Updated from 7:09 a.m. EST

A lot of good news -- earnings and economic -- counted for very little in the market on Wednesday. So it was hard to see how the market would have a positive reaction to mainly negative news after the bell Wednesday.

eBay's ( EBAY) after-hours miss isn't helping anyone on Thursday -- save, perhaps, the short-sellers. The Net auctioneer said profit rose 44% but guidance of 32 to 33 cents a share for the first quarter was lower than expected.

Similarly, Qualcomm ( QCOM) dropped in after-hours trading following a mixed earnings report. The wireless-chip juggernaut beat first-quarter earnings estimates by a penny but said second-quarter numbers would fall short of expectations.

In the wake of those reports, which overshadowed positive earnings from smaller firms such as F5 Networks ( FFIV), stocks were down, with the Nasdaq losing about 14 points to 2059 about 90 minutes into trading.

Sweet and Sour

On Wednesday, action in the banking sector, where indiscriminate sellers drove down everything, typified the lack of influence of strong earnings.

Several sweet fourth-quarter reports after the close on Tuesday, including from IBM ( IBM) and Yahoo! ( YHOO), along with positive macroeconomic reports were swept away on a tide of poor reports from the likes of J.P. Morgan Chase ( JPM), Southwest Airlines ( LUV) and Lucent ( LU).

Ending a two-day winning streak, the Dow Jones Industrial Average lost almost 89 points, or 0.8%, to 10,539.97. The S&P 500 fell 1% to 1184.63 and the Nasdaq Composite tumbled 1.5% to 2073.59.

Lucent's report, along with less-than-stellar guidance from Motorola ( MOT), led to a rout in technology shares, while airlines and retailers also sank.

Lucent slipped 8%, Motorola fell 7% and the Philadelphia Stock Exchange Semiconductor Index shed 2%. Despite better-than-expected results, IBM and Yahoo! fell too, dropping 2% each. Energy companies did better, but homebuilders and defense contractors lost most of their early strong gains.

The yield on the 10-year Treasury note was virtually unchanged at 4.19% as news that inflation remained under control helped offset signs that the economy was strong . The consumer price index fell 0.1% in December, new-housing starts and mortgage applications improved more than forecast, and weekly claims for unemployment insurance dropped the most in three years.

In addition, the Fed's beige book survey of business conditions in each of the central bank's 12 districts was also positive. All of the districts but Cleveland reported that activity expanded in late December and early January. (Activity in the Cleveland area was mixed.) Consumer spending was higher, manufacturers intended to increase capital spending in 2005 and real estate markets "remained generally strong."

Inflation, the subject of much Fed chatter in recent weeks, also remained contained, according to the survey.

"Inflationary pressures remained largely in check in December and early January," the beige book declared. "While many manufacturers and builders continued to report small increases in input costs, price increases for final goods and services were generally modest."

Not the Same Old Banks

In fact, there really was only one sector that looked weaker in the report: banking. Overall lending activity was mixed, with consumer mortgage lending declining in the Chicago, Dallas and New York districts and profit margins slipping in Chicago and San Francisco.

It's an old saw that higher rates in general and a smaller gap between long-term and short-term rates hurt banks by squeezing the margin between borrowed funds and lent funds. Back in 1994, bank stocks were crushed by the Fed's aggressive rate hikes.

It's not the same story nowadays, as noted here back in September. Many banks earn less from lending as a proportion of profits and more from consumer fees that are not as sensitive to rates. Plus, thanks to the Fed's telegraphing, banks have had time to rework their balance sheets and position themselves to benefit from rising rates.

Not everyone can dance the dance. Both Citigroup ( C) and J.P. Morgan said in filings with the Securities and Exchange Commission that they were likely to lose from higher rates. Comerica ( CMA), Wachovia ( WB) and Bank of America ( BAC), by contrast, all have said they were ready to increase profits on higher rates.

And in addition to the sensitivity of core businesses and balance sheets, Citigroup and J.P. Morgan also are top players in the securities underwriting markets, which tend to dry up when rates rise.

The yield on the 10-year Treasury note rose just 10 basis points to 4.22% in the fourth quarter. A year earlier, it climbed more, rising 32 basis points to 4.26%. The gap between the two-year note and the 10-year suffered the supreme squeeze, however. The spread ended the year at 1.16 percentage points, up from 2.43 points at the end of 2003.

Sure enough, as the reports have come in, Bank of America and Wachovia had good news. J.P. Morgan's report showed less-than-stellar performance, with revenue and earnings excluding merger charges falling short of expectations. It wasn't all rates and positioning. J.P. Morgan struggled to integrate its purchase of Bank One, while Wachovia and Bank America did better digesting their most recent acquisitions. Citi reports on Thursday.

The confusion hasn't helped anyone's share price. The Philadelphia banking index lost 1% on Wednesday and is down 3% year to date. It's still up 2% from a year ago.

Bank of America lost 1.7% on Wednesday and is down 4% this year. Wachovia was up 0.1%, or 4 cents, and is holding on to a gain of about 0.7% for the year. J.P. Morgan lost 1.5% for the day and 3% for the year. Citi dropped 0.3% on Wednesday and was flat in 2005.
In keeping with TSC's editorial policy, Pressman doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback.