Fifteen months into the bear market, U.S. stock funds continued bleeding after a Santa Claus rally respite, while the major indexes kicked off the year with the worst January returns in their history.

White-hot U.S. Treasuries sold off dramatically, experiencing their worst drop in five years, on fears of the ever-growing federal deficit heating inflation and ebbing foreign demand, especially from China. Conversely, high-yield and municipal bonds rallied.

U.S. diversified stock funds on average plunged 7.03% in January, wiping away a 2.8% uptick in December, according to Lipper Inc.

Short-selling funds, which make money from falling stock prices, returned 10.45%. They're the only stock group to book gains on a longer-term three- and one-year basis, up 5.26% and 26.48%, respectively, over those periods.

Growth funds trumped value in all size categories by a wide margin. Large-cap growth shed 4.6% vs. a 9.54% loss for large value.

Midcap growth sank 4.79%, while its value peer receded 8.15%.

Small-cap growth sagged 7.10%. Small-cap value, the worst-performing group, tumbled 11.01%.

The outperformance of growth over value stocks was primarily due to large drops in financials and positive earnings reports from health care and technology companies, said Paul Alan Davis, manager of the Schwab Core Equity (NASDAQ:SWANX - News) and Schwab Dividend Equity Select (NASDAQ:SWDSX - News) funds.

The in-house Schwab Equity Ratings model that Davis uses to pick stocks currently shows good ratings in small caps and midcaps, health care, energy and consumer staples.

"With all of the uncertainty about the economy and the net effect of the stimulus plans, we are positioning the funds for an extended slowdown and a slow economic recovery," said Davis, who oversees $4.7 billion in assets.

In anticipation of high volatility, Bart Geer, manager of Putnam Equity Income (NASDAQ:PEYAX - News), plans to trade more actively than usual on top of targeting defensive sectors and dividend payers such as electric utilities.

His fund bought Apple (NasdaqGS:AAPL - News) and State Street (NYSE:STT - News) after they sold off heavily; it currently sits on double-digit percentage gains in both.

"We're buying on weakness and selling on strength on a stock-by- stock basis," said Geer, who manages $2.5 billion in assets. In a volatile market environment, "the opportunities come faster, and frankly they're bigger," he said.

Geer overweighted the fund in health care with a large stake in Amgen (NasdaqGS:AMGN - News), which he bought a year ago. He booked profits from Wyeth (NYSE:WYE - News), thanks to a $68 billion buyout deal from Pfizer (NYSE:PZE - News) on Jan. 23.

Thyra Zerhusen, portfolio manager to the Aston/Optimum Mid-Cap (NASDAQ:CHTTX - News), is adding to existing holdings that she believes are undervalued or oversold and trimming positions that appreciated in price.

She recently pumped up positions in FMC Technologies (NYSE:FTI - News), Denbury Resources (NYSE:DNR - News), Chicago Bridge & Iron (NYSE:CBI - News) and Edwards Lifesciences (NYSE:EW - News). She steered clear of financials, while favoring energy and health care.

The Dow slid 8.84%, while the S&P 500 dropped 8.57%, booking the worst January in its 81-year history. The Nasdaq skidded 6.38%.

"The market is effectively discounting a 40% to 50% decline in S&P 500 earnings, so a considerable amount of the negative fundamental outlook is already reflected in its valuation," said Todd Lowenstein, co-manager of HighMark Value Momentum (NASDAQ:HMVMX - News), which controls $237 million in assets. "Moreover, the vast monetary and fiscal stimulus in the pipeline will eventually reinflate and stabilize the economy and markets, but it works with a lag."

With 22% of the companies in the S&P 500 having reported fourth-quarter results, earnings have fallen 34% year over year, according to Thomson Reuters. In Q3 2008, the S&P's earnings slid 19%.

Full-year '08 earnings are forecast to fall 12.5% and drop 7% in '09.

Earnings estimates forecast declines of 22.1% for the first quarter, 19.9% for the second quarter and 5.2% for the third quarter. Analysts see a fourth-quarter rebound with growth of 59%.

"We are approaching an environment," said Zerhusen, "in which a company can report decent earnings and not lower their outlook, and the stock's price will actually reflect that good news ... as opposed to October and November, when positive news seemed to have little to no effect on the markets."

Such reactions add to evidence that the market has bottomed, she says.

The proportion of companies missing earnings forecasts has flown to a 10-year high. Meanwhile, the speed and magnitude of downward revisions has surpassed those of the last two recessions, according to a Merrill Lynch investment strategy report.

NEW YORK (Reuters) –
Stocks rose on Tuesday as news of an alternative stimulus plan from Senate Republicans suggested lawmakers were moving closer to a package that would soften the blow of a deepening recession.

A surprise rise in December pending home sales also buoyed sentiment, while a solid profit from drugmaker Merck (MRK.N) offered a rare bit of welcome news in an otherwise gloomy earnings season.

"The fact that we've gotten at least a counter-proposal makes it more likely that something will pass," said Michael James, senior trader at regional investment bank Wedbush Morgan in Los Angeles.

"There was some concern that we might not get a (stimulus) bill passed a couple of days ago. That certainly added to the market's big move at the end of the day."

Merck shares climbed more than 6 percent, making health-care stocks one of the biggest boosts to both the Dow and the S&P 500. Schering-Plough (SGP.N) also posted quarterly results ahead of Wall Street targets, sending its stock up more than 8 percent.

The Dow Jones industrial average (.DJI) jumped 141.53 points, or 1.78 percent, to 8,078.36. The Standard & Poor's 500 Index (.SPX) added 13.07 points, or 1.58 percent, to 838.51. The Nasdaq Composite Index (.IXIC) shot up 21.87 points, or 1.46 percent, to 1,516.30.

A group of Republican U.S. senators offered a $445 billion alternative plan to boosting the ailing economy, about half of which would be in the form of tax cuts. The plan is an alternative to the $885 billion package crafted by Democrats who control the Senate.

DISNEY DISAPPOINTS

But even with the optimism, there was some unsettling news after the bell as Walt Disney Co (DIS.N) ,considered a bellwether for consumer spending, posted a 32 percent slide in quarterly profit, worse than expected. Its stock, a Dow component, slid than 9 percent to $18.70 after-hours, from a close of $20.62 on the New York Stock Exchange.

Disney's results could potentially unnerve investors on Wednesday.

In the regular session, technology notched a strong advance for a second straight day as shares of such bellwethers as Microsoft (MSFT.O) rallied on hopes that government stimulus plans will boost consumer and business spending, offsetting a disappointing outlook from flash memory card maker SanDisk Corp (SNDK.O).

Microsoft, up 3.8 percent at $18.50, was the top boost on Nasdaq, and the software maker capped its strongest two-day run-up in nearly two months. Tech services company International Business Machines Corp (IBM.N) led the Dow, finishing up 2.8 percent at $93.48.

Merck shares finished 6.4 percent higher at $30.24, while Schering-Plough climbed 8.2 percent to $18.91. Drug companies are a defensive play as their business is considered better able to withstand a downbeat economy. The pharmaceutical index (.DRG) rose 3 percent.

Investors saw a glimmer of hope in the battered housing market after pending sales of existing homes rose 6.3 percent in December, sparking an 8.5 percent rise in the Dow Jones home construction index (.DJUSHB).

Shares of luxury home builder Toll Brothers (TOL.N) gained 6.4 percent to $18.06. Shares of D.R. Horton (DHI.N) surged 21.4 percent to $7.42 after the home builder posted a smaller-than-expected quarterly loss.

BANK WOES

Bank shares slid, however, due to uncertainty about the Obama administration's plans to shore up the beleaguered financial sector. JPMorgan (JPM.N) ,down 4.6 percent at $24.05, was the top drag on the Dow, followed by American Express (AXP.N) ,off 5.2 percent to $16.09.

Bank of America (BAC.N) sagged for a fourth straight day, ending 11.8 percent lower at $5.30 on the New York Stock Exchange. The Obama administration is due to make an announcement about its bank plan next week.

Shares of SanDisk, whose chips are used in cell phones and digital cameras, plunged 23.2 percent to $8.66, a day after it gave a disappointing outlook and said it may undertake an equity offering that could dilute shares as much as 20 percent.

Volume was moderate on the New York Stock Exchange, where about 1.35 billion shares changed hands, below last year's estimated daily average volume of 1.49 billion shares, while on the Nasdaq, about 2.12 billion shares traded, below last year's daily average of 2.28 billion.

Advancers outnumbered decliners on the NYSE by a ratio of about 8 to 5, while on the Nasdaq, about four stocks rose for every 3 that fell.

(Editing by Leslie Adler)

NEW YORK – Bye bye endless varieties of men's shoes in black. So long, five-pocket jeans in five different colors.

Financial trouble at companies that make clothes, toys and items for the home will likely translate into fewer choices for shoppers, who may have a hard time finding the brands they like or see the same colors and styles repeatedly as stores take fewer risks.

Fall collections of nothing but black, forest green and dark purple? It's not that far-fetched, according to the fashion cognoscenti.

"It feels like a self-fulfilling prophesy," said Josh Green, CEO of Panjiva, which tracks shipments by global suppliers to the United States based on U.S. Customs data.

Companies concerned about the future are cutting back their shipments, which is having a big impact on the supply chain, he said, leaving stores struggling to figure out which vendors are stable and which are not.

Suppliers that survive will focus on their main items and are not going to take chances on "unproven products," Green said. "It is very hard to innovate when you are scrambling for survival."

Companies like apparel makers Liz Claiborne and Phillips-Van Heusen are doing everything from cutting jobs and closing distribution centers to trying to arrange more financing as the dramatic drop in consumer spending leads stores to order less. Toy maker Mattel Inc., which posted a 49 percent drop in fourth-quarter profit, said its focus this year will be "cost and spending reductions." It added that it's cutting back on underperforming products. Whether that means fewer choices with Barbie or Hot Wheels isn't clear yet.

Anxieties are running high ahead of January sales figures, due Thursday, that are expected to show an even deeper decline from December. Experts expect the economic tailspin to accelerate as consumers and businesses dig deeper into survival mode.

The caution can already be seen in the lean assortment of spring items in stores like Banana Republic and AnnTaylor, which have empty space in areas once teeming with tables of merchandise.

How else will the pullback appear? In toys, shoppers will likely see fewer types of train sets and fewer new toy launches, according to Chris Byrne, an industry consultant. Shoppers looking for lightweight sweaters will probably not have a huge selection of necklines. And what about that oddball color? Shoppers are going to have to look harder.

"How many different brands of men's black shoes do we need?" is one example of the questions Macy's is asking itself, Chief Executive Terry J. Lundgren told the The Associated Press this week after the chain announced it was cutting 7,000 jobs. "We have to do a better job in turning our inventory," he added.

Besides cutting back on merchandise, stores are also waiting longer to place their orders, pressing suppliers well beyond normal deadlines. While deadlines vary, retail strategist Amy Klaris at consulting firm Kurt Salmon Associates estimates that merchants are now ordering goods from three to six months ahead instead of four to seven months. This could put some manufacturers out of business in the meantime or leave them to guess what might be popular.

As chains from Circuit City Stores Inc. to Mervyns LLC disappear, the suppliers are also seeing shrinking opportunities to sell their wares. Luxury coat maker Searle Inc. filed for bankruptcy protection and toy maker Planet Toys has shuttered its business, with others likely to follow.

Green said of the firms he tracks, the number of global suppliers shipping to the U.S. dropped 13 percent to 156,000 in December compared with October 2007. Of those, 12 percent had a 50 percent drop or more in volume during the October through December period from a year earlier, he said.

At the same time, Green says factories are going to be in extreme trouble amid the global recession. Mattel's Chairman and CEO Robert A. Eckert said Monday he was concerned by a rash of bankrupt toy factories in China.

Overall, the most vulnerable manufacturers, analysts say, are smaller companies that are having a harder time than their larger competitors in getting financing. They also can't meet the increasing demands from major chains: lower prices and faster production.

The hardest hit suppliers are those that produce clothes and home goods. Stores in those areas are expected to slash inventories 20 percent to 25 percent for this fall, according to Craig R. Johnson, president of consulting group Customer Growth Partners. And after the dismal holiday season just past, he believes orders for holiday 2009 will at best be even with the reduced levels for last year.

Production streamlining and cost cutting by clothing makers could ultimately mean the disappearance of some labels from store shelves. Phillips-Van Heusen Corp., which owns the Calvin Klein, Izod and Van Heusen brands, is closing 175 stores and laying off 400 employees. Liz Claiborne Inc. said Tuesday that it will cut about 725 jobs, after announcing last week that it will close a distribution center, idling 350 employees.

Jones Apparel, whose brands include Nine West, Anne Klein and Gloria Vanderbilt, is cutting jobs and unprofitable divisions.

At Washington, D.C.-based clothing chain Up Against the Wall, sales declines have led fashion director Wendy Red to cut back on the number of vendors she works with.

"If the brand is risky, it's not a good time for testing," she said. "It's not acceptable."

She's focusing on bigger labels like Levi Strauss and Stussy, and is working with vendors to cut production time and lower prices on goods.

But some increasing demands from retailers are unrealistic, said Richard Leeds, whose eponymous company makes women's sleepwear featuring characters like Betty Boop.

"The prices that retailers want are still lower than what the fair market is able to produce," he said. Stores want him to lower prices by as much as 35 percent for the fall season; he says realistically he can only bring them down by about 10 to 15 percent.

Leeds said he simply cannot produce garments at the prices that stores are asking for, though in recent days he said they're becoming a little more reasonable.

"This is about maintaining minimal profitability and trying to adjust yourself to the new realities that confront us," he said.

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AP Retail Writer Mae Anderson contributed to this report.

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On the Net:

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