Market Talk

US stocks erase early losses and finish in positive territory despite continuing concerns about euro zone sovereign debt.

DJIA, which fell as much as 92 points, finishes up 10 (0.1%) at 11357, snapping two-day losing streak. S&P 500 rises 5 (0.4%) to 1219 and Nasdaq Comp jumps 16 (0.6%) to 2579.

Better-than-expected jobless claims and a sharp contraction in the US trade deficit did little to fuel stocks as worries across the pond persist. Bond markets in weaker European countries, such as Ireland, Portugal and Greece, were slammed as investors continued to demand higher yields. All this comes ahead of the highly-anticipated G-20 meeting, beginning tonight.

In after-hours trading, Cisco Systems dropped more than 4% despite solid FY1Q results. Dow Jones’ Roger Cheng reports investors were more interested in CEO John Chambers’ comments from the release, in which he said he is seeing capital spending moderate in some areas of the business. Wall Street had expected a more bullish tone after staying cautious with his macro comments last quarter.

It looks like the uncertainty is here to stay for a little while.

Stocks wavering between positive and negative territory despite encouraging jobless claims and trade deficit data. Campbell Soup also warns again about slowing soup sales. Newswires editors Anna Raff, Brian Baskin and George Stahl report on The Markets Hub.

Back in September and October stocks were surging no matter what the major headlines or economic data looked like. Our Newswires colleague Donna Kardos Yesalavich even penned a column headlined “For Stocks, Bad Economic News Could Be God In Face Of QE2.” Here’s an excerpt from her Oct. 7 column:

On Wall Street, bad may be the new good when it comes to economic data.

Investors believe a weak September jobs report Friday from the Labor Department wouldn’t necessarily be unwelcome. In a twist of logic, negative economic snapshots could lift stocks on hopes central banks might unleash additional stimulus more quickly.

The expectation is that the Federal Reserve, the Bank of England and perhaps the Bank of Japan might embark on a second round of quantitative easing — dubbed by investors as “QE2″ — to keep the recovery going. That means Wall Street has been viewing every negative economic report as another reason to snap up stocks.

“It’s almost a win-win situation for equities,” said Owen Fitzpatrick, head of the equity strategy group at Deutsche Bank Private Wealth Management. “That seems like the environment we’ve been trading in for all of September and to some extent October.”

The S&P 500 went on to post a whopping 17% gain from the end of August through the beginning of November. But after a few slow days in the market, we can’t help but wonder if the opposite effect of the “bad news is good news” theory is starting to take place?

After hitting fresh two-year highs, US stocks have stalled out and are on pace for their third straight day of declines. Yesterday marked the DJIA and S&P 500′s biggest declines in three weeks and stocks are slumping again today. Today’s decline comes on the heels of dropping jobless claims and a narrower trade deficit, which are positive signals for the weak economy.

Falling imports from China and exports rising to a two-year high on the back of a weaker dollar helped shrink the total US deficit more than expected. And jobless claims decreased by 24,000 to 435,000 in the week ended Nov. 6, the lowest in four months. That positive report comes after last Friday’s much better than expected monthly jobs report, which showed 151,000 jobs were added in October.

Yet the stock market is overlooking the positive data and trading lower. Granted, the market could merely be taking a breather after its precipitous rise. But it’s never too early to start wondering if investors are starting to view good news as bad news, especially in light of the Fed’s QE2 announcement last week.

If the economy starts improving much more than anticipated, the central bank may not feel the need to go through with all of its $600B stimulus plan, which would be bad for stocks. The Fed may also be growing more hesitant as the global backlash against QE2 keeps mounting.

“Just a few trading sessions after the Fed announced the launch of QE2, strategists are already arguing that this program’s days may be numbered,” Josh Lipton writes at Minyanville, “The good ship QE2 has only just set sail but already some are forecasting an early return to economic harbor.”

Is good news becoming the new bad? Time will tell.

I’ve been waiting to say “the dollar’s getting beaten like a rented mule.” Glad I finally got a chance.

I’m not sure you can even effectively “buy American” anymore. You want to buy your kids a toy? I can’t recall the last one I saw that didn’t have “made in China” stamped on it. Still, you don’t have to buy only American in order to help your fellow citizen. Miller Tabak’s Dan Greenhaus makes the point, in discussing today’s report on the trade deficit:

If US consumers shifted a moderate amount of their consumption from foreign made goods to domestically produced goods, it would be the single biggest stimulus package our country could realize,” he writes. “Imports of consumer goods rose $1.4 billion in the month and are up 12.8% from one year ago to over $281 billion thus far this year. Figuring out how to shift those consumption patterns without angering our trading partners is of course the challenge.

Now that’s a stimulus package everybody can love (except the Chinese, of course.) Reminds me of that old union jingle. “Look for the union label, when you are buying a coat, dress or blouse. Remember somewhere our union’s sewing, our wages going to feed the kids and run the house.” I know, who wants to support unions nowadays. They’re like zombie, blood-sucking marxists or some such terror, right? But they’re Americans, and Americans got to help Americans, Jack.

Look at that, I just gave some eagle-eyed politicians a new campaign platform.

Trade deficit numbers looked much better than everybody expected, and that may mean at least that imports won’t drag on 3Q GDP the way they dragged down  2Q economic growth.

- Jobless claims rising 2,000 is a relatively minor change. “The bigger problem is the trend,” James Picerno says at The Capital Spectator, noting claims have jumped 13% since bottoming in mid-July. “For months, it was treading water. That was bad enough. But now it’s rising, raising fears that it could go higher still.”

- Deflation is “overblown fear” and is unlikely for three reasons, writes blogger and MIT professor Simon Johnson.

- Appears the stock market has finally awoken to poor recent economic news. And Fed saying it won’t shrink its balance sheet isn’t generating much confidence. “The Fed seems to be exhibiting a pretty bad case of ‘if all you have is a hammer, every problem looks like a nail’ syndrome, particularly when it has (or perhaps more accurately, had) other tools at its disposal,” Yves Smith says.

- Reuters blogger Felix Salmon wonders if the “twitchy, volatile” stock market is still a worthwhile long-term investment, especially if long-term volatility continues increasing.

- Yesterday’s steep selloff and today’s drop show the “sharp risk-on/risk-off swings in markets are to be expected given the reality of today’s macro context,” PIMCO CEO Mohamed El-Erian writes.

- Treasury Secretary Tim Geithner recently said surging imports “reflect healthy and growing American demand.” So much for that optimism, especially in the wake of yesterday’s trade deficit report. “Combined trends in exports and imports are simply not supportive of economic growth,” Tim Duy writes at Economist’s View. “And, given the current state of the global financial architecture, where the US is expected to be the repository of global savings, it is difficult to see how the external sector contributes positively to the recovery.”

- Microsoft (MSFT), which lately has been knocked for lacking a strong consumer strategy, is launching a studio to develop games for mobile phones. The idea, it appears, is to promote use of the Windows Phone operating system.

- The latest on the rumor mill regarding a Verizon Wireless iPhone comes from Daring Fireball blogger John Gruber, who says Apple (AAPL) is taking part in advanced testing of a CDMA version of iPhone, the type compatible with VZ’s wireless network. “The drumbeat of reports pointing to an impending Verzion iPhone launch is getting louder,” MediaMemo blogger Peter Kafka says. “Which doesn’t mean that it’s true. Just that there’s a lot of drumming going on.”

- With so much information online, it’s easy to read something one day and forget where you’ve seen it the next. But there may be a solution. On Thursday, TechCrunch reviewed Sentimnt, a search engine that tackles the question, “Where did I read that?”

- Jetblue (JBLU) finally ends the silent treatment regarding its flight-attendant-turned-wing-nut Steven Slater. “It wouldn’t be fair for us to point out absurdities in other corners of the industry without acknowledging when it’s about us,” JetBlue says on its blog. “While we can’t discuss the details of what is an ongoing investigation, plenty of others have already formed opinions on the matter. Like, the entire Internet.”

- “The Fed’s current policy is grossly inadequate, logically bizarre, and slightly — but only slightly — encouraging,” Paul Krugman says. By maintaining the balance sheet’s size rather than shrinking it, the central bank “has gone from a completely crazy policy of monetary tightening in the face of massive unemployment and incipient deflation, to a policy of standing pat in the face of same,” Krugman says. “Whoopee.”

- Fed’s decision to reinvest proceeds of maturing MBS into Treasurys signals the central bank’s “continued willingness to throw money at the flagging economy,” Yves Smith writes at naked capitalism. “The problem, of course, is that with the Fed having failed to clean up bank balance sheets, all these efforts to throw money at the economy look an awful lot like pushing on a string.”

- When analyzing the “flash crash” and what should be done to prevent it in the future, NYT’s Floyd Norris says the solution is to fix markets, not tell investors they need to protect themselves against bad markets. “Markets are fragmented and depend on ‘liquidity providers’ who have no obligation to hang around when the going gets tough. We have somehow taken markets that worked and substituted markets that do not.”

- “It is important to remember that the Fed did not ease monetary policy yesterday,” former Dallas Fed chief Bob McTeer writes. “It acted to limit the tightening that would automatically have taken place with the run-off of mortgage backed securities.” And he cautions that the central bank’s recent actions may not be enough. “We need gradual growth in the balance sheet to support gradual growth in the money supply.”

- Google’s (GOOG) holding press event tomorrow where it will “unveil a couple of cool new mobile features,” which prompts All Things D blogger Kara Swisher to wonder what GOOG has up its sleeve. Some speculate integrated video calling will be released, but according to Swisher’s sources, that won’t be the case.

- That surging trade deficit number “was simply so awful that almost no one in the mainstream was ready for it,” Josh Brown writes at The Reformed Broker. “The implications of this number will work their way into GDP calculations and recalculations and the end result will not be pretty.”

- The Fed is failing in two aspects: Policy is too tight and it’s communication has been miserable, Ryan Avent says at The Economist’s Free Exchange blog. Stocks and commodities tumble, while safe havens, like the dollar, rise. Perhaps FOMC members are realizing they have “reinforced the economy’s disinflationary, pessimistic mood,” Avent adds. “The question is: come September, what are they going to do about it?”

- “I don’t buy the idea that so many of the unemployed are stupidly and stubbornly holding out for a higher wage than they can get, while at the same time they can be reemployed by a mere bit of money illusion,” Tyler Cowen writes.

- “Part of what propels stocks is confidence that they will do better than other investments,” Stephen Gandel notes. “That’s what created the equity premium in the 1980s and 1990s. And that has slowly slipped away. That’s bad news for the stock market. But it might not say anything about the economy.”

- WSJ’s Juliet Chung writes about “the shrinking second home” as the affluent turn to smaller, less expensive homes.

Inventory's getting pretty low at the Rainbow Shop.

You thought the Fed statement was a bummer?

Get a gander at today’s report on the June trade deficit. The deficit blew out to $49.9 billion, a 21-month high, as imports rose 3.1% and exports fell 1.3%. The Street pegged the deficit at $42.3 billion. Bulls will point and say, hey, look, imports are up, that means demand is up.

Uh, sure, guys, have fun with that one.

The real takeaway here is that this was the June report, still in the second quarter, and as such, it will have an effect on the revised GDP numbers that come out at the end of August. Depending upon whom who read, that could mean a badly revised number, or a drastically badly revised number.

“The BEA estimated a fairly large drag from net exports and indeed, the deficit reported in today’s report is even larger than they estimated,” Miller Tabak’s Dan Greenhaus wrote, “suggesting that 2Q GDP is indeed likely to be revised down closer to 1% or 1.5%.”

Ugly, right? Wait, it gets better.

“The deterioration in the trade balance in June was much sharper than had been assumed by the BEA in the advance Q2 GDP report,” Peter Newland at Barclays wrote. “As such, Q2 GDP growth is now tracking just 0.3% q/q (saar), relative to our previous tracking estimate of 1.6% and the initially reported 2.4%.” This ain’t Roubini’s crew saying this, by the way; Barclays is a relatively bullish camp on the Street.

Zero point three percent, can you imagine that? GDP in the second quarter coming in ultimately at just 1%, or 0.3%? And everybody expects the second half is going to be worse than the first half, so where’s that leading the third quarter to?

Can you say, ah, double-dip?

Addendum: Josh Brown over at the Reformed Broker nails it: “It was simply so awful that almost no one in the mainstream was ready for it.  The implications of this number will work their way into GDP calculations and recalculations and the end result will not be pretty.”

The FOMC yesterday finally got around to formally acknowledging something that most already knew — that the US economic recovery isn’t so hot, and the Fed’s largely symbolic action (reinvesting in Treasurys as agency assets on its balance sheet mature) won’t be much help.

Negative reaction in Asian markets overnight to Fed’s assessment of the economy, and stocks now sharply lower in Europe, with the euro tanking, briefly dipping below $1.30 after a knee-jerk rally late yesterday. Yen hit a 15-yr high vs USD.

June trade deficit widens to a record 21-month high.

S&P futures down 18.20; Dow futures off 146. Ten-year note still rising, yield down to 2.72%.