Positive Data Elicit Whimper Instead of Roar

Enron continued to punish financials as the major indices drooped Monday.
Publish date:

SAN FRANCISCO -- All the seasonal factors and some better-than-expected economic data couldn't stop stocks from beginning December in arrears.

Major averages closed off their intraday lows, but the session had a decidedly negative tone throughout, thanks to ongoing concerns about



fallout, violence in the Middle East and Argentina's debt situation. The

Dow Jones Industrial Average

fell 0.9%, the

S&P 500

lost 0.8%, and the

Nasdaq Composite

declined 1.3%.

On the economic front, the National Association of Purchasing Management's index of manufacturing activity rose to 44.5 in November, well above expectations and up from 39.8 in October. The NAPM index remains below levels indicating expansion, but the report's new orders index also showed signs of improvement, rising to 48.8 from 38.3 in October.

Separately, the government reported that construction spending rose 1.2% in October, reversing a 0.7% decline in September (revised from a 0.4% drop originally) and belying expectations for a 0.5% drop. Personal consumption recovered from a 1.8% decline in September to rise a record 2.9% in October. But that was offset by a weaker-than-expected report on personal income, which was flat for a second consecutive month.

The mostly better-than-expected data helped stocks and the dollar recover from their morning lows, and constrained a rally in Treasuries. But just as the data couldn't spark a full-blown recovery for stocks, they couldn't totally stem the bond market's advance. The benchmark 10-year Treasury rose 11/32, to 102 9/32, its yield falling to 4.7%.

Elsewhere, crude oil prices rose 3.3% to over $20 a barrel amid further escalation of violence in the Middle East. But any market concerns about crude were counterbalanced by a rise in oil-related shares; the Amex Oil and Gas Index rose 1% while the Philadelphia Stock Exchange Oil Service Index climbed 1.5%.


(IBM) - Get Report


General Electric

(GE) - Get Report

were the biggest drags on the Dow, and


(F) - Get Report

fell 6.1% after announcing cutbacks and benefits reductions. But much of the market's focus was on financial stocks.

Morgan Stanley


fell 5.7% after Goldman Sachs cut estimates and removed the firm from its recommended list. Goldman also cut estimates on

Lehman Brothers


, which fell 4.1%, and

Merrill Lynch


, which lost 1.9%.

Goldman cited a slowdown in overall M&A activity and valuations concerns about Morgan specifically. But investors are also clearly wary of banks' exposure to Enron as evidenced by renewed declines for those with the closest ties to the firm,


(C) - Get Report

, which fell 2.1%, and

J.P. Morgan

(JPM) - Get Report

, off 3.1%. The Philadelphia Stock Exchange/KBW Bank Index lost 1.6%, while the Amex Broker/Dealer Index shed 2.8%.

The Enron situation "has very long tentacles throughout the financial services industry

and not just in America," noted Nancy Bush, managing direction of financial industry research at Ryan Beck & Co. in Livingston, N.J.

Bush referred to revelations in Enron's

bankruptcy filing, which showed European banks with large exposures to the firm, including Barclays at $126 million, UBS at $74 million and Credit Suisse First Boston at $71 million. Other European banks have previously revealed their exposure to Enron, including ING Groep at $195 million and Credit Lyonnais at $250 million.

Beyond Enron, there's the nettlesome issue of banks' exposure to Argentina, which tried to halt a run on its banks by setting limits on withdrawals. Record spreads on Argentina's bonds and soaring lending rates by banks there were largely an afterthought on Wall Street last week, amid a feeling that nation's financial problems have long been factored into stock prices.

But "I don't think

the situation in Argentina has gotten better in anyone's assessment," Bush said. "I sense a greater willingness for the world to walk away and say 'handle it, we're not going to extend more credit.' The IMF does what it does, but private borrowers

sense inevitability about default."

Over the weekend, Argentina began the first part of its debt swap plan, causing Fitch to downgrade its debt ratings to DDD for default, though Moody's reaffirmed its Caa3 rating.


recently examined major financial institutions'

exposure to Argentina.

Between Enron and Argentina, we're talking about a few hundred million in bank exposure here and a few hundred million there. Pretty soon, it starts adding up to serious money.

The Sentiment Please

To the skeptics, the Enron situation plus developments in Argentina and the Middle East are just the clearest indications of the risks investors face. The bulls, meanwhile, seem

pretty sanguine about such developments.

On a more scientific note, bullish sentiment dipped last week according to both

Investors Intelligence

and Consensus Index. But bearish sentiment also declined to 27% from 28.6% in the


poll while those newsletter writers who expect a correction rose to 27% from 24.5%.

"The last three times the bearish percentage was this low were August 2001, July 1999, and July 1998, all of which coincided with intermediate-term market tops," noted Schaeffer's Investment Research in Cincinnati. At 46%, bullishness is "not as high as we have seen at recent tops, but certainly within striking distance of signaling extreme investor optimism."

Schaeffer's also noted the 21-day moving average of the Chicago Board Option Exchange's equity put/call ratio has stopped falling at 0.54. The firm noted prior market tops this year occurred around similar levels, as

reported previously.

Of course, Schaeffer's has a long-term bearish posture and thus sometimes takes a like-minded view of sentiment data.

What does seem clear is that just as professional investors are getting at least somewhat cautious, retail investors are becoming more ebullient. The American Association of Individual Investors' sentiment index showed bullishness rising to 69.3% last week from 58.3%, while bearishness fell to 20.2% from 25%.

Anecdotal evidence such as reader emails and fund-flow data indicate retail investors have remained wary of the market's recent advance, a stance heightened by rising concerns about job security. But the AAII numbers suggest that that outlook may soon change, which would likely aid the market short term.

The danger though is "long-term" investors might get left holding the bag once again.

Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

Aaron L. Task.