U.S. stocks closed lower for the first time this week as financials pressured the major indices and the day’s economic releases were hardly inspiring.  It has and will remain a long hard road for the mega banks as they remain unwilling to take the losses necessary to get the junk assets off their books and the economic stagnation results in poor loan demand; the S&P 500 measure that tracks these shares has slid back to levels first hit in August 1996.

Despite financials weighing on the broad market, it appeared we were headed for a gain as stocks staged a comeback with about an hour in the session.  However, another round of weakness in the final minutes pulled most equity measured back into negative territory.  The NASDAQ Composite bucked the trend to close higher – bouncing nearly 12% over the last eight sessions.

Tech, telecoms and utility shares led the market higher.   As mentioned, financials were the worst-performing group as bank earnings continue to be driven by what I view as accounting gimmicks, more on that below.  Industrials and basic materials were also among the underperformers.

This morning stock-index futures suggest we’ll bounce at the open.  The optimism is being driven by Google’s earnings results as the company handily beat estimates last night.  I’m afraid traders are getting a little carried away here, Google nearly always beats the Street’s expectations but those results haven’t exactly foreshadowed economic growth that is anywhere near escape velocity. In any event, we’re back near that top end of this range we’ve been stuck in since the correction began in August so we’ll see if we can break out or the major indices get slammed down again.

Market Activity for October 13, 2011

Sector Activity for October 13, 2011

Accounting Legerdemain & a Euro Short

Everyone was waiting for JP Morgan’s earnings release yesterday, and the company beat expectations, but the way they did it failed to inspire investors. That is, they only beat thanks to a debt-valuation adjustment (which accounted for 30% of their quarterly profit).  In short, in an accounting sense they are allowed to book a profit when the market value of their debt declines – the market flees bank debt, but the bank’s bottom line benefits.  It assumes, I suppose, they will buy back this debt at a cheaper price.   It’s one of the more insane accounting adjustments.

So the profit line for the banks have been driven by either the release of loan-loss provisions (reducing the amount of money they hold to protect against more loans going bad) or this debt-valuation adjustment that adds to the bottom line even though investors take their money and go eslwhere.   But forget that for now.  All you need to know is that pre-tax pre-provision profits at JP Morgan (what many believe is the most solid of the mega banks) are down 22% over the past year.

And on to Europe, Slovakia officially ratified the July 21 expansion proposal of the EFSF (bailout fund) – they were the last euro-zone country to vote on the measure.  So now, three months after it was proposed the larger EFSF is now in place – that fund is now up to $440 billion.  The outdated nature of this expansion is hilarious though as EU finance ministers have been working on getting the fund redirected to either recapitalize the banks or expanded yet again to the $2 trillion that will be needed to fully back all of the refinancing needs of the PIIGS, including Italy and Spain.  Thus, the EU has approved EFSF 2.0 when policymakers scramble to devise version 3.0 as the desperate attempt to sweep all of their problems under the rug plays on.

Jobless Claims

The Labor Department reported that initial jobless claims fell 1,000 last week from an upwardly revised 405,000 in the prior week.  So that puts initials up 404,000 last week – it was expected to come in at 405K, but since the reading is getting revised up virtually every week, one can expect this number too will show it missed expectations when the revision comes out next week.

The four-week average fell 7,000 to 408,000 – the lowest level since August 19.

Continuing claims fell 52,716 to 7.223 million as standard claims fell 55K, while emergency claims rose roughly 2K.  Although the previous week’s results for continuing claims were also revised worse, so we’ll see how they actually turn out when next week’s revisions arrive.

Trade Balance

The trade balance on a nominal basis came in virtually unchanged for August relative to July’s $46.625 deficit, but in real terms (adjusted for price) it widened by about $1 billion to -$46.955 billion.

For the quarter, which is what matters for the GDP print, the trade deficit is about 1.5% narrower than what it averaged during the second quarter.  As a result trade should contribute a bit to economic growth for Q3, assuming a major widening doesn’t occur for September.

Taking a more internal look at the figures, real exports fell 0.7% during August and real imports rose just 0.2%.  These are weak results particularly since the three-month average for both are essentially unchanged – exports up slightly and imports down a touch.  This lack of growth via the trade numbers, while they look set to benefit GDP for a second-straight quarter, shows the deceleration that’s occurred in global growth.

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Have a great weekend!

Brent Vondera, Senior Analyst

Phone: 636-449-4900