The payrolls number is pleasing to stock bulls. They wanted an upward revision to the crummy loss in August: they got it, in fact a little stronger (89,000 jobs) than they thought. And the September number (110,000 jobs) just a tad stronger than expected. The bottom line: this quashes a good part of the recession argument, but the numbers are not so strong that it kills the chances for an additional rate cut.

S&P 500 now has a chance at closing at an historic high today.

We turn to earnings, where matters are considerably more difficult than they were even a week ago. Q3 earnings for the S&P 500 now at 1.7% gain, the lowest in five years. The problem is particularly difficult for banks, who have been taking charges at a huge clip. While this "kitchen sink" approach may well help with a fresh start in Q4, it is hurting earnings models.

The debate on banks is pretty simple: the credit charges from the banks are bad, but bulls argue that the steepening yield curve will be a big help to their profit picture. That's why bulls love rate cuts: it often leads to a steeper yield curve and improved net interest margin (NIM) for banks.

It will, but not enough to make it a net positive. Just look at Washington Mutual

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[WAMU  Loading...      ()   ] , which just announced that its earnings would be 75% below the same quarter last year---that's a big miss: about $0.19 vs. expectations of $0.58. They cite the weakening housing market and disruptions in the secondary market.

But wait a minute: the stock isn't dropping! It's flat pre-open, and it was before the jobs report. Huh? Here's the bull effect I talked about above: WaMu is down 20% from mid-July when these concerns surfaced in earnest. Bulls argue that that drop is overdone; that more rate cuts and the yield curve will start to work in their favor as we go into 2008.

So the story is pretty simple: banks, builders and building materials all seem to be operating under the same premise, that is, the harder and swifter the fall, the sooner and higher the bounce (as one UBS analyst title his report), that bringing on all the bad news now--as much as it hurts those Q3 earnings projections--is the only way to proceed.

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