Update 1:30 p.m.:

Well, that was nasty.  The Dow closed near the lows of the day, dropping 261 points,  This is a decline of -2.52%, but the NASDAQ was even lower, losing 3.1% of its value today.  This wipes out the gains for the week.  The "better than expected" earnings mantra didn't work this time.  All of the stocks that reported this week "beat expectations" and all of them took a pasting.  Bank of America dropped 9.2%, Citibank was lower by 4.6% and GE dropped 4.6%.  What would have happened had they failed to "beat expectations"?  Financial stocks were down 4.4% as a group making them the worst performing sector today.

The only survivor was Goldman Sachs.  In one of the more flabbergasting press releases, Goldman said that they were not taking the tax deduction available on the $550 million settlement, an amount close to $185 million.  I should hope not.  Their stock closed higher today although well off its highest level.   

Market wrap-ups pointed to the retreat in Consumer Confidence in the Michigan Report, a weak dollar against the yen, and a growing concern that the economy has hit a soft spot as reasons for stocks beating a wholesale retreat.  

Bond yields dropped to historic lows.  The 2-year closed at 0.58%, the 5-year at 1.67% and the 10-year at 2.92%.  These are all record lows for their particular maturity.  One telltale sign that bonds were safe was their complete indifference to the equity rally that had carried the Dow up 700 points in just 6 sessions.  I noted that the markets were not in synch.  While not a pretty sight, the price action today is at least consistent.    

Next week is the week for housing news with Housing Starts, Existing Home Sales and various readings on home price levels.  We will get another look at Jobless Claims to see if the drop this week is the start of something or just an abberation.  Leading Indicators wrap up the week and a drop is forecast there. 

On Thursday the Treasury announces the next round of supply with 2, 5, and 7-year notes to be sold the following week.  This week's auctions are trading at fat premiums as yields responded to the drop in stocks. 

Update 7:15 a.m.:

The Dow has been open for less than one hour and is already lower by 180 points.  GE "beat expectations" on earnings but reported a miss on revenues.  The stock is lower by 3% to start the day.  The large banks continue to drop as well.  Only Goldman Sachs is enjoying the news today.  Don't forget it was $13 billion of your tax dollars that went from AIG to Goldman Sachs during the dark days of 2008 to make good on losses that Goldman would otherwise have had to incur.  Ironically, Goldman's profit last year was just about $13 billion.  Goldman scrambled to become a bank in 2008 to be able to access the Fed's Discount Window.  I digress.

Michigan Consumer confidence survey showed a drop to the 66 level.  This is the lowest reading since August 2009 and is just one more sign that the consumer is retreating.  Stocks had been lower before the report and really dropped once they saw it.  I am amazed that the Dow reacts more to a survey than hard news, but who can argue with irrationality.

The bond market reacted as one might expect.  Yields are pushing back to the lows of early July.  The 2-year is actually making new low yields with an offer of 0.59% at the moment, the 5-year is 1.70% (this is also a new low for the move, down a full 100 basis points since mid-April of this year, just two months ago) and the 10-year is 2.95% (it has not yet made new lows).  

Even though bonds are at or below their early July lows, the Dow is still 500 points above the early July posting.  Bonds and stocks do not appear to be in synch on this one.

NPR has been running a series this week about the status of the European Union and the Euro currency.  I thought they made a great point in today’s episode.  If you think that a European political union is just around the corner (which many argue has to happen if the Euro is to continue as a viable currency), look no farther than the World Cup.  Spain and The Netherlands were in the final.  Germany and France left early, etc.  They did not field an All-European team.  Did you notice that the United States had just one team?  We did not put California into the tourney even though its population is bigger than most of the European countries entered.  This national identity is deep in their bones.  I think they would rather scuttle the Euro than give up what makes a Spaniard a Spaniard.

Morning comment:

CPI for June was released today with the headline number dropping -.1% as forecast.  This marks the third month in a row of a negative reading.  However, the Core CPI came in at +0.2%, a tick above expectations.  The average of the Core for 2010 is +0.1%, but we have seen a small upward bias to this series as the low in January was -.1%.  This leaves the year-over-year Core increase at +0.9%. 

Bond yields are not responding to the uptick in the Core rate.  Bond prices had shown small gains before the number, experienced a short sell off after the report, then returned to unchanged.  In the Core Rate, rents stabilized after being softer earlier in the year.  The price of clothing and used cars rose, causing the somewhat larger increase.  Bond mavens don't appear to be too worried about this. 

The 2-year is 0.61%, the 5-year is 1.75% and the 10-yr is right at the 3.00% mark.

Bank earnings continue to be announced and a definite pattern is emerging.  Like JP Morgan before them, Citibank and Bank of America announced today that they “beat expectations” on bottom line revenue, although they missed on the general revenue line.  The banks all got nicked a bit on the difficult trading environment of the 2^nd Quarter, but they were able to boost returns by lowering their provision for loan losses.  So there you have it.  If the economy continues to improve, then more of the banks troubled loans will pay off on time.  If the economy slips, the strategy of boosting revenue for the short term will have contracted the margin to absorb losses in the future.  In pre-market trading, the shares of Citibank and Bank of America are lower as skeptics are wondering about the quality of the earnings. 

Goldman Sachs settled with the SEC.  They said that they did nothing wrong, and promised not to do it again.  While the SEC is crowing that they earned a great victory, Goldman’s stock has jumped 10% on the settlement.  Let Mr. Market decide who won that round.

Japan’s stock market tumbled overnight, dropping by nearly 3%.  They are supposedly concerned that a stronger Yen will make their exports more expensive in the world market.  Earlier this year it was the Euro/Yen mix that had them worried.  Recently, the Euro has strengthened nicely, but against the dollar.  This morning the Euro is 1.2985 versus the dollar.  The weak Nikkei Index did not drag the rest of the world with it. 

Jeff Smith