U.S. stocks were set for a mixed open on Wednesday, which ends one of Wall Street’s worst years and raises hopes that a new year and fresh policy initiatives will stave off a deepening recession.

The Federal Reserve on Tuesday pushed forward with its effort to drive down mortgage costs, setting a target of buying $500 billion in mortgage-backed securities by mid-2009.

The move could bolster optimism as investors have been heartened by signs that the Fed is fighting aggressively to cushion the downturn, including dropping interest rates to near zero.

“Things haven’t improved but at least the Fed has stopped things from appreciably worsening,” said Barry Ritholtz, chief market strategist at Fusion IQ in New York.

“Clearly most investors this year were not prepared for what happened and I think there’s a sigh of relief from those that were blindsided that the year is finally over.”

The number of workers filing new claims for jobless benefits fell much more than expected to 492,000, but seasonal factors likely contributed to the drop and the labor market remains very soft.

S&P 500 futures rose 3.40 points and were above fair value, a formula that evaluates pricing by taking into account interest rates, dividends and time to expiration on the contract. Dow Jones industrial average futures climbed 14 points, while Nasdaq 100 futures were off 3.25 points.

The broad S&P 500 looks set to end 2008 down about 40 percent for the year, though it has recovered almost 18 percent since hitting an 11-year low on Nov. 20.

Markets around the world have been pummeled as the collapse of the U.S. housing market evolved into a global credit crunch and economic slowdown which infected everything from financials to automakers to retailers.

The U.S. casualties include the bankruptcy, acquisition or government takeover of such household names as Bear Stearns, American International Group , Washington Mutual, Merrill Lynch and Lehman Brothers.

AIG, which was rescued by the government soon after the collapse of Lehman, is prepared to ask the Federal Reserve to relax rules on its more than $60 billion disposals program to allow bidders to use a greater proportion of shares to pay for its assets, the Financial Times reported.

On the housing front, demand for U.S. mortgage applications was unchanged during the Christmas holiday week, holding the highest levels in more than five years with loan rates near record lows, an industry group said on Wednesday.

Bernard Madoff, alleged to have run a decades-long $50 billion Ponzi scheme, faces a Wednesday deadline to tell regulators how much he is worth and where his money and other assets are.

The Madoff scandal, which came to light earlier this month, has added to already negative sentiment in the markets. Scores of wealthy people, banks, universities and charities around the world say they are victims, but so far the exact amount of money lost is not known in what could be the largest fraud in Wall Street history.

On Tuesday, stocks climbed after the government expanded its bailout of the auto industry, encouraging hopes policy-makers will continue to take steps to minimize the severity of the year-long recession.

NEW YORK, Dec 31 (Reuters)

Good day… And good morning from beautiful downtown Panama. Chuck had to get on a plane back to St. Louis early this morning, so he asked me to pfill in this morning. The dollar mostly traded within a range versus most of the major currencies yesterday as negative news from the United States was offset by predictions of a possible FOMC rate rise. The biggest movers yesterday were the commodity currencies and the ISK, which was helped by the Nordic central banks. More on that later, but lets start with the data due out in the United States.

The Reuters/University of Michigan consumer sentiment index will likely show a drop to a 26-year low when it comes out later this morning. The other major report released today will probably show that housing starts in the United States fell to a 17-year low in April. Home construction and property values “seem likely to decline well into 2009,” Federal Reserve Bank of San Francisco President Janet Yellen said earlier this week. And a jump in foreclosures, as values fall and adjustable rate mortgage costs rise, is adding to concern. Foreclosure filings climbed 65% and bank seizures more than doubled in April compared with a year earlier, according to figures issued this week.

The U.S. economy is in a recession, and the over-leveraged U.S. consumer won’t be able to ride to the rescue as they have in the past. And I don’t expect the stimulus checks to help much either, as they are way too little too late. The fundamentals of the U.S. economy don’t look good and this dollar rally will not last past the end of the second quarter. But short term, we could see additional dollar strength as investors focus on future FOMC moves.

Both the Federal Reserve and the Bank of England have had to admit that inflation is rising faster than they expected, leading currency traders to predict an end to their interest rate cuts. Higher inflation numbers have caused future traders to increase their bets that the Fed will reverse recent cuts later this year. This change in sentiment has helped push the dollar higher, but the move will likely be short-lived as the markets will realize that the FOMC is just too far behind in their fight with inflation. As prices continue to move higher, the U.S. economic growth will slow even further and the dollar will resume its steady decline.

Nordic central banks rode to the rescue of the Icelandic krona (ISK) this morning as they announced they have agreed to provide as much as 1.5 billion euros in emergency funds to Iceland’s central bank. We’ve written at length about how the credit crisis has spilled into the Icelandic banks, and recently the liquidity in the ISK has all but dried up as currency dealers questioned the financial stability of the Icelandic central bank. Traders have been concerned that the Atlantic island’s commercial banks may seek help from Sedlabanki (Iceland’s central bank) which doesn’t have the funds to bail them out. While the size of the swap agreement wasn’t large enough to move the krona, the announced cooperation seems to have restored at least some of the lost confidence. With the support of the central banks of Norway, Denmark, and Sweden, the Icelandic krona rallied more than 4.4%, the biggest gain on record.

In other news from the Nordic region, the Danish central bank raised its benchmark interest rate by 0.1% to 4.35% today.

Japan’s economy grew faster than economists estimated as exports to the rest of Asia helped offset the U.S. slowdown. Gross domestic product in the first quarter of 2008 grew 3.3% in Japan, well above estimates. Net exports accounted for most of Japan’s growth as demand from Europe and Asia continues to be strong. The figures coincide with reports released yesterday that showed the German economy expanded at the fastest pace in 12 years. Both of these reports confirm our thought that the global economy will not be dragged down by the slowdown in the United States.

But the currency markets ignored the positive surprise in Japan and the yen (JPY) continued to sell off. As Chuck pointed out earlier in the week, the carry trade is back as market volatility has eased. Japan’s currency slid the most against the Aussie dollar (AUD) and New Zealand dollar (NZD), both of which benefit from the return of the carry trades. With the markets generally range bound, volatility has decreased encouraging investors to borrow funds in the nations with low rates and invest where returns are higher. This week’s sell off of yen reflects a return to risk-taking activity and a revival of carry trades. Ultimately the currencies will return to trading on economic fundamentals, but for now the carry trade is continuing to dominate.

Currencies today 5/16/08: A$ .9449, kiwi .7675, C$ .9992, euro 1.5457, sterling 1.9479, Swiss .9465, ISK 74.43, rand 7.4835, krone 5.0855, SEK 6.0402, forint 160.20, zloty 2.1922, koruna 16.16, yen 104.77, baht 32.285, sing 1.3715, HKD 7.80, INR 42.65, China 6.9950, pesos 10.436, BRL 1.653, dollar index 73.28, Oil $125.58, Silver $16.81, and Gold… $886.90

That’s it for today… Had a great dinner with the folks from the Sovereign Society last night. I know it sounds like I came down here to Panama kicking and screaming, but this conference has far outweighed my expectations. The investors are knowledgeable and excited by the opportunity to diversify out of the U.S. dollar. Hopefully I will be able to convert a few of them over to the EverBank family. Got to get back downstairs now, as I don’t want to miss an early presentation by one of last night’s dinner hosts. Hope everyone has a Fantastico Friday and a great weekend!!

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Source: U.S. Housing Continues to Slump