Morning Update

Economy Center Stage

Following yesterday's impressive late-day rally, stocks are much lower in choppy trading as the focus turns back to the economy and away from Google's strong performance. Housing starts and building permits fell more than expected, indicating homebuilders remain under pressure. But the steep drop in starts and permits may also help clear out inventories. Meanwhile, IBM confirmed 3Q results and offered upbeat comments, Capital One Financial and Honeywell International topped the Street's profit forecasts, and Schlumberger matched. Treasuries are higher, gold continues to lose its luster, and world markets are mixed.

Housing still weak

Housing starts fell 6.3% in September to an annual rate of 817,000 units, well below the Bloomberg forecast of 872,000. Single family starts were particularly weak, falling 12.0%. Building permits fell 8.3% to 786,000 units, missing the Street's estimate of 840,000 units.

Preliminary University of Michigan consumer sentiment, to be released later this morning, will give us the first reaction by consumers to the credit crisis and the sharp drop in stock prices. A decline from 70.3 to 65.0 is forecast. The big drop in gasoline prices may temper some of the expected pessimism.

The flood of cash from the world's central banks has driven the overnight LIBOR lending rate near the fed funds rate, which would be expected in normal credit markets . The three-month rate has been slower to decline and is still elevated, but the rate has fallen for five-straight sessions, suggesting that the massive rescue plans put together by the US and European governments are slowly bringing back confidence. A drop in gold below $800 per ounce is also providing support for the idea that the extreme caution seen in early October is slowing abating.

Europe rises

The late-session advance in the US yesterday and upbeat profits from Google are inspiring an afternoon rise in Europe. Ericsson (ERIC $7) is trading higher after its joint venture Sony Ericsson posted a smaller-than-expected 3Q net loss of 25 million euros, but shipments improved and its market share held steady at 8%. But shares of ING Groep (ING $15) are down nearly 20%, extending sharp losses over the past two days, on speculation that the insurer may need additional capital, according to Bloomberg News and Dow Jones Newswires. There is also chatter of state intervention. The company did not comment.

Russian stocks continue their steep slide and are down another 4%. The Russian media and the Financial Times have reported modest runs on medium-sized banks, bringing back memories of the 1998 crisis. The country's foreign reserves, which are the third-largest in the world, are holding just above a hefty $530 billion, but support for the nation's top banks and sales to prop up the ruble have lopped off over $60 billion in just a couple of months. The near collapse in commodity prices, including the more than 50% drop in oil in recent months, is also darkening the outlook. Russia's dollar-denominated index has lost over 70% since mid-May.

Asia mostly weaker

Tokyo held onto the coattails of Thursday's late advance in the US, with the Nikkei 225 Index advancing a solid 2.8%. But the steep drop in commodities, including crude oil, leaned on most markets in Asia. Exporters gained ground in Tokyo. Steel companies, including Nippon Steel (NISTY $31) and JFE Holdings (JFEEF $21) posted strong advances after the Nikkei newspaper reported a group of steel companies, including Nippon and JFE, plan to invest in an iron ore producer.