Market Talk

It’s almost like yesterday never happened. US stocks rally sharply, after dropping sharply yesterday, as the dollar reverses course and all those troubles from yesterday seem so, well, far away.

DJIA rises 129 (1.2%) to 11108, recouping most of what it lost yesterday; S&P 500 rises 12 (1.1%) to 1178, Nasdaq Comp gains 20 (0.8%) to 2457. Euro rises more than 1.5% as yesterday’s dollar rally fades just as fast as it came. Treasurys also manage to rally, with the 10-year yield falling to 2.47%.

It’s amazing, really. Yesterday, China’s surprise rate hike was this great cautionary red flag, something to be feared. Today, I swear to God, people were out there arguing it was somehow a good thing for global growth. That’s how the market just does things sometimes. It was bad yesterday, it’s good today. Don’t try and make sense of it; it doesn’t make any sense.

Upbeat earnings are being cited for the rally, but they didn’t seem so upbeat before the dollar started falling, if you get out drift. The dollar, and the Fed’s plans for it, are still the top factor in the markets right now.

There’s one law that lawmakers would do well to keep in mind, and that’s the law of unintended consequences. From our colleague Michael Derby, who covers the Fed:

A veteran Federal Reserve official cast his lot Wednesday with those who believe the government itself was a major player in driving events that led up to and created the financial crisis. “The financial crisis was not a failure of our capitalist system,” Federal Reserve Bank of Philadelphia President Charles Plosser said. “Nor was it largely the result of a lot of greedy evildoers whom we could just put in jail to solve the problem.”

Instead, the official said “it largely reflected a collection of incentives, some arising in private markets and some created by the government, that motivated individuals to act in ways that proved damaging to the nation’s overall economy.”

The central banker said government officials and legislators often don’t realize that as they write laws to protect against trouble “new rules and regulations, often made with good intentions, can create bad incentives, which, in turn, yield ugly results.” Put another way, “our efforts to ‘fix’ a perceived economic problem might create unintended consequences.”

Plosser’s on target, although he takes a rather benign view of things. Those rules were just produced haphazardly, on some random whim. At every stage, there was one of those proverbial “special interests” using their power and influence to push rule-makers in a specific direction, one that usually benefited the interest in question.

Think about, say, the scuttling of Glass-Steagall, or the decision not to regulate derivatives, or the lifting of leverage caps on investment banks. All of these had rather painful unintended consequences, but all of them were pursued by specific players that wanted to make an intended profit from the rules.

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So, what do you think is driving today’s rally, the dollar or earnings? The dollar has completely reversed yesterday’s gains, and as you can see by looking at the euro, stocks, gold, oil and commodities like corn and cotton, yesterday’s losses have also been erased. Interesting, huh?

In today’s video, we take a look at two big stories, earnings and the foreclosure mess, and how the latter may affect a still limping housing market.

In today’s Upshot, written by our colleague in Chicago, Bob Tita, we look at the industrial sector, and the pressures there that are crimping profits. Given Monday’s industrial production report, which showed activity sliding, we’re looking at a slowdown in one sector where an awful lot of hope has been pinned.

Manufacturing companies have been among the best profit generators this year, but the party crashers—rising costs and slowing sales gains—are beginning to arrive in the industrial sector.

Companies that sell primarily to other businesses have staged a strong comeback this year thanks to inventory replenishments that create a bull-whip effect: Manufacturers, distributors and retailers all draw down their inventories during recessions as orders slow, but when customer demand picks up, they increase their orders to restock, creating a snap-back effect that’s often larger than customer demand.

But the snap-back appears to have run its course as Parker Hannifin Corp., Illinois Tool Works Inc. and A.O. Smith Corp., suppliers of aerospace parts, tools, fasteners, and electric motors, on Tuesday signaled subdued growth later this year and into 2011.

For instance, Parker Hannifin’s earnings guidance for the remainder of its fiscal year implies sales growth of between 8% and 11% for the year ending June 30, well below the searing 26.5% sales gain of the quarter ended Sept. 30.

US dollar relinquishes a chunk of yesterday’s strong gains, euro recaptures some lost ground, so US stock futures point moderately higher premarket, along with gold and oil.

It continues to be a formulaic, mechanical trade and likely remains so at least until we hear from FOMC on Nov. 3. Another boatload of 3Q earnings in store, but currency movements look to still be a key influence on the overall equity market.

Notable names on today’s earnings calendar include Boeing, Morgan Stanley and Wells Fargo — all due before the open. UTX 3Q bottom line looks a little better than expected, but 4Q may be weaker as company’s full-year view is a couple pennies below Street’s estimate.

S&P futures up 4.20, DJ futures up 25. Ten-year note lower, yield at 2.48%.