Market Talk

US stocks rally in the afternoon, after reports that Nouriel Roubini upgraded his economic views sparks a buying spree, although his people said the comments were misconstrued. Meanwhile, CIT Group teeters amid fears of bankruptcy.

DJIA jumps 96 (1.1%) to 8712, S&P 500 rises 8 (0.9%) to 941, Nasdaq Comp gains 22 (1.2%) to 1885. You want volatility? The Dow is up 6.9% – in four sessions.

Weekly jobless claims plunge, but Labor Department says seasonal adjustments are exaggerating the numbers. JPMorgan posts sharply higher earnings, on a huge quarter for investment banking. But the consumer side of the business is still suffering. Video recap here.

Now, are the bears going soft? First it was Meredith Whitney on Monday, going bullish on Goldman. Today it was, apparently, Roubini. But what’s so frustrating about the Roubini story – and what illustrates just how jumpy the market is – is that ultimately Roubini didn’t say anything new.

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CIT Group has a long road ahead

CIT Group’s (CIT) ominous financial situation just got a lot worse, now that the government has decided not to save the ailing lender.

CIT said “there is no appreciable likelihood” it’ll receive government aid in the near future, which has sent its shares down 75% to 41c in mid-afternoon trading. The lender is scrambling to line up at least $2B in rescue financing from existing debtholders, according to WSJ. Without the financing it’ll likely file for bankruptcy protection.

CIT is the first major financial company the government hasn’t propped up since the Lehman collapse. Several bloggers expressed optimism that the government showed restraint by not bailing out CIT, especially amid the recent bailout mania.

“CIT had friends, but not enough – and maybe this tells us something about the shifting political sands,” former IMF chief economist Simon Johnson writes at The Baseline Scenario.

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Keep blowing boys; we got a lot of work to do.

We’ve mentioned deflation once or twice. It’s a great destroyer of assets, taking down the value of, says, a house, while the owner’s mortgage payments remain the same. It’s a force that turned a downturn into the Great Depression. It is something to be feared and fought at all costs.

Which makes the World Bank’s latest screed on deflation worth pondering. Unless a global effort is made to combat the excessive slack currently in industrial capacity, the world risks descending into a deflationary spiral.

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So China’s back on the front page. Not because it’s detaining employees of companies whose management’s are in stalled contract negotiations with the state-owned steel industry, but because – by some miracle of stimulus spending that apparently can’t be replicated here – China’s economy is back on track.

China’s 2Q GDP rose 7.9%, the Journal reports, rebounding far faster than most people expected. The turnaround puts the economy on target to reach the government’s target of 8% GDP growth.  From the Journal:

China has rebounded after authorities used the state-controlled banking system to engineer one of the most dramatic monetary expansions in history. Banks have issued twice as much in new loans so far this year as in the first half of 2008, and China’s money supply is now expanding at nearly triple the rate in the U.S.

How’d that happen, you ask? Easy. The government ordered it to happen. China ordered its banks to make loans. It is that state-dictated activity that is driving growth in China. Imagine how things would look here if Washington could order the banks to make loans, rather than just beg them to do it.

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Bulls have walked the walk this week so far, putting forth some powerful follow-through to Monday’s rally. After the S&P 500′s nearly 7% run-up off Friday’s low, US stocks clearly look overbought and due to pull back.

But that’s a tricky bet amid a torrent of 2Q earnings reports and closely watched economic data, where “less bad” is still embraced as “great.”

JPMorgan put up some strong 2Q numbers this morning, not unexpected, which may help nudge banks even higher. IBM, Google report after the close.

Weekly jobless claims due at 8:30am; Philly Fed’s July manufacturing report at 10:00am; Home builders July sentiment index at 1:00pm.

S&P futures off 2 points; DJ futures down 2. Ten-year Treasury flat, yield at 3.58%. Crude down, but still above $60/bbl.