Vivian Taibi

NEW YORK (Reuters) – Stocks were little changed on Tuesday as investors followed a two-day slide by snapping up energy shares on a recovery in oil prices while hopes for more funds to stabilize credit markets offset worries about Citigroup’s (C.N) outlook.

A day after Alcoa Inc (AA.N) kicked off what investors fear will be a bleak fourth-quarter earnings season with an unexpectedly large loss, investors scoured the market for beaten-down shares, sending sectors like energy and technology higher.

Shares of Chevron Corp (CVX.N) climbed more than 2 percent while rival Exxon Mobil Corp (XOM.N) also rose. But a broad advance was limited by a fall in shares of financial services companies as investors fretted about the possibility of more credit losses and uncertainty over Citigroup’s outlook.

Hopes that Washington would work speedily on a plea by President-elect Barack Obama for the remaining $350 billion of financial rescue funds to stabilize credit markets helped underpin sentiment, however.

“Obama is in a much better position to work with Congress than the previous administration,” said Gail Dudack, chief investment strategist at Dudack Research Group in New York. “The market wants to see some very pragmatic action, and Obama is trying to do that.”

The Dow Jones industrial average (.DJI) dipped 12.58 points, or 0.15 percent, to 8,461.39. The Standard & Poor’s 500 Index (.SPX) inched up 0.30 points, or 0.03 percent, to 870.56. The Nasdaq Composite Index (.IXIC) gained 7.87 points, or 0.51 percent, to 1,546.66.

Chevron shares rose as high as $72.70 on the New York Stock Exchange before slipping back to be up 1.4 percent at $71.82, while Exxon Mobil climbed 1.6 percent. On Nasdaq shares of Microsoft (MSFT.O) climbed 2.1 percent to $19.89.

Investors drew comfort from comments by Federal Reserve Chairman Ben Bernanke that the government could consider buying troubled assets. News the U.S. trade deficit had its biggest contraction in 12 years in November also lent support.

“Trade numbers came out a bit better than expected, which is also helpful because of course trade numbers are a piece of the gross domestic product,” said Dudack.

Embattled bank Citigroup is pushing ahead with a plan to sell a controlling stake in its Smith Barney retail brokerage, a crown jewel, and analysts suggested it must be urgently seeking to replenish capital due to mounting losses.

Citigroup shares were down 3.8 percent to $5.39 on the New York Stock Exchange. U.S. front-month crude was up $1.15 at $38.70 a barrel.

Obama, who is due to be sworn in on January 20, is pushing for Congress to release the remaining $350 billion of the $700 billion financial industry bailout. Obama wants the aid to go to consumers threatened by home mortgage foreclosures and plans to meet Tuesday with Senate Democrats to seek their support.

Citigroup Inc. and Morgan Stanley agreed Tuesday to combine their brokerages in a deal that shows how much Citigroup wants to slim down and build up cash.

Morgan Stanley is paying Citigroup $2.7 billion for a 51 percent stake in the joint venture. Citigroup will have a 49 percent stake.

Citigroup’s retail brokerage, Smith Barney, was once the crown jewel in its wealth management business.

The new unit, to be called Morgan Stanley Smith Barney, will have more than 20,000 advisors, $1.7 trillion in client assets; and serve 6.8 million households around the world, the companies said.

Citigroup will recognize a pretax gain of about $9.5 billion because of the deal, or about $5.8 billion after taxes, the companies said. The joint venture is expected to achieve total cost savings for the two companies of around $1.1 billion.

The deal was announced after the market closed. Shares of Citigroup rose 30 cents, or 5.4 percent, to $5.90 on Tuesday, and Morgan Stanley shares rose 7 cents to $18.86.

CEO Vikram Pandit has been saying for months that he plans to sell assets to raise cash, but the executive, according to media reports, is getting ready to announce that Citigroup is abandoning the financial “supermarket” model. That term described the aim of Citigroup — created over the last couple decades by former CEO Sandy Weill — to service all of individuals’ and businesses’ financial needs, from saving to borrowing to investing to deal-making.

Citigroup has fared worse than other banks in recent years, particularly during the recent credit crisis. The New York-based company is expected to post a fifth straight quarterly loss next week. The government has already lent it $45 billion — more than other large banks received — and agreed to absorb losses on a huge pool of Citigroup’s mortgages and other soured assets.

Some investors believe Citigroup is headed for a larger-scale breakup now that the government is involved and that President-elect Barack Obama is rethinking how to dole out the remaining $350 billion of bailout money.

The new administration could “come to the realization that the whole economy does not hinge on the banks,” said Octavio Marenzi, head of financial consultancy Celent. “Banking is important. The banks themselves are not.”

William Smith of Smith Asset Management, who still owns shares of Citigroup, has been calling for a breakup of Citigroup for years and believes the government will force that fate, in piecemeal fashion, over the coming year.

“I think within 12 months, Citigroup no longer exists,” Smith said. “The new CEO of this company is the government.

By Emily Kaiser

WASHINGTON (Reuters) - The U.S. recession will probably be the longest since World War Two and could worsen without heavy government spending, according to a closely-watched survey of economists released on Saturday.

The Blue Chip Economic Indicators poll of 52 economists from top financial firms, major companies and academia found that most expected a tepid recovery to begin later this year, with growth returning to more normal levels in 2010.

A majority of those polled thought the recession would officially end in the third quarter of 2009, which would make this the longest downturn since World War Two.

However, more than half of respondents thought unemployment would peak no earlier than 2010, suggesting that economic pain may linger long after the recession is technically over.

For 2009, the consensus view was that real gross domestic product would fall 1.6 percent, gloomier than the previous month’s forecast for a 1.1 percent decline. A drop of that magnitude would be the worst yearly performance since 1982.

Merrill Lynch held the most pessimistic view, predicting a 2.8 percent decline, while Fedex Corp was the most optimistic of the bunch, forecasting just a 0.2 percent dip.

“Much likely will depend on the relative success or failure of ongoing and prospective stimulus measures applied by government,” Blue Chip’s monthly newsletter said, adding that absent a stimulus package, “prospects would be much darker.”

The consensus opinion was that the stimulus plan would total $778 billion, with estimates ranging from $635 billion to $900 billion. President-elect Barack Obama has encountered some resistance in Congress, but a large spending package is widely expected to be approved next month.

The economists seemed to conclude that government efforts to push down mortgage rates may stall. On average, they expected rates on 30-year conventional mortgages at 5.1 percent at the end of 2009, roughly where they are now.

They forecast that the consumer price index would fall 0.4 percent this year, which would mark the first year-over-year decrease since 1955 and no doubt deepen investors’ worries about deflation.

The panelists were split on the outlook for the U.S. dollar, which some economists have warned may be headed for a steep slide this year as the U.S. deficit soars and the Treasury Department issues a record amount of debt.

Nearly 48 percent thought the trade-weighted value of the dollar would end 2009 higher than its current level.

(Editing by Gary Crosse)