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CNBC ON DIGG

Stocks Erase Gains as Financials Slide

Published: Monday, 2 Nov 2009 | 1:01 PM ET

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By: Cindy Perman
CNBC.com

Stocks erased all of their gains Monday after an early surge due to a better-than-expected manufacturing report. Financials and techs led the decline.

By early afternoon, the Dow was flat and the Nasdaq was in the red. Earlier, the Dow was up more than 140 points after a report showed manufacturing expanded more than expected last month.

Major U.S. Indexes

.DJIA

.NCOMP

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Citigroup [C Loading... () ] dropped below $4 a share around midday, the first time it's been there since mid-August. Bank of America [BAC Loading... () ] went from the top of the Dow pack to the bottom.

Traders said it was one-two punch for finanicals: It was in part Citi's drop below $4 but also cautious testimony from Jon Greenlee, director of the Fed's Division of Banking Supervision and Regulation, to a House panel.

1) "Poor loan quality, subpar earnings, and uncertainty about future conditions raise questions about capital adequacy for some institutions," Greenlee said.

AT&T [T Loading... () ] and Intel [INTC Loading... () ] also dragged on the Dow as techs were weak after a report showed chip sales rose in the third quarter but revenue remains below year-ago levels.

Stocks got off with a surge this morning after the ISM reported its gauge of manufacturing activity in the U.S. came in at 55.7 in October, the thrid straight month of growth and the highest reading since April 2006. Anything above 50 indicates expansion. Economists had expected the gauge to rise to 53.

The encouraging reading on U.S. manufacturing came after three reports from around the globe showed an improvement in manufacturing: First, a report showed China's manufacturing sector expanded at its fastest pace in 18 months in October amid rising demand from both overseas and at home. Then, a report showed factory activity in the euro zone expanded for the first time in 17 months and also picked up in the U.K.

Among the other U.S. economic data this morning: Pending-home sales rose to their highest level in nearly three years in September, boosted by the first-time homebuyers tax credit. Also for September, construction spending rose 0.8 percent.

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The market rebound came after Friday, when the Dow and S&P 500 experienced their biggest one-day percentage drops since July.

Among the early buzz in the market, Ford [F Loading... () ] stunned Wall Street, reporting a quarterly profit and saying that 2011 should be "solidly profitable." Analysts had expected Ford to post a loss of 11 cents a share, but the company instead earned seven cents. Ford shares jumped more than 8 percent.

This came a day before automakers report their October sales. Analysts say sales likely rose last month but caution that they are still at 1980s levels.

A couple days before retailers report on their October sales, Wal-Mart [WMT Loading... () ] once again slashed its toy prices.

Retailers are expected to report an uptick in sales but analysts remain wary about the outlook for the holiday season.

Retailers started the day mostly lower, with Sears and Bon-Ton down about 2 percent, but gradually gathered some strength with Nordstrom and Bed, Bath & Beyond up more than 1 percent.

In the morning's other earnings news, Clorox [CLX Loading... () ] reported its profit jumped 23 percent as consumers stocked up on disinfectant products amid swine-flu fears.

Winterizing Your Portfolio - A CNBC Special Report

Pharmas were also among the leaders. Human Genome Sciences [HGSI Loading... () ], which soared more than 30 percent after the company said its experimental lupus drug was successful in a second clinical trial. It would be the first new lupus treatment in 50 years.

Also in the sector, Vertex Pharma [VRTX Loading... () ] shares leaped more than 10 percent after the company said a phase II study showed that twice-daily treatments of its experimental hepatitis C drug telaprevir worked as well as three times a day.

Elsewhere, Royal Caribbean [RCL Loading... () ] shares gained after an upgrade from Wells Fargo, and Progressive [PGR Loading... () ] shares jumped after Barron's said the insurer was set to expand earnings and revenue for the first time in years.

Friday's market drop erased October gains for the S&P 500 and the Nasdaq and left the Dow up less than half a point for the month. Investors may experience a case of pre-Fed meeting jitters this week, but also have a number of key economic stats and earnings to get through as well: Auto sales are due out on Tuesday, ISM services on Wednesday, retail sales on Thursday and the October jobs report on Friday.

CIT Group [CIT Loading... () ] officially filed for bankruptcy protection over the weekend following the failure of a proposed debt exchange offer to bondholders. The filing is one of the biggest in U.S. corporate history. CIT shares tumbled more than 50 percent to about 30 cents a share.