Daily Insight

U.S. stocks rebounded yesterday – recovering roughly 60% of the prior session’s losses -- as expectations increased that Congress will find the votes to pass the rescue package, there was actual talk of modifying mark-to-market accounting rules and the FDIC is looking to temporarily boost deposit insurance and thus confidence.

Naturally, financial stocks led the gains, jumping 13.09% as measured by the S&P 500 index that tracks these shares. Energy, information technology and industrial shares accounted for the other stellar performers – energy shares jumped 5.80%, tech was up 5.40% and industrials gained 4.23%.

Market Activity for September 30, 2008

The third quarter came to an end yesterday and one may think the declines endured by the benchmark indices were the worst in quite a while, but they weren’t as the past year has been a rough one coming off of the all-time high hit last October.

The Dow Industrials Average lost 4.4% during the July-September period, marking the fourth-straight quarter of decline. The S&P 500 declined 8.88%, which followed a 3.23% drop in the second and a 9.92% plunge in the first quarter of 2008. The NASDAQ Composite fell 8.77%, but little more than half of the first quarter loss.

Among the major domestic benchmarks, the Russell 2000 (small cap stocks) held up very well, falling just 1.46%. The S&P 400 (mid cap stocks) got dinged for 11.20%.

The main international index was thoroughly hammered – down 21.05% during the Q3.

Senate Minority Leader McConnell offered some very encouraging words yesterday, stating they intend to pass legislation – speaking of TARP – and will pass it on a bipartisan basis. At least the Senate has heard Monday’s market message.

We even heard rambling of at least modifying accounting standards away from the pure mark-to-market basis that has proven so pernicious – although one shouldn’t count on this even if it makes as much sense as anything proposed thus far.

Further, FDIC Chairman Sheila Bair, by far the most accomplished player in all of this, announced she is seeking authority to temporarily increase the insurance limit from $100,000 in order to increase confidence. This is important not just for individuals but for small businesses that hold accounts for payroll purposes.

Now we seem to be getting somewhere.

Short-term Economic Outlook

Despite this encouraging news, one has become conditioned to refrain from excitement. You really have to ignore a few years of actions to have any confidence in this group – speaking of Congress – and every day that goes by without the passage of TARP, or some alternative that would be as effective, is another day the credit distribution channels remain blocked.

It is amazing how quickly things have changed. What looked like a 2.0% real GDP third quarter just three weeks back now may turn out to be flat. Credit is in the process of drying up for many small businesses and the costs have risen for those that still have access. For the consumer, those with a top-tier credit score have zero problem receiving a loan, but for anyone else it will become more difficult by the week.

Business sales continue to perform well, but I’ll be very interested to see the August reading, which likely took a substantial hit. And this entire development has caused businesses large and small to become even more cautious – business-capital spending, which was rebounding in strong fashion, looks now to have ceased.

We should not forget that Hurricanes Gustav and Ike will have caused their own damage as Gulf of Mexico energy production was shut down for a couple of weeks, among other things.

All is not terrible. The manufacturing sector remains amazingly upbeat, productivity improvements remain stronger than anytime in history, and personal income growth continues along a healthy pace even if persistent inflation has caused real incomes to flatten out. But we must do something to unlock the credit markets, which are very blocked, and change insane accounting rules that force the financial services industry to endure a death spiral that has forced the hoarding of cash.

Yesterday’s Data

On the economic front, the S&P Case/Shiller Home Price Index showed that home-price declines accelerated in July as the 20-city composite showed a 16.35% drop from the year-ago period. The relative good news is on a three-month annualized basis the declines did ease from 10.03% in June to 8.56% in this latest report.

However, this index has a large lag to it – we are talking about July data here – and from what we’ve seen with the new and existing homes sales figures for August we wouldn’t expect any positive trends to continue in the short term.

As we point out each month, this index does exacerbate the declines as it does not give a very broad look. Yes, it does cover the largest 20 metro areas but there’s a lot that is missed. Further, nine of the cities covered have witnessed the largest prices declines in the nation and that is greatly affecting the overall reading. For instance, Detroit, Tampa, LA, San Diego, San Fran, Phoenix, Washington DC and Miami have posted price declines of between 16% and 30%. In fact, LA and San Fran, which make up 23% of the composite, have registered home price declines of 25% over the past year.

When we average all of the home price data – which covers four main indices including the Case/Shiller -- we see home prices have dropped roughly 8% from over the past year.

In a separate report, the Chicago Purchasing Manager Index (PMI) registered a reading that remained upbeat in September as the survey came in at 56.7 -- a number above 50 illustrates expansion. This is a good sign as the Chicago region represents the largest manufacturing base. We’ll get the national look at the factory sector tomorrow as the ISM report is released. Since Chicago posted a healthy reading it should assure that ISM remains right around the 50 level.

In terms of the internals (the sub-indices of the report), they looked good and point to continued expansion – although with what has occurred in the credit markets doubt has increased.

The production index jumped to 71.4 from 63.4.


New orders fell to 53.9 from 60.2, yet remained in expansion mode.


Order backlogs slipped to 54.9 from 63.0, but again remains nicely in expansion mode.


Unfortunately, the prices paid index remains elevated, which corroborates what various other inflation gauges have shown.


This morning we get the ISM Manufacturing survey for September (the national look at the factory sector) and August construction spending. It is likely ISM held up reasonable well, but the construction number will post a weak reading.

After today, we’ll be looking to Friday, as the September jobs report is released. We’ve endured eight months of declines, but the job losses have been mild relative to the typical period of labor-market weakness.

The concern though is this credit situation. Small businesses (the engine of job creation) have likely been the hardest hit by this reality and this may cause job losses to deteriorate over the next few months. Anyone that thinks the TARP plan is nothing but a life-line to Wall Street is unfortunately unaware of the flow-through effect. If an effective plan is not put in place the employment numbers will get worse, and I believe more people got a sense of this after the stock market sent its message on Monday.

Have a great day!

Brent Vondera, Senior Analyst