In late trading, the 10-Year Treasury Note was up by 4/32, lowering its yield by 1 basis point to 2.66%; the Dow was up by 172.60 points to 8,591.69; and the Nasdaq was up by 42.58 points to 1,492.38.

Today's economic news was mixed. The revised assessment of productivity in the third quarter was surprisingly better than originally reported in the preliminary estimate. Unit labor costs were also revised down.

But the ISM index on the services sector showed the strongest contraction of activity in November since the new index or the old one has been in existence (eleven months for the new one, eleven-plus years for the old).

The ISM news and technical pressure following a rally yesterday weighed on stocks in early trade but they got a boost on news that mortgage applications spiked last week due to lower rates. The morning climb faded but news this afternoon of strong online consumer buying on Monday helped spur another rally.

By the end of stock trading, the Dow had gained 2.05%; the S&P 500, 2.58%; and the Nasdaq, 2.94%. In the last two sessions, the Dow has gained 5.43%; the S&P 500, 6.67%; and the Nasdaq, 6.75%. But this followed Monday's rout that sent the Dow down by 7.70%, the S&P 500 by 8.93%, and the Nasdaq by 8.95%.

In other news, the Energy Information Administration reported that inventories of crude oil declined last week by 456,000 barrels (one barrel equals forty-two gallons). This was the first decline in ten weeks but it was small and the level was 6.7% above were it stood a year earlier. This was the highest weekly Y/Y margin since the week ending October 13, 2006.

The report indicated that inventories of gasoline fell by 1.5 million barrels last week, the first decline in five weeks. This left levels down by 2.5% on a year-over-year basis, the worst margin in seven weeks. The report also said that inventories of distillates fell by 1.7 million barrels. Distillates are assuming greater significance as the weather cools since the category includes heating as well as diesel fuel. Supplies were 7.3% below year-ago levels, the worst margin in six weeks.

Despite the reductions in inventories, the price of a barrel of light, sweet crude oil for January delivery edged down by $0.17 on the New York Mercantile Exchange to close at $46.79, the lowest for a front-month contract since February 9, 2005. The decline reflects decreasing demand for the commodity as the world economy slows.

The latest edition of the Fed's Beige Book offered no real surprises and was summed up in the first sentence: "Overall economic activity weakened across all Federal Reserve Districts since the last report." Contractions were reported in consumer spending, manufacturing, services, residential and commercial real estate, and banking. The results were mixed for agriculture. Demand for labor was generally weak and inflation pressures eased.(BEIGE BOOK)

The employment situation will be addressed again tomorrow with the weekly report on jobless claims. In the report released last Wednesday, the Labor Department said the seasonally adjusted level of initial claims for state unemployment benefits fell in the preceding week by 14,000 to 529,000. The decline was not unexpected following two week's of increases totaling 59,000. In any case, readings over 400,000 are considered a sign that layoffs are outpacing hiring and the latest claims level was the second highest since July of 1992.

The four-week moving average, which smoothes out some short-term volatility, rose by 11,000 to 518,000 -- the highest reading since January of 1983. For the first forty-seven weeks of the year, the average initial claims reading was 406,340. For the same period last year it was 319,085.

The report said that continuing claims fell by 54,000 to 3.962 million in the week ending November 15 (continuing claims must be at least a week old). This was the second highest reading since January of 1983. The four-week average rose by 60,250 to 3.929 million -- the highest reading since January of 1983. For the first forty-six weeks of the year, the average continuing claims reading has been 3,203,413. For the same period last year, the average was 2,535,957.

Tomorrow's initial claims number may be discounted somewhat because of the possibility that it was skewed by the Thanksgiving Day adjustment. In any case, it is not likely to affect expectations of a grim data in Friday's employment report for last month.

Also tomorrow, the Commerce Department will release its report on factory orders for October. September's report said that the seasonally adjusted level of new orders fell that month by 2.5%. The decline was stronger than the 1.0% that analysts had predicted. August's originally reported decline of 4.0% was also revised to a drop of 4.3%, the largest decline since October of 2006.

All of the key sub-categories also saw sizeable declines. The order level outside the large but volatile category of transportation fell by 3.7% after a 3.6% decline in August. September's drop was the largest in the history of the data series going back to 1992. Within the transportation sector, orders rose by 6.5%, the biggest increase in seven months.

Another closely watched category is that of orders outside the defense sector since those in the sector are not governed by standard market forces. Ex-defense orders fell by 3.3% following a 4.5% decline in August. Defense orders rose by 22.8%, the biggest increase since last December.

Orders for capital goods outside of the defense sector and excluding commercial aircraft are seen as a gauge of core business demand. The category saw a decline of 1.5% in September following a decline of 2.3% in August.

Last week's report on durable goods orders, which make up slightly more than half of all factory orders, showed a decline of 6.2% in October, a much larger drop than the 2.5% decline analysts had predicted. Because of this, recent projections of a 2.7% drop in the overall factory orders level have been revised to a decline in excess of 4.0%.

10:30 AM EST : Stocks opened with moderately deep losses on a bit of profit-taking following yesterday's rally and bad news on the economy's services sector. But a better than expected report on productivity and a jump in mortgage application activity last week has eased bearish sentiments and stocks have pared their earlier losses. Treasuries opened under technical pressure after huge gains but the initial decline in stocks provided some footing. However, with the improvement in stocks, Treasury notes and the long bond have fallen deeper into the red.

In today's news, the Labor Department reported that the annualized rate of nonfarm business productivity (average output per worker per hour) increased by 1.3% in the third quarter relative to the second. This was up from the preliminary estimate of 1.1% reported in early November. Productivity rose by 3.6% in the second quarter.

The revision surprised forecasters who because of the downward adjustment to the gross domestic product calculation for the quarter (-0.5% instead of the initial estimate of -0.3%) had expected a productivity gain of just 0.9%. The improvement was due to a greater decrease in hours worked (down by 3.1% instead of the originally reported 2.7%) than the downward adjustment to average output (down by 1.9% instead of the originally reported 1.7%).

The better productivity number helps stocks by suggesting greater efficiency and therefore increased projections of corporate earnings. It also helps both stocks and bonds by pointing to reduced labor cost pressure, a welcome inflation measure. This was seen in today's report, which said that unit labor costs (ULC: average cost per unit of output) rose by 2.8% last quarter instead of 3.6% as cited in the preliminary report.

Moreover, today's report revised the second quarter change in ULC to a decline of 2.6% instead of the previously reported decline of 0.1%. On a year-over-year basis, ULC rose by 1.4% in the third quarter instead of the originally reported 2.3%. Second quarter ULC rose by just 0.1% Y/Y instead of the previously reported 0.8%.

Another plus for stocks came in a minor report. The Mortgage Bankers Association of America reported that its mortgage application index surged last week by a record 112.1% as mortgage rates plunged on the announcement that the Fed would buy mortgage backed securities and debt issued directly by the mortgage agencies. It should also be noted, however, that the extent of the move may have been exaggerated by a faulty adjustment factor for the Thanksgiving Day holiday.

The report said that the bulk of the jump came on the refinance side where the index soared by 203.3%. Both the overall application index and the refinance index posted their highest readings since last March. Refinances accounted for 69.1% of application activity last week, the largest portion since last February.

But the purchase index also saw an impressive increase of 38.0% and the reading was the highest since early September. Demand for adjustable rate mortgages was feeble, representing just 1.4% of application activity, down from 3.0% the week before.

But there was also bad news for the economy released today. The Institute for Supply Management (ISM) said that its index on the non-manufacturing -- or services -- sector came in at 37.3 last month, down from 44.4 in October and below the 42.5 that forecasters were predicting. Any reading under 50.0 reflects a general contraction in activity relative to the preceding month.

The current index, the NMI or Non-Manufacturing Index is new -- first published last January. It is a composite of four seasonally adjusted indices: business activity, new orders, employment, and supplier deliveries.

The latest reading is the lowest in the current data series. Before the NMI was instituted, the business activities index was the headline indicator on the services sector, but it is derived from a single question in the survey of business purchasing managers. It came in at 33.0 last month, the lowest reading in the history of the series going back to 1997.

In addition to the weak services sector news, the employment issue was raised this morning with the release of the report from the employment services firm of Automatic Data Processing (ADP) on nonfarm private (non-government) payrolls for November. According to the company's data, the seasonally adjusted payroll figure fell by 250,000. This was a fourth consecutive monthly decline and the largest of them. October's originally reported decline of 157,000 was also revised to a larger drop of 179,000.

The news heralds the approach of Friday's report from the Labor Department. In recent months, the Labor Department's figures have been considerably worse than those from ADP. The last employment report from the Labor Department said that non-government payrolls fell by 263,000 in October. Analysts are looking for an overall decline (including government payrolls) of between 300,000 and 325,000 in Friday's report.

Still to come: this afternoon, the Federal Reserve will release its latest edition of the Beige Book, an anecdotal summary of economic conditions in the twelve Fed regions. The report is used as one of the background resources in the monetary policy committee's deliberations. The next policy meeting is slated for the 15th and 16th of the month.

The Beige Book rarely has much impact on the markets since previously released indicators have already sketched out the economic landscape. But any rhetorical variant, a particular focus or emphasis, could be perceived as a signal of Fed intentions and have some influence on traders. Currently, Fed watchers are anticipating another cut in the committee's target for the fed funds rate (overnight borrowing rate between banks) and the discount rate (rate charged for loans directly from the Fed) . . . .

LionMTS