Regular gasoline fell to a national average retail price of $3.692 a gallon at the pump from $3.702 a day earlier, according to the Daily Fuel Gauge Report from motorist group AAA and the Oil Price Information Service.

Prices have fallen for 36 straight days, for a total decline of more than 42 cents since hitting a high of $4.114 a gallon, according to the AAA report.

Alaskan drivers paid an average of $4.552 a gallon, slightly up from $4.549 a day before, while drivers in Hawaii paid about $4.429, according to AAA.

The state with the cheapest gas was Missouri, at an average of $3.452 a gallon, followed by South Carolina at $3.466

Despite gas having fallen more than 10% since mid-July, prices remained more than 91 cents, or nearly 33%, above where they were 12 months ago, according to the survey.

The high price of gas has worried investors in crude oil, gasoline’s primary ingredient. Concerned that expensive gasoline had caused drivers to buy less fuel, investors have driven crude prices more than 17% lower since mid-July, pulling retail gas prices with it.

High gas prices have also given consumers pause, as they trade in their low gas mileage trucks and SUVs for more efficient small cars and hybrid vehicles.

Automakers are scrambling to respond by developing vehicles such as the compact Chevy Cruze, and car-based SUVs.

Diesel: The price of diesel fuel, which is used to power most trucks and commercial vehicles, fell to $4.32 from $4.337 a gallon a day before, according to AAA.

Diesel fuel has fallen in price since July, just like gasoline. However, it remains nearly $1.50 higher than a year ago, the survey said.

Diesel’s use in shipping and transport has added to the operating costs of many businesses, driving up prices for goods and services as they pass those costs along to customers.

Diesel prices were most expensive in Hawaii, with drivers paying an average of $5.31 a gallon. Diesel was cheapest in Missouri at $4.049 a gallon, according to AAA.

Ethanol: The price of E85, an 85% ethanol blend that can substitute for gas in specially configured "flex-fuel" vehicles, fell to $3.013 a gallon on average from $3.023, AAA reported.

Corn-based ethanol has been getting much attention from drivers due to the high cost of petroleum-based fuels. However E85 fuel is difficult to find outside the corn-producing midwest region, and is not sold in some states.

E85 also generally burns less efficiently than gasoline. According to AAA estimates, drivers of flex-fuel vehicles running E85 would have to pay the equivalent of $3.966 a gallon to get the same mileage as gasoline. 

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The Dow Jones industrial average (INDU) added a few points and the broader Standard & Poor’s 500 (SPX) index rose around 0.2%. The Nasdaq composite (COMP) declined 0.4%.

Oil prices rallied $6.48 a barrel during the session, before retreating a bit to settle at $121.18, a gain of $5.62 per barrel. Crude spiked on the weaker dollar, which makes dollar-traded commodities cheaper to buy; tensions in Russia, which caused worries about supply disruptions; and renewed fears about a U.S. recession.

Meanwhile, jobless claims fell for the second week in a row, the Philadelphia Fed index showed continued weakness in manufacturing and an index of leading economic indicators fell more than expected.

Also in focus: financial shares, which managed to trim earlier losses despite more worries about Fannie Mae, Freddie Mac and Lehman Brothers.

Oil price boom resumes: An advance in oil, gold, silver and other resources over the last three sessions seems to have put an end to a month-long selloff in commodities, sparked by a stronger dollar and bets that global demand for oil will retreat.

Crude peaked at $147.27 a barrel in mid-July and settled at a more than 3-1/2-month low of $112.87 a barrel Monday. That selloff boosted stocks, as investors reallocated funds into financials and other sectors that had been battered year-to-date. But that’s changing now.

"The correction in oil, gold and many commodities appears to have run its course," said Rob Lutts, chief investment officer at Cabot Money Management. He said oil is now likely to go back up to the mid-July highs or even beyond.

Most of the major commodities came down between 20% and 25% over the last month or so, according to Lutts, which is a normal pullback in a bullish phase, rather than an indication that prices are set to keep sliding.

At the same time this drop in commodities occurred, stocks rallied, as investor psychology changed from panic about rising oil prices to a belief that prices were going to continue to fall.

That psychology is changing again. "I think the [stock] market is adjusting to the reality that oil prices may not continue to drop," he said.

However, as significant as the fluctuations in the oil market are to investors, they pale in comparison to the mortgage market meltdown, said Bob Andres, chief economic strategist at Envestnet Asset Management.

"The central issue that stops us from moving forward right now is housing," Andres said. "I think the crisis has been and is bigger than a lot of people are willing to admit."

He said until there is some kind of significant breakthrough on that front, the market and the economy will not be able to make substantial improvements.

"We will get through this ultimately," he said. "It’s just going to take time and continued innovation on the part of the Fed."

Financials stocks: Fears of a government takeover of Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) have dragged on those stocks and the broader financial sector. On Thursday, Fannie shares hit a 20-year low before bouncing back, while Freddie flirted with an all-time low before closing off those levels.

Lehman (LEH, Fortune 500) slumped through the early afternoon on worries about its financial solvency. But the stock recovered late in the session after an analyst upgraded the stock and said it could become a hostile takeover candidate.

Lehman had initially dropped after a Citi Investment Research analyst cut his third-quarter forecast for the bank, along with those of Morgan Stanley and Goldman Sachs. The analyst also predicted steep quarterly writedowns related to bad mortgage bets for all three banks. Bank of America Securities also issues a dour note on the sector.

Morgan (MS, Fortune 500) and Goldman (GS, Fortune 500) shares ended the session with small losses.

Lehman’s money problems led the firm to hold secret talks with South Korean and Chinese investors to try and sell up to half of its shares, the Financial Times reported, although no deal was reached. However, the Chinese firm in question denied any knowledge of talks with the company.

Meanwhile, the Wall Street Journal reported that the Federal Reserve quizzed Credit Suisse last month about a rumor that it had pulled a line of credit from Lehman. However, Credit Suisse reportedly said that it had not done so and had no plans to.

Other movers: One upside during Thursday’s session was that oil stocks jumped. With the energy sector the second-biggest in the S&P 500 after technology, the rise in stocks such as Exxon Mobil (XOM, Fortune 500) and Chevron (CVX, Fortune 500) helped offset weakness in technology and financial shares.

In earnings news, JDS Uniphase (JDSU) posted a wider fourth-quarter loss that was worse than analysts were expecting. Shares of the communications gear maker lost 14% in active Nasdaq trading.

A variety of airline stocks tumbled in response to the rise in oil prices, with higher fuel costs cutting into air carrier profits. The Amex Airline (XAL) index lost 4.1%.

AIG (AIG, Fortune 500), GM (GM, Fortune 500), Intel (INTC, Fortune 500), JP Morgan Chase (JPM, Fortune 500) and Coca-Cola (KO, Fortune 500) were the Dow’s biggest losers.

Market breadth was negative. On the New York Stock Exchange, decliners beat advancers nine to seven on volume of 912 million shares. On the Nasdaq, losers topped winners eight to five on volume of 1.57 billion shares.

Economic news: The Philadelphia Fed index, a regional manufacturing survey, posted a reading of minus 12.7 versus forecasts for a weaker number. The prior month’s reading was minus 16.3. Any reading that is negative suggests weakness, while a positive reading suggests growth.

The index of leading economic indicators(LEI) slumped 0.7% in July, topping forecasts. June LEI was revised to neutral from an initial decline of 0.1%.

The number of Americans filing new claims for unemployment fell last week by more than expected, the government reported. However, the figure remained above the key 400,000 level for the fifth week in a row. (Full story).

Other markets: In the bond market, Treasury prices fell, raising the yield on the benchmark 10-year note to 3.83% from 3.79% late Wednesday. Prices and yields move in the opposite direction.

In currency trading, the dollar was little changed versus the euro and the yen.

COMEX gold for October delivery rose $19.70 to settle at $835 an ounce.

Retail gas prices dropped overnight, extending the downward trend for a 35th day, according to a survey of gas station credit-card activity. (Full story.) 

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The fall in application volume is the latest sign of a struggling housing market. On Tuesday, a Commerce Department report showed construction of homes and apartments fell in July to the lowest level in more than 17 years.

And while fewer new homes are being built, fewer customers are also refinancing existing mortgages. A sharp drop in refinance volume in recent weeks has been the leading driver of declining application volume.

The trade group’s application index fell to 419.3 during the week ending Aug. 15, its lowest level since the index hit 298.3 in December 2000, and a 1.5% decline from the prior week. Application volume is down 61% from its 2008 peak in February.

The MBA’s index peaked at 1,856.7 during the week ending May 30, 2003, at the height of the housing boom. An index value of 100 is equal to the application volume on March 16, 1990, the first week the MBA tracked application volume.

The survey provides a snapshot of mortgage-lending activity among mortgage bankers, commercial banks and thrifts. It covers about 50% of all residential retail mortgage originations each week.

Application volume fell despite a drop in interest rates as well. The average rate for traditional, 30-year fixed-rate mortgages fell to 6.47% during the week ending Aug. 15, from 6.57% the previous week.

The average rate for 15-year fixed-rate mortgages, often a popular option for refinancing a home, fell to 5.99% from 6.17%. The average rate for one-year adjustable-rate mortgages fell to 7.07% from 7.15%. 

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The cookie company is reorganizing and working out a prepackaged plan with its creditors, according to a filing Friday with the Securities and Exchange Commission.

Representatives from Mrs. Fields did not immediately return calls for comment.

In the filing, Mrs. Fields reported "aggressive competition" in its franchising business. "Many of our competitors have greater resources or more favorable business models than ours with which to attract new investors and procure sites," the filing said.

Mrs. Fields also said there has been a decline in customer traffic at shopping malls - a trend that has hurt revenue.

The filing also said the company has experienced a number of franchise store closings since its 2004 fiscal year, and this trend has continued throughout fiscal 2008. Mrs. Fields may need to close more stores in the future, according to the filing.

Many restaurant companies have struggled amid waning discretionary spending from consumers and high gas prices. And over the past several years, Mrs. Fields has altered product offerings and revamped stores to boost its competitive presence and lure customers into its locations.

In 1996, Mrs. Fields Original Cookie Company Inc. was formed when Capricorn Holdings bought Mrs. Fields Inc. and The Original Cookie Company. The company expanded through acquisitions, such as the frozen-yogurt business TCBY, Pretzel Time, and Great American Cookie.

Mrs. Fields has nearly 390 location in the United States and at least 80 locations abroad. 

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“I think it will be a number of years before they start paying taxes again,” the mayor told a news conference. “Look at those losses. They can carry them forward for a number of years.”

New York City relies heavily on its hometown financial industry for its tax revenues. The mayor added that some banks and brokerages already were asking the city to return some quarterly tax payments because they had overpaid.

Many companies rely on safe harbor rules, basing their estimated quarterly tax payments on what they paid in the previous year. This saves them from any penalties if their profits — and their tax bills — unexpectedly zoom higher.

But this time around, with many Wall Street companies still wandering in the subprime mortgage swamp, their earnings likely will fall below last year’s results.

Bloomberg was responding to questions about New York Gov David Paterson’s decision to ask the Legislature to slice aid for counties, cities and towns as part of a $1 billion menu of budget cuts that the Democratic governor wants them to enact in a special session.

FEELING THE PAIN

New York state must close an estimated $26 billion deficit over the next three years, thanks to Wall Street’s sinking profits and the government’s years of overspending. 

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But it was more UBS’s failure to put sufficient risk controls in place that did the damage, than shortcomings of the model, which has also been adopted by the likes of Credit Suisse (CSGN.VX: Quote, Profile, Research, Stock Buzz), HSBC (HSBA.L: Quote, Profile, Research, Stock Buzz) and SocGen (SOGN.PA: Quote, Profile, Research, Stock Buzz).

“It failed for them,” said David Williams, bank analyst at Fox-Pitt, Kelton. “They (UBS) didn’t have the necessary safeguards, protections and strategic oversight of what they were doing, and that’s required them to go for a much more effective separation of the business units.”

UBS — Europe’s biggest casualty of the credit crunch — said on Tuesday it will separate its wealth management arm from its troubled investment bank, which analysts expect to lead to a spin-off or sale of the latter.

“Our review has clearly revealed the weaknesses associated with the integrated “one firm” business model,” said Peter Kurer, UBS chairman.

The universal model spans retail and investment banking and can include insurance, fund management and other areas. But big investment banking losses during the credit crunch of the past year have prompted calls for a rethink.

Kurer admitted the model blurred the risk-reward profile of individual business.

Cheap funding provided by lavish income from its wealth management arm and a lack of oversight allowed UBS’s investment bank to build up huge trading positions, which left it nursing writedowns of $42 billion when they soured. 

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The market upheavals which started a year ago have now spread to the wider economy. They are threatening to throw the industrialized world into recession but soaring fuel and food prices are pushing up inflation, preventing central banks from offering more succor.

Central bank forecasts this year have consistently been getting it wrong, underestimating how fast inflation would rise or how quickly economic growth would slow.

Many commentators and even some policymakers are now worried that central banks could be making the wrong decisions about interest rates because the tools they use for forecasting don’t pay enough attention to the real world.

“I am very struck by the value placed on little models that are never actually confronted with data from the real world,” said one G7 central banker. “This is not science in my view.”

One argument is that models can be useless at economic turning points, the central banker told Reuters.

Instead of recognizing the economy is moving from growth into recession, the models can assume that everything is in balance. Many are linear and therefore may not account for a difference in the way in which economies act at different stages of the business cycle.

Models could also be misleading policymakers because some do not take account of the effect of changes in prices when a trigger point is reached. For example, the model could fail to highlight a step change in output growth that could occur if oil prices moved past a particular level. 

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Former employees charged they had unfairly lost their jobs because of their union activities. Wal-Mart’s Canadian subsidiary insisted that they had lost their jobs for the “good and sufficient reason” of the closure of the store.

The Supreme Court gave no hint of which way it was leaning on the issue, but its decision to hear the case keeps the workers’ hopes alive.

No Wal-Mart outlets in the United States or Canada have collective agreements in place, though several in Canada have received union certification since the closure of the store in question in this case, which was in Jonquiere, Quebec.

The Supreme Court’s eventual ruling will likely affect union activity and Wal-Mart’s response in other stores.

Wal-Mart Canada said it saw hopeful signs in the legal history of the case as it wound its way through Quebec’s courts.

“Every previous court decision on this matter — decisions from the Quebec Superior Court as well as the Quebec Court of Appeal — have found in favor of Wal-Mart Canada against the union and have found that closure of the Jonquiere store was lawful,” spokesman Andrew Pelletier said.

United Food and Commercial Workers Canada, the union involved, said it would not comment until Friday. 

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Now, central bank policy-makers are acting like parents lecturing teenage children on the dangers of drinking and driving — while making clear they are willing to provide a ride home at any hour to prevent a tragedy.

Until the collapse of U.S. housing market and the credit crisis that became full-blown in August last year, the Fed was known principally for setting interest rates to ensure steady growth with low inflation, raising rates when the economy turned a bit too festive and cutting them when growth was flagging.

While the institution supervises large bank holding companies, those functions took a back seat, in the public eye, to monetary policy and macroeconomic forecasting.

But as a global credit crisis and painful U.S. economic slowdown drag on, the Fed has interpreted its dual mandate on growth and prices to include responsibility to maintain the stability of the entire financial system — an evolution that will mean more rules for financial institutions and an expanded caretaker function for the Fed.

That broader role — which has led to closer ties with investment banks and a menu of options to ensure credit markets remain liquid — has reshaped the central bank and will likely be subject to extensive scrutiny and debate for years to come.

SUPERVISORY ROLE

A rising tide of defaulting U.S. subprime mortgages, which undercut the value of assets held by financial institutions around the world, has thrust the central bank’s regulatory authority, and its responsibility for financial stability, squarely into a not-always-flattering spotlight. 

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While Canadians celebrated last year as the country's dollar reached parity with its U.S. counterpart for the first time since 1976, traders now predict the currency will fall as much as 17 percent through 2009.

After soaring 17 percent in 2007, the loonie, as the currency is known because of the aquatic bird on the one-dollar coin, is down 2.8 percent in 2008 amid a shrinking economy and an 13 percent drop in oil prices the past month. It's one of five of the 16 most-widely traded currencies to drop against the U.S. greenback, joining the New Zealand dollar, South Korean won, South African rand and British pound.

“The way energy prices and certain commodities have boomed, many thought we would weather the downturn better,'' said Steve Butler, director of foreign-exchange trading in Toronto at Scotia Capital Inc., a unit of Canada's third-largest bank. “You've got a pessimistic look at the economy by the market. It's forced a lot of people to rethink that view.''

Canada's economy shrank 0.1 percent in May, as the extraction of natural gas slowed and car production dropped, Statistics Canada said last week in Ottawa. Economists surveyed by Bloomberg predicted a 0.2 percent expansion, according to the median of 24 estimates.

Forecast Cut

The Bank of Canada cut its 2008 growth forecast on July 15 to 1 percent from 1.4 percent. That's even less than the U.S., where the economy is likely to expand 1.5 percent, according to the median estimate of 81 analysts in a separate poll.

Canada's currency traded at C$1.0271 per U.S. dollar as of 1:43 p.m. in Tokyo, depreciating 11.8 percent since it reached 90.58 Canadian cents on Nov. 7, the strongest since 1950.

The loonie will slide to C$1.05 by the end of December, and to C$1.09 by the start of 2010, according to the median estimate of 31 strategists surveyed by Bloomberg. New York-based Lehman Brothers Holdings Inc. is the biggest bear, predicting the currency will weaken to C$1.15 this year and C$1.20 in 2009. Paris-based BNP Paribas, the most accurate foreign-exchange forecaster in a 2007 Bloomberg survey, predicts C$1.12 this year.

“The Canadian dollar is extremely overvalued at these levels,'' said Momtchil Pojarliev, head of currencies at London- based Hermes Pension Management Ltd, which has about $70 billion under management. “Oil prices have come down quite a lot from their peak but the Canadian dollar still hasn't moved at all. The currency should also weaken due to the weaker economic data.''

Export Driven

Commodities such as gold and crude oil account for 54 percent of Canada's exports. As the price of crude oil soared 57 percent in 2007 to $95.83 a barrel, Canada's economy expanded 2.54 percent, compared with 2 percent in the U.S.

And though oil surged 53 percent this year to a record of $147.27 a barrel on July 11, it has since slid to $126.22 on speculation high prices will cut demand for fuel in the U.S., the world's largest energy consumer. U.S. motorists drove less for a seventh consecutive month in May, pointing toward the first annual drop in road travel since 1980, the Federal Highway Administration said in a report last week.

“From a technical and fundamental perspective, we are looking for the Canadian dollar to weaken,'' said George Davis, chief technical analyst in Toronto at RBC Capital Markets, a unit of the Royal Bank of Canada, the country's biggest bank. `Continued contraction in global growth, would be negative for the Canadian dollar.''

Buy Orders

If the currency weakens past C$1.0343, a so-called level of resistance where strategists say orders to buy the loonie may be clustered based on past trading patterns, then it may depreciate to about C$1.0460, Davis said.

The downturn in the Canadian economy is already largely priced into the currency, said Bettina Mueller, a fund manager at Deutsche Bank AG's DWS Investments unit in Frankfurt, which manages $398 billion.

“Commodities are still a positive story, as the strategic direction is upward,'' Mueller said. “The Canadian dollar is underpinned from this point of view.''

Canada's fixed-income securities are losing their interest- rate advantage over the U.S., further weighing on the currency.

Three-month deposit rates in Canada exceed those in the U.S. by 0.55 percentage point, compared with 0.91 percent in the first quarter. By year-end, the gap will shrink to 0.09 percentage point, according to the median estimate of 47 strategists surveyed by Bloomberg News.

Story `Over'

“Canada's own sluggish domestic fundamentals suggest their interest-rate cycle will lag'' behind an increase in U.S. rates, said Peter Pontikis, a treasury strategist at Brisbane, Australia-based Suncorp-Metway Ltd., the country's third-largest general insurer. “Like many good stories, as the Canadian dollar had been, it is over. We are targeting a retracement back to more comfortable levels at C$1.14 per U.S. dollar, if not higher into end 2008.''

Interest-rate futures show traders no longer expect the Bank of Canada will raise borrowing costs this year.

Policy makers kept the overnight lending rate at 3 percent on July 15 for a second straight meeting, after lowering it four times from 4.5 percent at the beginning of December. Futures on the Chicago Board of Trade show speculators assign a 30 percent chance that the Federal Reserve will raise its target rate, which has been unchanged at 2 percent since April 30, in September.

Interest rates “will take a back seat to another catalyst: the end of the oil rally,'' said Kathy Lien, chief strategist at currency dealer DailyFX.com in New York. “The exchange rate will push higher as the rally in oil prices reverses'' with the Canadian dollar weakening, she said.

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