Daily Insight

U.S. stocks gained ground Tuesday after the day’s home price data and consumer confidence readings came in better than expected. A successful $42 billion auction of two-year notes (an activity that garners increased anxiety these days) also surely helped the equity markets. More of that to come though, $39 billion in five-year notes today, $28 billion of seven-years on Thursday and trillions more to come over the next couple of years at least – such is the heightened cost for the way we’re attacking the economic deterioration..

However, stocks retreated from late-morning session highs as traders had time to think about the level at which consumer confidence stands and the headwinds the largest segment of the economy still has to endure.

Consumer discretionary shares led the broad market higher on that bounce in the consumer confidence reading. Energy shares led the three sectors that lost ground on the session, as oil prices pulled back to the $71 handle.

Just over one billion shares traded on the Big Board, 8% below even the meager three-month average.

Market Activity for August 25, 2009
The Dollar

The U.S. dollar managed to shake off the reappointment of Chairman Bernanke by managing a mild gain. His easy money ways are no friend of old green; in fairness, the pilot of this cash-dropping helicopter doesn’t have much choice here, which is kind of why some view the latest leg of this stock market rally with skepticism, as the economy needs this easy money crutch. My main criticism is with the Fed policy of the past that played a major role in creating the debt-laden/housing bubble/mispricing of risk scenario that brought us to this state.


S&P CaseShiller Home Price Index

The most-watched home price index showed the June data improved markedly, posting a 1.4% increase – this marks the second month in which this gauge has shown home prices to rise and the June increase was the best since June 2005.

On a year-over-year basis, CaseShiller has home prices lower by 15.4%, which is also the best reading since April 2008. While this remains a harsh decline from the year-ago period, we’ll take the improvement.

The table below shows the vast improvement that has occurred within most cities (focus on current month-over-month vs. previous).


This is great news, but one needs to refrain from getting too excited about this move and surmising the housing market is on a sustained move in the direction needed. (I need to be careful when explaining these things, taking a cautious approach and warning against the tendency to view this as an “out of the woods” indication is dangerous for me at this point as many very likely see those “green shoots.” But I’m sorry; the foreclosure readings are showing the trouble is spreading from the sub-prime area of the mortgage market to the prime segment. We’re seeing prime mortgage delinquency rates move higher as the very weak job market situation will have this affect on things.)

The foreclosure reality will likely put pressure on home prices again as we move to the end of the year (and away from what is almost always the best quarter for home sales, especially so for CaseShiller as it does not seasonally adjust its monthly price data). If the market is going to take the approach that the price declines have completely run their course, there remains an outsized chance that equity values will react harshly to data that shows this not to be the case a couple of months out.

In the end, I have to see some improvement in the job market, an improvement that shows the monthly payroll declines ease from current levels that are commensurate with the peaks seen during the typical recession (that is, monthly job losses need to move below 100K – currently they remain at -250K, much better than we endured a few months prior but still deep losses). We also need to see the housing market show some ability to stand on its own – refundable tax credits and fed-induced interest rates are providing a large boost right now.

Consumer Confidence

The Conference Board’s consumer confidence survey showed a bounce back to 54.1 from 47.4 – halting a two month retrenchment after it appeared as if the reading was on a sustained rise from the record lows hit in March. The reading for August brings us nearly back to the level hit in May, a point that puts the reading closer to the pre-Lehman fallout point of 61.4.

For clarity, the overall confidence survey is an average of respondents’ appraisals of current business conditions, business conditions six months out, current employment conditions, employment conditions six month out, and total family income expectations six months out.

The key aspect of this report for me is the jobs “plentiful” minus jobs “hard to get” reading, which rose above the all-time low hit in July. The measure increased to -40.9 last month from the all-time low of -44.8. (Those stating jobs were “plentiful” rose to 4.2% of respondents vs. 3.7% in July. Those stating jobs are “hard to get” fell to 45.1% from 48.5 in July.

The present conditions index remained extremely depressed, registering a reading of 24.9, compared to 23.3 last month. However, the expectations reading (respondents’ expectations six months from now) jumped to 73.5 from 63.4. This is the highest reading since December 2007.

While the rebound in confidence is a good sign, the figures remain low from a long-term perspective. What people need to realize, in my opinion, is that consumer activity as a percentage of GDP will move back to the historic average of 65%. Presently, it remains near 70%, and hit 72% at its peak as very easy credit conditions, historically low unemployment, solid real income gains and the wealth effect (much higher stock and home prices) allowed this to occur. After the situation we have been through, credit standards have moved to a more appropriate stance, and thus one factor that will move personal consumption back to the historic average over time. Another factor is the weak job market (and I fear the jobless rate will remain stubbornly high for a prolonged period due to the current policy path); the consumer will choose to add incrementally to cash savings as a result.

Over the next couple of quarters, the inventory dynamic and government spending will propel GDP growth but the lower level of spending by the consumer will weigh on the expansion. The business side is still a question. We need business spending to rebound in a robust way to help offset consumer weakness, but we have yet to see evidence of this turn taking place.

Maybe we’ll see an early sign of a business spending upswing in this morning’s durable goods orders report, that would be very welcome. However, if durables are solely boosted by auto production, as “cash for clunkers” helped to erase inventories, this will not offer economic assistance outside of a one-two quarter pop.

Richmond Manufacturing Survey

The Richmond Federal Reserve Bank’s survey of factory activity in the region held steady at 14 for August – same reading as in July. This marks the fourth-straight month of expansion.

The shipments index jumped to 21 from 16; the new order volume slipped to 18 from 24 (still nicely in expansion mode though) and the average workweek rose to 16 from 14 – we need to see this figure rise within all of the factory indices.

The unfortunate development, which I also noticed in last week’s Philly Fed reading, was that prices paid have exceed prices received for two months now. This could put pressure on profit margins, but the huge decline in payrolls should ease this development.

Federal Housing and Finance Agency’s (FHFA) Home Price Index

The FHFA reported its home price index rose 0.5% for June after a downwardly revised 0.6% increase for May. On a year-over-year basis, this measure has prices down just 2.2%. This is a very broad measure of home prices, much broader than CaseShiller, but does miss the high end market as it does not capture purchases made with jumbo mortgages and only includes single-family homes that have mortgages backed by Fannie Mae and Freddie Mac.

Equally weight CaseShiller, FHFA and the median home price via the existing home sales data and you get home prices down 10.9% from the year-ago period – a welcome improvement from the cycle trough of 17.5% that took place in January.


Have a great day!


Brent Vondera, Senior Analyst