Stocks Plunge as Economic Worries Grow

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7 billion.

The increased use of debit cards and home equity loans, combined with refinancing-related paydowns, have accounted for much of the volatility and restraint in consumer credit growth over the last couple of years, despite the strength in the economy, Action Economics said. Despite high debt levels, interest rates remain low and the ongoing rise in incomes, employment, and the value of household assets leave current debt levels manageable, Action Economics said.

The consumer credit number was so "eye-poppingly different than consensus" -- raising questions about whether consumers are tapped out -- that "when it hit the tape, it got a negative reaction and accelerated the sell-off," Hogan said.

In his January Investment Outlook, published Tueday, PIMCO's Bill Gross concluded that public financing assistance "in the form of lower interest rates and increasing fiscal deficits" will be required to fill the gap created by the failed shadow banking system, which includes collateralized debt obligations and other instruments not backed by cash reserves. He repeated his prediction that the Federal Reserve will slash the Fed funds target to 3% from 4.25% by mid-2008 and also said that Congress and the White House should, but likely won't, cooperated in a tax relief program that benefits low-income homeowners.

Nor was there any comfort to be found in comments from Fed officials Tuesday. Boston Fed President Eric Rosengren predicted the longest housing decline in 50 years if the forecasts are correct and warned home prices could drop more quickly this year if the economy isn't strong, Action Economics said. Rosengren was the sole member of the Fed's policy committee to recommend easing interest rates by a half-percentage point instead of a quarter when the committee met on Dec. 11.

In his daily briefing note, Ed Yardeni, president of Yardeni Research, said a recession in the U.S. is becoming more likely, but he expects the global expansion to continue. He cited the fact that the S&P 500 financial and consumer discretionary sectors are in bear markets, posting declines of more than 23% from their 2007 peaks, while the S&P 500 Bank index is down 39.0% from last year’s peak. The S&P 500 Retailing index has fallen 20.2% from its 2007 peak.

Confidence in the sustainability of the global boom has limited losses in the Materials, Energy, and Industrials sectors to single-digit moves and Yardeni expects them to remain good bets, although "more speed bumps are likely this year than last year," he said.

Jeffrey Kleintop, chief market strategist at LPL Financial Services in Boston, said in an email commentary that while stock market participants have braced for a recession, so far the data indicates only a mid-cycle slowdown. He warned that to shift out of stocks now "may result in missing out on what has historically been a period of strong returns." But he cited the need for a half-percentage point rate cut by the Fed on or before its Jan. 31 policy committee meeting in order to prevent the mid-cycle slowdown from turning into a full-blown recession.

Oil futures rebounded after dropping by nearly $3 per barrel on Monday on speculation that U.S. crude inventories fell last week to three-year lows. The U.S. Energy Department is expected to report on Wednesday that stockpiles fell 1.25 million barrels from 289.6 million barrels last week, a Bloomberg News survey said.

February NYMEX crude oil ended $1.24 higher at $96.33 per barrel, as traders worried that an eighth consecutive decline in inventories would cause supplies to remain tight over the next few months, Bloomberg reported.

Among the stocks in the news Tuesday, Starbucks (SBUX) shares rose 8.1% after it appointed its chairman, Howard Schultz, to take on the additional role of CEO, effective immediately, replacing Jim Donald, who is leaving the company. Starbucks also said it will slow U.S. store growth and accelerate international expansion.

Isis Pharmaceuticals Inc. (ISIS) shares jumped 27.4% after it said it signed a deal with Genzyme (GENZ), under which Genzyme will develop and market mipomersen, ISIS's lipid-lowering treatment for high-risk cardiovascular patients.

Leap Wireless International Inc. (LEAP) shares climbed 6.1% on news that it gained about 152,000 net customer additions during the fourth quarter, bringing the total number of net additions for 2007 to about 634,000 and ending the year with about 2.9 million customers.

The Greenbriar Companies Inc. (GBX) shares fell 12.4% after posting a lower-than-expected second-quarter profit of 16 cents, vs. 12 cents per share in the first quarter, on 16% revenue rise.

European stocks finished higher Tuesday. In London, the FTSE 100 index rose 0.33% to 6,356.50. In Paris, the CAC 40 index advanced 0.79% to 5,495.67. Germany's DAX index climbed 0.42% to trade at 7,849.99.

Major Asian markets finished mostly lower. Japan's Nikkei 225 index edged up 0.19% to 14,528.67. In Hong Kong, the Hang Seng index fell 0.24% to 27,112.90. The Shanghai composite index slipped 0.13% to 5,386.53.

Treasury market

Treasury bonds traded higher on the rout in equities. The 2-year Treasury note rose 04/32 to 101-03/32 for a yield of 2.68%, the 10-year note advanced 14/32 to 103-25/32 for a yield of 3.78% and the 30-year bond was up 16/32 to trade at 111-14/32 for a yield of 4.31%.