Daily Insight

U.S. stocks ended the worst first-quarter (-11.67%) since 1939 on a high note yesterday. And for the month, the 8.54% jump in March (as measured by the S&P 500) marked the best monthly performance since October 2002. (Yesterday I stated that March was on track to decline 12%. In fact, it was the quarter that was on track to decline by that magnitude. When gauging this against historic quarterly moves, the past six months marks the worst back-to-back quarterly performance for the S&P 500 since the second and third quarters of 1974)

In terms of sector, the best performers for the quarter were tech (+3.96%) and basic materials (-2.82%). The worst performing sectors were financials (-29.49%) and industrials (-21.70%). The remaining six major sectors declined between -8.47% and -12.08%.

A huge level of cash remains on the sidelines and one would like to think we can continue this rally that has brought us 18.2% above the March 9 flagitious low of 666 on the S&P 500. After massive back-to-back quarterly declines of 22.56% and 11.67% on the index there is certainly room to move higher.

Unfortunately, the government is so involved, and so many of their plans are counterproductive it is really tough to have conviction we can keep this rally going. Another disturbing example is this bill sponsored by the Chairman of the House Financial Services Committee Barney Frank (named the Pay for Performance Act) that would put Secretary of Treasury Geithner in charge of determining the “appropriate” level of pay for all financial institutions that have received a government capital injection. This will involve all employees, according to the bill, and will affect even pre-existing compensation arrangements. This is exactly the kind of thing that will drive top talent from the institutions that need it most and the power grab has a meaningful affect on the market’s confidence regarding the future.

Market Activity for March 31, 2009

Economic Data

S&P Case/Shiller Home Price Index

The Case/Shiller index showed home price declines continue to accelerate. The index, which is not the broadest home-price gauge we have, but does seem to get the most attention, stated prices fell 2.76% in January on a month-over-month basis and 18.97% on a 12-month basis – both of these figures were worse than the declines for the previous month.

The three-month annualized rate of decline accelerated too, showing prices fell 26.46% -- we need to see this three-month figure improve relative to the 12-month level of decline in order to state a statistically significant bottoming in home prices has occurred and the sequential rebound has begun.


The damage in the West continues to drive the index lower – Phoenix and Las Vegas registered the largest declines, down 35% and 32.5%, respectively. Miami, Detroit, and Tampa also experienced significant erosion from the prior month’s readings.


We’ll point out that Case/Shiller is not a broad look at the housing market. The broadest look actually comes out of the Federal Housing and Finance Agency (FHFA), which measured home prices actually rose 1.7% in January, the first monthly increase in nine months. (This FHFA index misses the high-end home market, but it is very broadly based – Case/Shiller, to the contrary, is affected too much by the areas that experienced the greatest levels of speculation during the boom and thus the highest levels of foreclosure in this contraction)

When we average all four of the major home price indices – the two mentioned, along with new and existing home prices from the Commerce Department and National Association of Realtors, or NAR) – home prices were down roughly 9% in January from the year-ago period. We’ll note, data compiled by the Commerce Department and the NAR is more up-to-date and have already released their February data, which showed home prices declined again. As a result you can be sure the next Case/Shiller reading will post an even larger year-over-year decline.

Chicago Purchasing Managers Index (PMI)

The Chicago PMI came in weaker-than-expected, hitting 31.4 in March from 34.2 in February. The average for the quarter was 33.0, down from the fourth-quarter average of 35.7, suggesting the Q1 GDP will show a deeper degree of contraction than the -6.3% posted for Q4 2008.


The sub-indices of the report, indicators that give us some idea of how the next month’s reading will shape up, were flat to lower.

The new orders index rose ever-so-slightly to 30.9 from 30.6 in February – down from the fourth-quarter average..


The production index slipped to 32.7 from 34.7 – in line with the Q4 average.


The employment index, a much watched segment of these factory gauges due to the weakness in the national job market, improved to 28.1 from 25.2 – although much lower than the fourth-quarter average of 37.6.


Overall, nothing in this report suggests the economy has bottomed – although I’ve got to believe we’ll soon see evidence the business cycle has troughed, there has very significant inventory liquidation and firms will need to ramp up production in order to rebuild stockpiles, even if it’s a mild build.

Tomorrow we get the national look at factory activity for March via the ISM reading and it will likely dip to the low 30s (it posted a reading of 35.8 in February – a number below 50 illustrates contraction).

Again, we expect the inventory dynamic to boost factory activity a couple of months out, unless of course government policy scares business – and if business is scared, and remains in survival mode, you can also forget about help from the consumer side of the economy as job losses will continue for longer than they otherwise naturally would.


Have a great day!


Brent Vondera, Senior Analyst