Financial Market Update: After the Closing Bell-Thursday, Oct. 2

Yesterday, hope. Today, fear. The Dow Jones Industrial Average lost 348.62 points today, seemingly upset by lousy numbers on the economy regarding jobs and manufacturing (see below). Among the decliners today were insurance stocks, stung by a passing remark by U.S. Senate Majority Leader Harry Reid (D.-Nev.) about a “well-known insurer” being on the edge of insolvency. A spokesman for Reid backpedaled today, telling Reuters that “his comments were meant to refer to the conditions in the financial sector generally,” not any particular insurer. It’s more evidence for the case that markets do not, in fact, behave rationally. The U.S. Senate passed the proposed $700 billion bailout plan; now attention turns back to the House. The bill has been tweaked, or larded with extras, depended on who’s commenting on it, and the arm-twisting has started in earnest. Only 10 or so reps need to change their minds about it. Surely even this administration can come up with 10 promises of bridges to nowhere in 10 districts to get the bill passed. Credit crunch or confidence crisis? Whatever the reason, the economy is turning in some disheartening numbers. Factory activity is down, according to the Institute for Supply Management, and jobless claims are at a seven-year high, according to the US Labor Department. Libor has risen for the fourth day in a row, and a thing called the TED spread — the difference between rates on interbank loans and short-term T-bills — has hit a new high of 360 basis points. The Securities and Exchange Commission has extended its “temporary” ban on short selling certain financial stocks. But the commission also backed down on one aspect of the rules. Under the original “emergency rules” on short-selling of nearly 800 financial stocks, fund managers had to disclose major short positions in public filings, subject a two-week delay. Hedge fund managers and other short sellers were outraged by this, and it seems they’ve gotten their way about it. Now the SEC says that “disclosure under the emergency order will be made only to the SEC.” The European Central Bank is mulling an interest rate cut, the first in more than five years. Bank president Jean-Claude Trichet told a press conference in Frankfurt today that such a reduction was discussed among the bank’s muckamucks, but for the moment the rate is staying at 4.25 percent. Trichet noted that inflation risks “have diminished,” leading observers to speculate that the rate cut could be a soon as next month. Writing in a contrarian vein in Forbes, Alan Reynolds, senior fellow of the libertarian-flavored Caro Institute, says that banking lending in the United States has not ground to a halt. Instead, smaller banks have made up the slack in terms of credit liquidity now that a handful of large banks aren’t lending as much as they used to. Reynolds cites the Federal Reserve’s figures for US bank loans as of the week ending Sept. 17, which put business lending at $1.531 trillion, real estate lending at $3.625 trillion and consumer lending at $847.1 billion — all up from a year earlier. On the other hand, the figures for the last two weeks aren’t out yet, which might indicate whether there has been an overall decline in credit availability. Some jokers have created what purports to be “Strategy Capital Management L.L.C.,” which calls itself a “unique hedge fund… the largest in the world, with expected initial capital of $700 billion… It has no fixed mandate, though it is expected to initially focus on mortgage-backed securities. And it is the only fund backed by the full faith and credit of the U.S. Government…” The site is here.