Stocks down as Fed launches credit auction

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NEW YORK -- Wall Street extended last week's losses Monday as investors remained concerned about flagging growth and rising prices, and skeptical that a special Federal Reserve credit auction will be a solution.

The Fed is offering $20 billion in 28-day credit through an auction Monday. The central bank will not release the results until Wednesday, but the aim of the auction is to encourage commercial banks to borrow from the central bank. That, in turn, would boost banks' lending to businesses and consumers and keep the economy humming.

Last week, the Fed disappointed investors when it cut interest rates by only a quarter-point, which was less than some analysts expected. Wall Street is pleased that policy makers say they will keep trying to lift market confidence, which has dwindled since home foreclosures started soaring, but the market is so far unconvinced that the auction will be enough.

A speech Sunday night by former Fed Chairman Alan Greenspan added to the market's ill humor. Greenspan said "stagflation" -- when inflation accelerates and the economy weakens -- is a growing possibility, given last week's data showing spiking consumer prices. With inflation on the rise, the Fed, which has reduced the target federal funds rate three times since the summer, may feel less inclined to lower rates again.

Higher inflation is also a problem for consumers, whom retailers rely on during the holidays to fuel their profits. With only a week left until Christmas, sales data has suggested tepid spending by Americans, who are struggling with higher food and energy costs and tumbling home values.

"The consumer is two-thirds of our economy. The consumer holds the key to whether we have a recession in 2008," said Alfred E. Goldman, chief market strategist at A.G. Edwards & Sons Inc. in St. Louis.

The Dow Jones industrial average fell 67.87, or 0.51%, to 13,271.98.

Broader stock indicators also declined. The Standard & Poor's 500 index dropped 7.29, or 0.50%, to 1,460.66, and the Nasdaq composite index fell 25.16, or 0.95%, to 2,610.58.

Last week, the Dow dropped 2.10%, the S&P 500 fell 2.44% and the Nasdaq lost 2.60%.

Government bond prices rose as stocks fell. The yield on the 10-year Treasury note, which moves opposite its price, slipped to 4.19% from 4.24% late Friday.

The dollar rose against most other major currencies Monday, while gold prices fell.

Light, sweet crude futures fell $1.15 to $90.12 a barrel on the New York Mercantile Exchange.

In economic data, the U.S. government said the current account deficit, the broadest measure of international trade, narrowed in the third quarter compared to the second quarter, as expected, to the lowest level in two years. Meanwhile, the New York Fed's Empire State Manufacturing Index fell more sharply in December than economists anticipated.

Later on Monday, the National Association of Home Builders is scheduled to release its housing market index, which is expected to hold steady.

Wall Street started 2007 soaring due to strong merger-and-acquisition activity, but found little consolation in deal-making Monday.

Ingersoll-Rand Co. -- the manufacturer that makes, among many things, Thermo King refrigerated trucks -- said it will buy air conditioner maker Trane Inc. for $10.1 billion. Ingersoll-Rand shares fell $3.36, or 6.8%, to $45.82, Trane surged $8.65, or 23%, to $45.85.

Meanwhile, Aon Corp. announced it will sell two insurance units for $2.75 billion in separate cash deals, and the conglomerate Loews Corp. said Monday its board approved a spinoff of Lorillard Inc., one of the nation's largest cigarette makers.

Loews rose $1.77, or 3.8%, to $48.57.

Aon rose 52 cents to $49.46.

And National Oilwell Varco Inc. said it is buying a smaller Houston-based oil drilling equipment maker, Grant Prideco Inc. The $7.37 billion deal includes cash and stock valued at $58 a share.

National Oilwell fell $5.38, or 7%, to $71.99. Grant Prideco rose $7.05, or 14.9%, to $54.51.

Declining issues outnumbered advancers by about 2 to 1 on the New York Stock Exchange, where volume came to 424.9 million shares.

Overseas, Japan's Nikkei stock average fell 1.71%, and Hong Kong's Hang Seng index fell 3.51%. Britain's FTSE 100 dropped 1.40%, Germany's DAX index lost 1.33% and France's CAC-40 declined 1.38%.
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