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Stocks are sharply lower at midday, with the S&P 500 down 3.2% in broad-based weakness. A dour holiday outlook from a major retailer and word that the Treasury feels it needs to take even more emergency actions are weighing on sentiment.

Stocks opened with a loss after Best Buy (BBY 22.13, -1.75) said that the changes in consumer behavior since mid-September have created the most difficult climate the retailer has ever seen. As a result, the company slashed its fiscal year 2009 (ends in February) earnings per share guidance to between $2.30 and $2.90 from its previous forecast of $3.25 to $3.40. This falls well below the consensus estimate of $3.02 per share. Best Buy earned $3.18 per share last year.

Treasury is dropping its original plan to buy troubled mortgage assets, as it no longer believes it is the most effective way to use the $700 billion in TARP funds, and laid out its alternative plans.  Stocks fell to session lows on the news.

Treasury Secretary Paulson said there are three priorities for remaining TARP funds following the $250 billion in direct investments in U.S. banks and $40 billion in AIG. First, the Treasury will reinforce the stability of the financial system, which may include a second capital purchase program that will consider the needs of banks and nonbanking companies. Note that up to this point the Treasury only directly invested in banks.

Second, Paulson said the government will look at ways to support credit from outside the banking system, such as asset-backed securities (which give consumers greater access to credit, such as auto loans and credit cards). The government is exploring the development of a liquidity facility for AAA asset-backed securities.

Finally, the Treasury is looking at ways to mitigate mortgage foreclosures.

In earnings news, Macy’s (M 8.92, -0.49) posted a smaller-than-expected third quarter loss and reaffirmed its guidance for its fiscal year 2009. Shares originally traded up on the news, but sold off as the broader market extended its decline and as the company started its conference call. Retailers are down 4.6% this session.

Thomson Reuters (TRI 22.01, +0.07) posted better-than-expected third quarter revenue and earnings, and reaffirmed its full year revenue guidance of growth between 6% and 8%.

All ten of the economic sectors are posting a loss, with selling interest spread out. The best-performing sector, healthcare, is down 2.3%, while the worst-performing sector, energy, is down 4.5%.

Commodities (-2.0%) are falling in conjunction with stocks, as oil prices decline 4.0% to $57.00 per barrel, marking the lowest level since March 2007.

Meanwhile, risk averse investors are buying Treasuries, with the 10-year note up 21 ticks, sending its yield down to 3.66%.

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