling vehicles.

Adding to Citi's woes, Reuters reports that Moody's Investors Service lowered Citigroup's rating to Aa3, saying it doubted that the bank could rebuild its capital ratios any time soon, and said Citi's failure to restore its capital ratios in the medium term could lead to a further downgrade. The agency suggested ways to rebuild included raising more outside capital and reducing its dividend.

Citi's shares declined 1% on Friday.

Among other stocks in the news Friday, Novell (NOVL) posted a fourth quarter loss under generally accepted accounting principles (GAAP) of 5 cents per share, vs. 5 cents EPS one year earlier, as higher expenses offset a 4.7% revenue rise. The software provider sees fiscal 2008 revenue of $920-$945 million; non-GAAP adjusted operating margin is expected to be between 7%-9%. Novell expects to record an additional $15-$25 million in restructuring costs.

JetBlue Airways (JBLU) was upgraded by a Bear Stearns analyst to "peer perform" from "underperform."