Stocks cling to gains

Financial shares rallied Thursday on the back of global efforts to stabilize the banking industry, but the broader market struggled after the latest grim readings on the economy.

New home sales plunged to an all-time low in January and the number of Americans filing new claims for unemployment hit a 26-year high last week. GM's huge quarterly loss added to the auto sector's woes.

The Dow Jones industrial average (INDU) gained 45 points, or 0.6%, more than two hours into the session. The S&P 500 (SPX) index rose 5 points, or 0.6%. The Nasdaq composite (COMP) advanced 1 point, or 0.1%.

Stocks had posted gains through the morning, but by midday, only the blue chips remained in positive territory.

"We had a good start today, but it's already giving a lot of it back," said Greg Church, president of Church Capital.

He said that the banks and the broader market were advancing on hopes that the various plans to help the financial sector will work. But those hopes could be dashed if more details don't emerge soon.

"I think we still don't know enough about how these various plans are going to work and when they will start to work," he said. "Until we do, it's going to be hard for the market to really get going."

In Washington, President Obama presented a budget summary for fiscal 2010 to Congress on Thursday, with a detailed account due in April. The roughly $3.55 trillion spending plan is for the fiscal year beginning in October.

The government is forecasting a $1.75 trillion deficit for the 2009 fiscal year and a $1.17 trillion deficit for the 2010 fiscal year. Obama has said he plans to cut the deficit inherited from former President George W. Bush in half by 2013.

Economy: New home sales plunged to an annual unit rate of 309,000 in January, the worst level since the government began keeping records in 1963. Economists thought sales would fall to 324,000 in the month, according to a Briefing.com survey. Sales stood at a 344,000 annual unit rate in December.

An earlier report showed that weekly jobless claims rose to a fresh 26-year high last week of 667,000 versus forecasts for a drop to 625,000. Claims stood at a revised 631,000 in the prior week.

Durable goods orders fell to a 6-year low in January, declining for the sixth straight month, the government reported. Orders fell 5.2% in January versus forecasts for a drop of 2.5%. Orders dropped a revised 4.6% in December.

Financials: JPMorgan Chase (JPM, Fortune 500) said that its expects steeper home-equity loan losses this year and that it will cut more jobs related to its purchase of Washington Mutual. Shares jumped 11%.

Citigroup (C, Fortune 500) is close to finalizing a deal for the government to increase its stake in the troubled bank to as much as 40%, according to reports. A deal could be announced as soon as Thursday. Citi shares gained 3%.

Worries that the U.S. government will have to fully take over hard-hit banks like Citigroup have dragged on stocks for weeks, although Fed Chairman Ben Bernanke sought to temper such fears in his address to Congress Tuesday.

On Wednesday, Treasury offered more details on its plan to "stress test" banks for potential losses should the economy worsen. Tests of the 19 largest banks will be used to determine what future bailouts may be necessary.

On Thursday, Obama's budget outline included $250 billion to be added to the already in existence $700 billion bank bailout plan.

Britain announced a plan Thursday to insure at least £600 billion ($854.2 billion) of banks' toxic assets, the Wall Street Journal reported, as it looks to restart lending and avoid fully nationalizing banks.

Royal Bank of Scotland (RBS) will dump £325 billion ($462.7 billion) in bad debt into the government program. RBS posted an annual loss of £24.14 billion ($34.4 billion), the biggest loss in British corporate history. In addition to participating in the government program, RBS announced a huge restructuring plan and said it will sell off certain assets. Shares gained 22% in U.S. trading.

GM: The beleaguered automaker reported a massive $9.6 billion quarterly loss in the fourth quarter, in a period in which its sales plunged and it needed a federal bailout to stay afloat. GM (GM, Fortune 500) shares were little changed. (Full story)

Market breadth was positive. On the New York Stock Exchange, winners beat losers by almost three to one on 475 million shares. On the Nasdaq, advancers topped decliners two to one on volume of 800 million shares.

Bonds: Treasury prices tumbled, raising the yield on the benchmark 10-year note to 3.0% from 2.92% Wednesday. Treasury prices and yields move in opposite directions.

Lending rates were little changed. The 3-month Libor rate was 1.26%, unchanged from Wednesday and the overnight Libor rate rose to 0.28% from 0.27%, according to Bloomberg.com. Libor is a bank lending rate.

Other markets: In global trading, Asian markets slumped and European markets rallied in afternoon trading.

In currency trading, the dollar fell versus the euro and gained against the yen.

U.S. light crude oil for April delivery rose $2.20 to $42.70 a barrel on the New York Mercantile Exchange.

COMEX gold for April delivery fell $32.60 to $933.60 an ounce.

Stocks end volatile session lower

Wall Street abandoned a late-session rally attempt Wednesday, ending lower, as investors took a mixed response to new details on Treasury's plan to help stabilize the banking system.

On Thursday, investors will focus on Obama's fiscal 2010 budget plan, the weekly jobless claims and reports on new home sales and durable goods orders.

The Dow Jones industrial average (INDU) lost 80 points, or 1.1%. The S&P 500 (SPX) index fell 8 points, or 1.1%. The Nasdaq composite (COMP) lost 16 points, or 1.1%.

Stocks tumbled in the morning after a report showed existing home sales plunged to an 11-year low in January. But equities managed to cut losses and even turn higher in the afternoon after the bank plan announcement, with a number of financial stocks rallying.

"I think people are just glad to know what they are planning," said Dave Rovelli, managing director of U.S. equity trading at Canaccord Adams.

Yet after a brief rally, stocks erased the gains and turned lower again, as investors continued to worry about the depth and duration of the recession.

"There's a lot of nervousness," said Terry L. Morris, senior equity manager at National Penn Investors Trust. "It's a tug-of-war between the news that's out there and the fact that the market has already gotten pounded."

Confusion about the bank bailout plan has dragged on stocks lately. And recent worries have surrounded the threat of nationalization, which would wipe out shareholder value.

On Tuesday, Federal Reserve Chairman Ben Bernanke downplayed bank takeover talk, helping the stock market bounce off 12-year lows. The Treasury announcement Wednesday added to bets that the government doesn't plan to nationalize, Rovelli said.

"They're probably going to handle things like they are with Citigroup, where they take a stake in the bank, but don't take it over," he said.

Banks to face tests: Treasury plans to test the 19 banks with more than $100 billion in assets to see if they have enough capital to hold up if unemployment rises to 10% and the housing market contracts another 20%. The testing will be over by the end of April. (Full story)

The collapse of the housing market has left banks riddled with bad debt that they can't unload, and that makes them wary of lending to businesses and individuals. Although the credit markets have shown a slight improvement lately, the lending market is still sluggish at best, exacerbating the impact of the recession.

Treasury's bailout plan is ideally meant to keep banks afloat, but also get them to lend again.

The plan may achieve that, but it doesn't resolve the problem of how to value the bad assets at a price that is both good for the holders and good for the buyers, said Gregory Miller, chief economist at SunTrust Banks.

"They're trying to repair bank balance sheets when the assets that define the balance sheets keep declining," he said. "This plan may come a step closer to doing that, but it's taking an indirect route, instead of attacking more directly."

Shares of bank stocks were volatile after the Treasury news. Citigroup (C, Fortune 500) and Goldman Sachs (GS, Fortune 500) ended lower. Wells Fargo (WFC, Fortune 500), JPMorgan Chase (JPM, Fortune 500) and Bank of America (BAC, Fortune 500) ended higher.

Washington: Speaking Tuesday night before both chambers of Congress, President Obama told the nation: "We will rebuild, we will recover and the United States of America will emerge stronger than before."

The president outlined plans for creating jobs, stabilizing the credit markets, reforming health care and improving schools, among other issues. He presents his fiscal 2010 budget plan to Congress Thursday.

Separately, President Obama told Congress Wednesday that stronger financial sector regulation is needed.

Ben Bernanke told the House Financial Services Committee Wednesday that fixing the mortgage market is necessary for fixing the financial market, even if it means bailout out irresponsible buyers.

Company news: Ford Motor (F, Fortune 500)'s CEO and chairman agreed to cut their pay by 30% for the next two years and to suspend bonuses for salaried workers. Ford will also offer another round of buyouts and early retirement packages to all of its hourly workers. The changes were announced as union members are nearing a vote on contract concessions.

General Motors (GM, Fortune 500) rallied nearly 15%. Currently, an Obama administration task force is reviewing turnaround plans from GM and Chrysler, which have asked for a combined $22 billion more in bailout money on top of the $17.4 billion they have already received. GM issues fourth-quarter results before the start of trading Thursday.

In deal news, Canadian fertilizer Agrium made a hostile bid for U.S. rival CF Industries (CF) worth $3.6 billion in cash and stock - a 30% premium over CF's closing price Tuesday. Any deal is conditional on CF giving up its hostile offer for Terra Industries (TRA), which the company has already rejected.

First Solar (FSLR) plunged 22% in unusually active Nasdaq trade after the solar panel maker warned late Tuesday that first quarter and full-year 2009 revenue will fall from a year ago amid a bleak outlook for the industry and economy.

Market breadth was negative. On the New York Stock Exchange, decliners beat advancers three to two on volume of 1.82 billion shares. On the Nasdaq, losers beat winners by more than two to one on volume of 2.45 billion shares.

Bonds: Treasury prices tumbled, raising the yield on the benchmark 10-year note to 2.92% from 2.79% Tuesday. Treasury prices and yields move in opposite directions.

Other markets: In global trading, Asian markets rose and European markets were mixed.

In currency trading, the dollar gained versus the euro and the yen.

U.S. light crude oil for April delivery rose $2.54 to settle at $42.50 a barrel on the New York Mercantile Exchange. The price of oil was volatile after the government said the supply of crude increased less than expected last week.

COMEX gold for April delivery fell $3.30 to settle at $966.20 an ounce.

Compound your gains, not losses

Hoyt Cory doesn't know quite what hit him. The 61-year-old holistic wellness practitioner in Sonora, Calif. expected steep losses in his $890,000 retirement funds, given the market crash. But when he added up the damage at the end of last year and saw that he had only $542,000 left in his stock and bond portfolio - nearly a 40% decline - the former corporate training and development consultant couldn't believe it.

"I thought I did everything right," says Cory, who is about to get married. "I read up on this stuff, I diversified, I even got help from a financial adviser. I just didn't see the writing on the wall."

There are plenty of people who share Cory's disbelief - and pain. The typical long-term 401(k) investor ages 45 to 64 lost about 20% in 2008, according to the Employee Benefit Research Institute. If, like Cory, you suffered steeper losses than that, it's probably a sign that you had problems in your portfolio. That means you got pounded twice - first by the crash and then by your missteps.

While you can't do much about the market, you can correct your errors.

Mistake no. 1: You invested too aggressively for your age

The very young can invest almost all of their money in equities, since they have time to make up for losses. But the same isn't true for boomers. Yet an alarming number of workers nearing retirement are too heavily weighted in stocks.

Among 401(k) savers 56 to 65, nearly two in five recently had 80% or more of their retirement assets in equities, according to EBRI research director Jack VanDerhei. Cory was one of them, though he didn't realize it at the time.

While virtually all assets (stocks, corporate bonds, real estate and so forth) were hit hard by this downturn, a higher fixed-income allocation would still have prevented Cory from losing so much, notes Plymouth, Mass. financial planner William Driscoll.

For instance, had Cory invested 65% of his money in an S&P 500 stock index fund and 35% in a diversified bond index fund, he would have lost 22% last year. That still would have hurt, but it'd be better than his actual 39% decline.

Solution: Sit down and figure out your proper allocation. Take into account your financial standing, expected retirement date and tolerance for risk. Based on these factors, Colorado Springs financial planner Allan Roth recommends that Cory put 65% of his portfolio in equities - not the nearly 85% he currently has - with the rest in bonds and cash.

To figure out the best strategy for you, check out the asset-allocation tool. Even if you work with a financial planner, run the calculation. If your adviser recommends a different strategy, ask why.

Mistake no. 2: You forgot to keep your plan in check

It's tempting to let your portfolio run unfettered when stocks are rollicking. But failing to routinely monitor your investments will make you more vulnerable to market crashes.

Take Cory. It was never his intent to have nearly 85% of his retirement funds in stocks. When he was in his mid-fifties, an adviser recommended that he be 75% in equities. Cory took the advice. But he never reset his portfolio to that initial mix of stocks and bonds. Since his equities grew faster than his bonds between 2003 and 2007, his 75%-stock strategy morphed into a more aggressive plan on its own.

Solution: Reset your mix to your desired allocation at least once a year. In a rising stock market, rebalancing forces you to take some profits. It also ensures that your portfolio won't be too aggressive when the next bear strikes. Conversely, when equities are falling, rebalancing forces you to buy shares when prices are low. And it ensures that your portfolio won't be too conservative when the next bull rolls around.

What's the best way to rebalance? Driscoll suggests that Cory set triggers. If his stock weighting changes by more than five percentage points in either direction - in other words, if his 65%-stock allocation shrinks to less than 60% or grows to more than 70% - rebalance then and there. An easier solution: Pick a date on the calendar and just rebalance annually.

Mistake no. 3: You picked some real dogs

Sometimes it's not your overall strategy that's flawed. It's the individual funds you picked to implement your plan.

Yet investors often struggle psychologically with the idea of selling their underperformers. Part of the problem is that many investors "feel the pain of taking a loss twice as much as the pleasure of realizing gains," says Michael Pompian, author of "Behavioral Finance and Wealth Management."

It could also be the fear of triggering long-term capital-gains taxes. That's not as big a concern now, with 52% of U.S. stock funds down over the past 10 years and 91% underwater for the past five. Yet with so many funds down, it's also hard to figure out which funds are the true losers.

Solution: Separate your real laggards from funds that are simply down - and take this opportunity to sell. Start by comparing apples with apples. "If the stock portion of your portfolio did worse than the S&P 500's 37% plunge, that's telling you something," says Daniel Moisand, an adviser in Melbourne, Fla.

Then dig deeper. Check how each of your funds has done over the past year and the past five years compared with peers that invest in a similar style. So if you own a large-cap growth fund, see how it ranks against other large-growth portfolios. It doesn't have to be the absolute best, but make sure it's at least close to average. To look up average performance figures for all fund categories, visit Morningstar.com, click on the Markets tab and then scroll down to Fund Categories.

After looking over his portfolio, Cory found that many of his funds were under-performing - and that he was losing too much to fees and commissions. So he is simplifying his strategy by replacing his dogs with low-cost index funds.

That may not be the approach you ultimately select. But whatever you do, don't wait too long to fix your portfolio. Who knows if the next rebound - or sell-off - is just around the corner?

Dow closes at 6-year low

The Dow industrials ended at a fresh six-year low Friday, as worries about the outlook for the banking sector exacerbated fears of a prolonged recession.

Treasury bond prices rallied, lowering the corresponding yields, and gold prices flirted with record highs as investors sought safety in hard assets.

The Dow Jones industrial average (INDU) lost 100 points, or 1.3%, closing at the lowest point since Oct. 9, 2002, at the bottom of the last bear market.

Since peaking at 14,164.53 in November of 2007, the Dow has lost 48%, as the recession, housing market collapse and banking crisis have all pummeled investor confidence.

The S&P 500 (SPX) index lost 9 points, or 1.1%, ending at the lowest point since Nov. 20, 2008, seen by some as the low of the current bear market.

The Nasdaq composite (COMP) lost 1 point or 0.1%, erasing bigger losses. The session low was 1416.96, which is still above the Nasdaq's low from January of this year. The tech sector has performed better in 2009 than the rest of the market.

Stocks had tumbled through the early afternoon on worries about the economy and the future of the biggest banks, amid talk that the government might have to nationalize the hardest-hit companies.

But stocks managed to cut losses and the Nasdaq turned higher for a while after White House spokesman Robert Gibbs reiterated that the administration believes in a privately held banking system.

The comments from Gibbs seemed to give investors a reason to stop selling off the banks so much and to get back into the market, said Joseph Saluzzi, co-head of equity trading at Themis Trading.

"The Gibbs' conference gave them an inkling of hope that the government won't nationalize the banks and that brought people back in," Saluzzi said.

However, the confidence problem that has been plaguing the markets remains in place for the time being, Saluzzi said.

"Without confidence, no one wants to step up and buy," he said.

Stocks have been sliding over the last few weeks as investors have shown skepticism about the government's ability to slow the recession, despite the announcement of a series of programs, including a massive economic stimulus package. Skepticism about CEOs is also a factor. And worries remain that another Ponzi scheme could be brewing, along the lines of Bernie Madoff or Robert Allen Stanford.

"The stimulus plan got more attention, but fixing the banking system in a way that's durable is the primary overhang in the markets right now," said Lee Schultheis, chief investment strategist at AIP Mutual Funds.

Financials: Bank, housing, insurance and other financial stocks have led the retreat this year and continued to do so Friday.

Bank stocks were hit especially hard Friday on worries that the government may have to nationalize certain flailing banks, a move that would wipe out shareholder value. Senate Banking Committee Chairman Chris Dodd, D-Conn., said that such short-term takeovers may be necessary. However, the White House is not in favor of such a move.

Dow components Bank of America (BAC, Fortune 500) Citigroup (C, Fortune 500), American Express (AXP, Fortune 500) and JPMorgan Chase (JPM, Fortune 500) all tumbled through the afternoon. But all except Citigroup managed to cut losses by the close.

The selling in the bank sector has picked up in the last 10 days since Treasury announced a revamped bank bailout plan that critics say provides few essential details. In particular, the plan did not establish how to value the bad assets that are cluttering up bank balance sheets.

"Not only is a good solution required, but it has to happen quickly," Schultheis said. "Every day that goes by without action is adding to the deteriorating environment for corporate earnings, which is hurting stocks."

On Thursday, the Dow ended at the lowest point since Oct. 9, 2002, the low of the last bear market. The S&P ended the session at its lowest point since Nov. 20 of last year, when the panic around the financial crisis peaked.

Tech has performed better than the rest of the market and the Nasdaq stands almost 10% above its Nov. 20 close.

Over the last two weeks, the government has announced a number of programs meant to take the edge off the recession.

President Obama's $75 billion housing plan, announced Wednesday, is intended to help up to 9 million struggling borrowers. On Tuesday, Chrysler and GM asked for another $21.6 billion to stay afloat on top of the $17.4 billion in government assistance they have already received.

Investors are still sorting through the details of the $787 billion economic stimulus plan, signed into law Tuesday.

Company news: Lowe's (LOW, Fortune 500) reported weaker quarterly sales and earnings and issued a fiscal 2009 forecast that is short of analysts' expectations.

J.C. Penney (JCP, Fortune 500) reported higher-than-expected earnings but forecast a current-quarter loss that is bigger than what analysts are expecting.

General Motors (GM, Fortune 500) tumbled 11% on ongoing worries about its solvency, closing at a more than 70-year low, according to Dow Jones.

Market breadth was negative. On the New York Stock Exchange, losers beat winners by almost three to one on volume of 2.12 billion shares. On the Nasdaq, decliners topped advancers by over 2 to 1 on volume of 2.57 billion shares.

Economy: The Consumer Price Index rose 0.3% in January, as expected, after falling 0.8% in December. The so-called Core CPI, which strips out volatile food and energy costs, rose 0.2% versus forecasts for a rise of 0.1%. Core CPI was flat in December.

Other markets: Treasury prices rallied, lowering the yield on the benchmark 10-year note to 2.79% from 2.81% Thursday. Treasury prices and yields move in opposite directions.

In currency trading, the dollar gained versus the euro and the yen.

U.S. light crude oil for March delivery fell 54 cents to settle at $38.94 a barrel on the New York Mercantile Exchange after spiking 14% Thursday.

COMEX gold for April delivery rose $25.70 to settle at $1,002.20 an ounce, near an all-time high.

Senate passes $787 billion stimulus bill

It's a done deal. Still controversial, but a done deal.

The Senate on Friday evening passed the $787 billion American Recovery and Reinvestment Act of 2009, which was drawn up, amended and negotiated in record time.

The bill got 60 votes -- the minimum it needed to pass. Three Republicans -- Sens. Susan Collins, R-Me., Arlen Specter, R-Pa., and Olympia Snowe, R-Me. -- voted for it. Earlier in the day, no Republicans in the House voted for the legislation, which nevertheless passed 246 to 183, with just 7 Democrats voting against it.

President Obama is expected to sign the bill into law soon.

"The goal at the heart of this plan is to create jobs. Not just any jobs, but jobs doing the work America needs done: repairing our infrastructure, modernizing our schools and hospitals, and promoting the clean, alternative energy sources that will help us finally declare independence from foreign oil," President Obama said Friday morning.

The Obama economic team estimates the stimulus plan will create or save between 3 million and 4 million jobs.

"We've done something today that's transformational for the nation," said House Speaker Nancy Pelosi, D-Calif., in a press conference after the House vote.

During the House floor debate earlier on Friday, House Appropriations Committee Chairman David Obey, D-Wisc., characterized the bill as "the largest change in domestic policy since the 1930s."
Republican discontent

The bill's final passage would represent far less than the bipartisan victory Obama had hoped for weeks ago, a hope he tabled as it became clear that Republicans and some fiscally conservative Democrats were adamantly opposed to the size and contents of the bill.

Republican critics believe there are more targeted and effective ways to create jobs than the measures in the bill, including more spending on infrastructure and more tax relief.

They frequently cite the tag line to describe what Democrats have often said makes stimulus measures effective -- that they be timely, targeted and temporary. "This bill fails on all three points," Senate Minority Leader Mitch McConnell, R-Ky., said Friday.

In the House, Rep. Mike Pence, R-Ind., blasted the bill as misguided.

"Republicans are not about saying 'No' but about saying 'Yes' to solutions that put Americans back to work," Pence said. "[This legislation] will not grow our economy. It will grow our government."

And they frequently cite the burden of such an expensive package on the country's record high deficit and the burden that will place on the next generation.

In response to Republican critics, Sen. Dick Durbin, D-Ill., cited provisions in it that will help families facing job loss, education expenses and mortgage troubles.

"Consider the impact on the next generation if their parents lose a job ... if their home is foreclosed upon ... if they're forced out of college because their parents can't pay the bills," Durbin said.

Democrats have also countered the Republicans' debt argument by noting that record deficit levels were achieved as a result of borrowing to pay for the cost of the Iraq war and to finance a series of tax cuts -- both decisions made during a Republican administration.

The compromise bill was crafted after intensive negotiations in recent days between the House, Senate and White House, although Republicans said repeatedly they felt excluded from the process. And on Friday, several said they did not think it was fair that they were being asked to vote on a 1,000-page-plus bill that was posted online only late Thursday night.
How the bill breaks down

The package devotes $308.3 billion -- or 39% -- to appropriations spending, according to the Congressional Budget Office. That includes $120 billion on infrastructure and science and more than $30 billion on energy-related infrastructure projects, according to key congressional committees.

It devotes another $267 billion -- or 34% -- on direct spending, including increased unemployment benefits and food stamps, CBO said.

And it provides $212 billion -- or 27% -- for tax breaks for individuals and businesses, although the biggest piece of that is for individuals. (Here's a quick breakdown of those breaks.)

Depending on how tax measures are categorized, the percentage of the bill devoted to tax relief is 35%, according to the Joint Committee on Taxation.

Unlike the CBO, the committee counts all portions of tax credits that are refundable. A refundable credit is one that may be paid to tax filers even if the credit exceeds a tax filer's liability. In other words, it is money the government needs to spend. The CBO, by contrast, treats that money as an outlay.

Republicans have advocated for more tax relief in the bill -- they wanted at least 40% -- and they often oppose tax credits going to those who pay less in income tax than they receive in refunds.

Democrats counter that the lowest-income families do pay money into the system by way of payroll tax for Social Security and through sales taxes. And they note that it is those low-income families most likely to quickly spend any tax relief they get, thereby making it more stimulative for the economy.
What it can - and can't do

For months, economists -- both liberal and conservative -- have urged lawmakers to act quickly to help stem the economic downturn. They argue that while tax cuts can be put out more quickly than infrastructure spending, they may not be as stimulative as spending because tax filers are likely to save at least a portion of what they receive.

There also has been debate over how large the total package should be. Many economists think it should be larger -- to help combat what is expected to be a $2 trillion shortfall in the country's output this year and next. But at this point, though they're not enamored with every provision in the bill -- they say it's necessary to do something.

Proponents of the bill aren't promising the economic recovery package will be a panacea for the economy. "No one thinks this is the answer," said House Majority Whip Steny Hoyer, D-Md.

But, they say, it's needed to stem the downturn and ease the financial strains hurting Americans. Indeed, Obama's economic team last month said they expect that the unemployment rate likely will go up in the near term but having a stimulus package could bring it down to around 7% by the end of 2010. That's slightly below the rate of 7.6% today.

Oil dips to $40 a barrel

Oil slipped towards $40 a barrel Friday as the weakening economic outlook overshadowed OPEC's attempts to curb crude supplies and boost prices.

U.S. light crude for March delivery fell $1.01 to $40.16 a barrel by 5:52 a.m. ET.

Inventories in Cushing, Okla.-- the delivery point for the U.S. light crude contract -- are at record levels. U.S. light crude for delivery in two months time is trading above $45 a barrel.

The global economic slowdown has curbed demand for fuel around the world, knocking oil prices sharply lower since they peaked at almost $150 in July.

U.S. non-farm payroll numbers due later Friday are expected to add to the gloom, after data released the previous day showed applications for U.S. jobless benefits hit a 26-year high while German manufacturing suffered its largest fall since 1990.

Oil prices could stay as low as $40 a barrel for the rest of 2009, the head of Italy's largest oil company said Friday.

"A price of $40 a barrel, it's roughly my forecast for this year," Eni SpA Chief Executive Paolo Scaroni said during an address at a Confindustria conference.

The Organization of the Petroleum Exporting Countries has been cutting oil output in a bid to boost prices. OPEC sources have indicated the group could cut a further 1 million barrels per day (bpd) from output quotas when it next meets in March.

OPEC has already cut member production quotas by 4.2 million bpd since September, but oil tanker tracking firms have said the group has yet to successfully implement all of its cuts.

"OPEC's compliance has been impressive even if they've still got some way to go," Julian Keites at Newedge in London said.

"These are significant output cuts and if they can implement more then we should see global stock cover start to come down. Until then prices seem well supported above $40 a barrel by the cuts so far."

Democrats in the Senate on Thursday pushed towards passage of a huge economic stimulus package despite scant Republican support, hoping to boost the U.S. economy, which could help stem a decline in fuel demand.