The market was strangely quiet yesterday as the broad market traded very steady the entire session, an anomaly these days. Don’t know if this is telling us anything or not, we’ve seen a number of occasions over the past five months that seemed to offer more normal behavior may be on the horizon, only to see things become crazy again – too much government involvement right now to get excited.
Financials led stocks higher, maybe it was leaked the Obama Administration was about to set up a “bad bank” to house troubled assets – I don’t believe the news was actually released until after the bell. In any event, it’s not even clear this will be a plus for bank stocks longer-term as there’s talk of the government taking common equity stakes. Egad! But the shares seem to like it for now.
Industrials performed very well too. Considering the earnings report DuPont put out, the rise in these shares was surprising.
(That report from the chemical giant was just another sign of how things changed on a dime last quarter; we went from withstanding high energy prices and a nasty housing correction with amazing resilience to a real shutdown following the September 15 Lehman collapse in a flash.)
Market Activity for January 27, 2009
Housing Data
The S&P Case/Shiller Home Price index stated home values for the 20 major metro areas it tracks fell 2.23% in November and are down 18.18% over the past year.
That year-over-year reading continues to deteriorate, although the rate of decline has eased – for October prices were down 18.06% from the year–ago period.
The declines continue to be driven by areas that saw the largest level of speculation during the boom, such as Phoenix and Las Vegas – these are where foreclosures and thus distressed pricing is most evident. Also hurting the figure was increased weakness in Chicago and parts of the Northeast, areas that took a while before things got especially ugly.
Detroit, a special situation, continues to be hammered by the auto-industry malaise and state tax-rate hikes that continue to drive businesses and workers out of Michigan.
So we have existing home prices down 15% over the past year, the FHFA Home Price index down 8% and Case/Shiller down 18%. (Note: Case/Shiller is a month behind as its latest release is for November, the two others have released prices through December). Average the three and you get home prices off by roughly 13% over the past 12 months.
It doesn’t appear home prices will begin to flatten out for several months, especially since we have the weight of the labor market putting an additional drag on the housing market. But mortgage rates are low, and should go lower so long as Treasury Secretary Geithner gets a clue and doesn’t cause Treasury rates to jump via the currency fight he seems to be picking. It may take a 4.50% 30-year mortgage rate to get home sales fired up by the spring/summer, and as we’ve touched on before we think that is the target the Obama Administration will shoot for.
Consumer Confidence
The Conference Board’s index of consumer confidence dropped to a record low in January, falling to 37.7 from 38.6 in December. The present situation index fell to 29.9 from 30.2; the expectations index fell to 43.0 from 44.2.
The good news in the report, and I’m stretching here for a bright side, was consumers’ assessment of the labor market. The percentage of consumers judging jobs as “plentiful” rose to 7.2% from 6.5%, while those viewing jobs as “hard to get” feel to 41.1% from 41.5%. This means the net “plentiful” less “hard to get” index improved to -33.9% from -35.0% in December. This marks the first improvement in a year. The improvement was marginal, but we’ll take it. Now we need to see some help from the ISM surveys and jobless claims.
When consumers are comfortable with their cash savings, as their two major savings vehicles – homes and stocks – have been hit hard, and feel better about the labor market they will increase spending again, but probably not before. This is just one of the reasons we’ve harped on the need of a tax-rate response. Slashing rates on income would immediately drive disposable income higher and speed up recovery. Ignoring this pro-growth response to current economic problems is a big mistake.
Pre-Market Higher
Futures are higher this morning on news the Obama Administration will lay out details of an “aggregator” or “bad bank” with which to buy, house, hold and eventually sell troubled assets. This will remove what’s causing the problems on bank balance sheets. Too bad Paulson chose not to do this even though it was the original plan of the TARP.
I find it hilarious to hear that this “bad bank” will use a net present value accounting, or so it’s being reported. Apparently the government doesn’t want to be hampered by the pernicious mark-to-distressed market accounting that is making things appear worse than they actually are. It is mind-blowing to me that regulators have not yet killed this pro-cyclical accounting standard for one that makes much more sense, such as the standard in place prior to November 2007.
The market will also be watching to see how government Treasury auctions go as they issue close to a trillion in debt over the next several months. Also in focus will be how the commercial paper market reacts as it is weaned from the Federal Reserve CP program and moves back to private investors bidding on this short-term debt. These will be very important develops and we need them to go well.
Have a great day!
Brent Vondera, Senior Analyst
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