Mid-Day Recap: Stocks Off the Lows of the Day

Equities opened lower this morning following disappointing earnings results from Bank of America, and losses were extended 25 minutes into the session when it was reported that consumer sentiment took a dip in the first two weeks of October, suggesting retail sales in the holiday period could be weaker than forecasts assumed.

After being down more than 1.00% in the lunch hour, stocks are making a small comeback from the lows of the day. As of 2:00pm, the S&P 500 is down 0.82% to 1,087, the NASDAQ is down 0.65% to 2,159, and the Dow is trading 0.69% lower at 9,993. On Wednesday and Thursday the Dow closed above 10,000 for the first time in a year.

Today’s session started on a soft note after a mixed Asian session and poor earnings from the top lender in the US. Bank of America showed a Q3 loss of $0.26 per share, a worse result than forecasts for $0.21 shortfall. The news contrasts with better-than-expected earnings from competitors Goldman Sachs and JPMorgan earlier this week. 

Earnings from General Electric were two cents above consensus at $0.22 per share. Revenue of $37.80 billion was below estimates, however, and shares are down 4.7% as mid-day.

Weak sentiment in the US drew European shares lower. The French CAC-40 closed 1.45% lower, while London’s FTSE 100 shed 0.63% and Frankfurt’s DAX fell 1.50%.

Multiple data reports this morning failed to help US equities to recover from the post-earnings decline, even though some beat the Street’s forecast.

Industrial production shot up 0.7% in September against forecasts for a +0.2% print, and the prior month’s 0.8% gain was revised to +1.2%. Three months of increases allowed the quarterly figure to climb 5.2%, the first sign of growth since the recession began. 

Investors didn’t greet those numbers with much enthusiasm. Much of the gain was owed to the temporary cash-for-clunkers program, and going forward there remain concerns about how sustainable the apparent recovery will be.

Those concerns were validated when the University of Michigan’s consumer sentiment figures failed to expand as anticipated. Instead, the index fell 4.1 points to 69.4, erasing more than half of September’s 7.8 point leap.

“The question is not why the Reuters/Michigan consumer sentiment weakened in October, but why it was so strong in September,” said Nigel Gault from IHS Global Insight, who correctly predicted the survey would be a “reality check.” “The September bounce was not corroborated by other consumer confidence surveys, so it is not surprising that the Reuters/Michigan index has now given up about half of September's gain.”

Also in the morning was the Treasury’s report in international capital flows. The report said net foreign purchases of long-term securities were in line with forecasts at +$28.6 billion in August. That compares favorably with +$15.3 billion in the prior month, but compared with the pre-crisis monthly average of +$64 billion demand is looking halfhearted. 

 “This presents clear risks for USD and Treasury yields,” said Eric Lascelles, senior rates strategist at TD Securities. 

Looking at Treasuries alone, demand remains steady with the private sector increasing its holdings by $10.7 billion and the official sector adding $13.2 billion. 

Considering the bond issuance needs of the US government to run trillion dollar deficits for years to come, Lascelles called the official sector results “a drop in the bucket.”

Indeed, we learned earlier this week that fiscal year 2009 ran a deficit of $1.5 trillion, a debt three times larger than the prior year. Looking to the next decade, the Office of Management and Budget projects the annual shortfalls to total a cumulative $9 trillion. 

Bad as that is, many economists believe those estimates are quaint. “The administration forecasts that real GDP will expand at a 4% average rate in the five fiscal years beginning in 2011,” noted economists from Nomura Global Economics. “That is at least a full percentage point faster than our own long-range GDP forecast and that of the forecasters participating in the long-range survey conducted by Blue Chip Economic Indicators.”

Nomura ends their weekly note on a somber note. 

“How the political process will reconcile this tension between the budget and other social policy priorities is a challenge that has beleaguered policymakers for decades. It is little wonder that the markets are skeptical of policymakers’ ability to fashion a fiscal ‘exit strategy.’”