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Stocks Falter Amid Worries About Stimulus

Stocks started February in the red amid worries about the fate of the stimulus plan and the economy but pared their losses after a better-than-expected reading on the manufacturing sector.

The morning slide put the Dow Jones Industrial Average back below 8,000 and follows the worst January on record that piled another heap of losses onto last year's carnage.

The Dow lost 9 percent during January, while the S&P fell 8.8 percent and the Nasdaq slipped 6.5 percent. Many analysts believe that a poor performance in January spells weakness for the year as a whole.

After a report Friday showed the economy contracted at its fastest pace in 27 years during the fourth quarter, today's economic news was mixed.

The Institute for Supply Management reported its gauge of manufacturing activity contracted for a 12th straight month in January, though the reading of 35.6 came in better than expected. Construction spending fell 1.4 percent in December, much more than expected, and November was revised to show a decline double of what was previously reported.

The first economic indicator of the day was a wash: Consumer spending fell 1 percent in December, as expected. Income fell 0.2, half of the 0.4-percent decline expected, but November income was revised lower by exactly the same amount that December beat.

The buzz on the market floor was that traders don't think the government stimulus package will stimulate the economy.

"It's not going to produce a lot of jobs and will cost the taxpayer a lot of money," Art Cashin, director of floor operations at UBS, told CNBC.

Hugh Johnson, chairman and chief investment officer of Illington Advisors, agreed.

"The markets are sending a very defensive signal ... Right now, the answer is [that there's] not much evidence this is going to work," Johnson said.

Financials were mostly lower amid worries that the so-called "bad bank" plan is faltering, with Bank of America, which would have a lot to gain from getting some of the Merrill load off its books, leading Dow decliners.

But Hartford Financial led the Nasdaq gainers after Barron's on Sunday wrote that the company is a "compelling buy" on expectations that it will rebound as the value of its bond holdings recovers.

That, coupled with some strength in techs, helped push the Nasdaq into positive territory.

But another rough batch of earnings reports kept a lid on the rest of the market.

Toy maker Mattel said its quarterly profit fell 46 percent, far worse than analyst expected, with the company blaming a stronger dollar and the weakest holiday shopping season in years for its troubles.

(Where do you invest in such a turbulent market? Click on the video at left.)

Also, health care company Humana reported a 28 percent drop in profit, though the company predicated a big turnaround this year, raising its guidance to expected earnings per share of $5.90 to $6.10 for the full year compared to $3.83 for 2008.

Applied Materialswarned it would post a quarterly lossamid charges related to restructuring, inventory and financial problems, and said sales would come in at the low end of its previously forecast range.

Analysts said that's par for the course in this downturn but worried about how low sales will go when there's no sign of recovery.

Alcoa shares fell following news that Chinese aluminum company Chinalco held talks with Rio Tinto about possibly acquiring minority interests in some Rio units, Chinalco said. Alcoa teamed with Chinalco last year to buy about 9 percent of Rio Tinto.

Ford Motor shares skidded after Barclay's Capital downgraded its rating on the stock to "underweight" from "equal weight," saying the auto maker will need government bailout cash by the end of 2009.

The Obama administration will focus on Wall Street bonuses and executive compensation this week, instead of the financial bailout package as expected, CNBC learned from industry sources.

The administration discussed measures to ease the credit crisis with financial industry representatives over the weekend, including proposals for a 'bad bank' to buy toxic assets.

CNBC.com has now learned that the administration is considering three options for institutions: a) a bad bank, b) more capital injections into institutions and c) a so-called "ring fence" concept, in which the government uses a combination of guarantees and insurance to cover bad assets within an institution without technically removing them from the balance sheet.

Meanwhile, an Associated Press review of visa applications revealed that some US banks had sought government permission to bring thousands of foreign workers into the country for high-paying jobs. The report sparked questions over the banks’ employment policies as the number of US jobless continues to rise.

This Week:

TUESDAY: Auto sales; pending-home sales; Earnings from Merck, Schering-Plough, Dow Chemical; Motorola, Northrop Grumman, PNC Bank, Disney, Electronic Arts, Met Life and Yum Brands
WEDNESDAY: Weekly mortgage applications; ISM services index; weekly crude inventories; Earnings from Time Warner, Clorox, Kraft, Cisco, Prudential, Sunoco and Visa
THURSDAY: Chain-store sales; weekly jobless claims; factory orders; Earnings from Kellogg, MasterCard, Unilever, Hartford Financial, News Corp
FRIDAY: December jobs report; consumer credit

Send comments to cindy.perman@nbcuni.com.