U.S. stocks declined for a third-straight session but held in there quite well considering an abysmal consumer confidence reading and an awesome two-year Treasury auction. Demand was too awesome in fact as it illustrated the bond market has zero belief in the strong recovery musings. (I’ve talked about the concern of demand drying up. What occurred yesterday was exactly the opposite as investors made like the entrance at Wal-Mart the day after Thanksgiving and virtually trampled each other to get in on two-years at roughly a 1% yield; the safety trade looks set to roll again.)
IBM’s announcement that they’ll increase their stock buyback program helped buoy the market as the latest regional factory survey and consumer confidence readings for October missed expectations by wide margins. A little bounce in oil prices helped most energy shares. Overall, telecom, energy and health-care shares helped to offset weakness in consumer discretionary, industrial and tech shares.
The transportation index has led stocks lower over this three-day decline and got hit hard yesterday, down almost 2%. While the broad market is down just 3% from its recent peak, the Dow Jones Transportation Index is off by 8.4% -- the reports we’ve seen from the rails and on-road shippers show their underlying businesses remain weak; this is not a good economic vibe.
The Dow Industrial Average managed a slight gain as shares of Exxon and Chevron kept the index of 30 stocks above water.
As mentioned, the $44 billion two-year note auction, yes that is correct $44 billion, saw an inundation of demand (bid-to-cover at 3.63, highest in more than two years). Indirect bidders (which includes foreign governments) totaled 44.5%, in line with the past several auctions. The yield was three basis points below where when issued was traded (auction came in at a yield of 1.02%). Needless to say, the bond market appears to think the V-shaped recovery delusion is on a collision course with the inconvenience of reality.
Decliners beat advancers by more than a two-to-one margin on the NYSE Composite -- volume was decent, at least for these days, as 1.34 billion shares traded on the Big Board, which is in line with the six-month average.
Market Activity for October 27, 2009
S&P CaseShiller Home Price Index
The CaseShiller HPI, not the most geographically diverse but certainly the most watched housing market survey, showed home prices in the 20 U.S. metro areas it tracks rose 1.18% in August. This follows a 1.64% increase for July and marks the fourth-straight month of increase – a streak that ended a 33-month stretch of decline. This headline reading on CaseShiller is not seasonally adjusted. When you adjust for seasonal factors the index is up for three months in a row. Home prices are down 11.32% from the year-ago period, according to CaseShiller -- a bit better than the -11.90% expected.
Price increases in L.A., San Francisco and New York accounted for 50% of the month’s gain in the overall index – these three cities account for 42% of the total index. California is benefiting (if you can call it that) from the foreclosure wave as an outsized decline in prices has encouraged buying. The state also offers a tax credit for buyers of new homes, which has combined with the federal government’s first-time homebuyers’ credit. That California credit ended in August.
Seventeen of the 20 cities tracked posted price advances during August, which is slightly down from the 18 for July. Las Vegas, Charlotte and Cleveland were the three posting declines (Seattle and Vegas were the two losers in the previous month). Twelve of the 20 posted declines of at least 10% from a year ago. The best individual city year-over-year changes are Dallas (down just 1.22%), Denver (down just 1.94%) and Cleveland (down just 2.82%).
On an annualized basis, CaseShiller has home prices up 18.38% over the past three months, an improvement from the 15.31% increase for July.
The index has home prices down 29.30% from the cycle peak, which was hit in July 2006. For perspective, the existing home sales data that comes from the National Association of Realtors (NAR) has home prices down 24% from the cycle peak. The average U.S. home price resides at the level seen in the fall of 2003.
The front-loading effect of the tax credit (or credits – plural -- with respect to California) should begin to show up over the next several months. Even though the federal tax credit is likely to be extended it is unlikely to have the same positive effect on home sales as the home buying season has ended. We should be prepared for choppy performance within the housing market simply due to very weak labor-market conditions – Fed-induced rock-bottom interest rates will not be able to completely offset the drag from a 10% jobless rates environment.
On that housing market tax credit, and I should just stop talking about it until Congress finalizes the thing but it was a driver of Monday’s trading activity and thus worth a mention, so since I’ve started here’s the latest: The Senate has moved closer to replacing the existing credit with a slightly smaller one that includes more homebuyers. The Senate’s plan would reduce the credit to $7,290 (there’s a Washington number for you) to be available for home purchases under contract by April 30. We’ll keep you up to speed on the changing nature of this thing.
Consumer Confidence
Just as should have been expected, particularly since the more preliminary UofM look at sentiment suggested, the Conference Board’s gauge of consumer confidence fell in October. The reading got smashed, down to 47.7 from 53.4 in September – the September reading was revised slightly higher from the initial estimate of 53.1. Economists expected this measure of confidence to tick up to 53.5.
The reality that we can’t get consumer confidence to move up to even the lowly level of 60 is quite telling and it seems to me the equity markets are going to have to begin factoring this in. Consumer activity makes up 70% of GDP and with the jobless rate at 9.8% (and will surely test the post-WWII record of 10.8%), stagnant income growth, and a need to pay down debt levels no one should expect the consumer to lead the expansion. What’s likely is that lower levels of consumer activity for a year or more will put pressure on final demand and firms know this. Beyond the way that government policy is scaring business, they have this in the back of their minds too.
(This is why accelerated business equipment expensing and a slashing of corporate tax rates are needed. We may have a populist wave rolling right now, a view that despises the business community, but without business confidence it’s kind of difficult to get job growth moving. Policy makers need to understand that business spending is a major job creator. As firms place orders for plant and equipment, it increases capacity utilization rates in order to produce these goods and that eventually leads to more hiring. Place more burdens on business and they will shrug; the unemployment rate will remain high as a result.)
The overall consumer confidence reading is a collection of respondents ‘ appraisals of current and expected (six months out) business conditions, current and expected employment conditions and expectations regarding household incomes six months out. Here are how a couple of these segments came in.
The present situation index made a new cycle low, posting 20.7 for October after 23.0 in September. For reference, during the market low in March this figure bottomed out at 21.9. The all-time low is 15.8, hit in December 1982.
The expectations reading (view of economic prospects six month out) fell to 65.7 from 73.7 in September. At least the reading seems to have left the cycle low (also the all-time low) in the dust.
The most important segment of this report is the jobs “plentiful” less jobs “hard to get” reading. This is the confidence index’s best indication of future consumer activity trends. The measure made a new cycle low of -46.2. The all-time low is -58.7, hit in December 1982.
The share of consumer stating jobs are “plentiful” fell to 3.4% from 3.6% in the previous month and those stating jobs are “hard to get” increased to 49.6% from 47.0%. Policy makers that believe their efforts will stoke consumer activity, and confidence within the business community, are living a fantasy.
Richmond Fed
The Richmond Federal Reserve Bank’s gauge of factory activity in the region slipped to 7 in October from 14 in the previous month – so the reading remains in expansion mode, but the rate of growth slowed. Another reading of 14 was expected.
The new orders index fell to 7 from 13; the order backlog reading declined to -11 from -5; the average workweek got crushed, falling to -1 from 15 in September. The labor market desperately needs the average workweek numbers to trend higher because until current workers are pushed to the limit, firms obviously are not going to add new ones.
Unfortunately, this reading doesn’t provide an actual gauge of inventories, which is about the most important things to watch right now – the next couple of GDP reports will need a rebuilding in stockpiles in order for the figures to meet expectations.
Have a great day!
Brent Vondera, Senior Analyst
IBM’s announcement that they’ll increase their stock buyback program helped buoy the market as the latest regional factory survey and consumer confidence readings for October missed expectations by wide margins. A little bounce in oil prices helped most energy shares. Overall, telecom, energy and health-care shares helped to offset weakness in consumer discretionary, industrial and tech shares.
The transportation index has led stocks lower over this three-day decline and got hit hard yesterday, down almost 2%. While the broad market is down just 3% from its recent peak, the Dow Jones Transportation Index is off by 8.4% -- the reports we’ve seen from the rails and on-road shippers show their underlying businesses remain weak; this is not a good economic vibe.
The Dow Industrial Average managed a slight gain as shares of Exxon and Chevron kept the index of 30 stocks above water.
As mentioned, the $44 billion two-year note auction, yes that is correct $44 billion, saw an inundation of demand (bid-to-cover at 3.63, highest in more than two years). Indirect bidders (which includes foreign governments) totaled 44.5%, in line with the past several auctions. The yield was three basis points below where when issued was traded (auction came in at a yield of 1.02%). Needless to say, the bond market appears to think the V-shaped recovery delusion is on a collision course with the inconvenience of reality.
Decliners beat advancers by more than a two-to-one margin on the NYSE Composite -- volume was decent, at least for these days, as 1.34 billion shares traded on the Big Board, which is in line with the six-month average.
Market Activity for October 27, 2009
S&P CaseShiller Home Price IndexThe CaseShiller HPI, not the most geographically diverse but certainly the most watched housing market survey, showed home prices in the 20 U.S. metro areas it tracks rose 1.18% in August. This follows a 1.64% increase for July and marks the fourth-straight month of increase – a streak that ended a 33-month stretch of decline. This headline reading on CaseShiller is not seasonally adjusted. When you adjust for seasonal factors the index is up for three months in a row. Home prices are down 11.32% from the year-ago period, according to CaseShiller -- a bit better than the -11.90% expected.
Price increases in L.A., San Francisco and New York accounted for 50% of the month’s gain in the overall index – these three cities account for 42% of the total index. California is benefiting (if you can call it that) from the foreclosure wave as an outsized decline in prices has encouraged buying. The state also offers a tax credit for buyers of new homes, which has combined with the federal government’s first-time homebuyers’ credit. That California credit ended in August.
Seventeen of the 20 cities tracked posted price advances during August, which is slightly down from the 18 for July. Las Vegas, Charlotte and Cleveland were the three posting declines (Seattle and Vegas were the two losers in the previous month). Twelve of the 20 posted declines of at least 10% from a year ago. The best individual city year-over-year changes are Dallas (down just 1.22%), Denver (down just 1.94%) and Cleveland (down just 2.82%).
On an annualized basis, CaseShiller has home prices up 18.38% over the past three months, an improvement from the 15.31% increase for July.
The index has home prices down 29.30% from the cycle peak, which was hit in July 2006. For perspective, the existing home sales data that comes from the National Association of Realtors (NAR) has home prices down 24% from the cycle peak. The average U.S. home price resides at the level seen in the fall of 2003.
The front-loading effect of the tax credit (or credits – plural -- with respect to California) should begin to show up over the next several months. Even though the federal tax credit is likely to be extended it is unlikely to have the same positive effect on home sales as the home buying season has ended. We should be prepared for choppy performance within the housing market simply due to very weak labor-market conditions – Fed-induced rock-bottom interest rates will not be able to completely offset the drag from a 10% jobless rates environment.
On that housing market tax credit, and I should just stop talking about it until Congress finalizes the thing but it was a driver of Monday’s trading activity and thus worth a mention, so since I’ve started here’s the latest: The Senate has moved closer to replacing the existing credit with a slightly smaller one that includes more homebuyers. The Senate’s plan would reduce the credit to $7,290 (there’s a Washington number for you) to be available for home purchases under contract by April 30. We’ll keep you up to speed on the changing nature of this thing.
Consumer Confidence
Just as should have been expected, particularly since the more preliminary UofM look at sentiment suggested, the Conference Board’s gauge of consumer confidence fell in October. The reading got smashed, down to 47.7 from 53.4 in September – the September reading was revised slightly higher from the initial estimate of 53.1. Economists expected this measure of confidence to tick up to 53.5.
The reality that we can’t get consumer confidence to move up to even the lowly level of 60 is quite telling and it seems to me the equity markets are going to have to begin factoring this in. Consumer activity makes up 70% of GDP and with the jobless rate at 9.8% (and will surely test the post-WWII record of 10.8%), stagnant income growth, and a need to pay down debt levels no one should expect the consumer to lead the expansion. What’s likely is that lower levels of consumer activity for a year or more will put pressure on final demand and firms know this. Beyond the way that government policy is scaring business, they have this in the back of their minds too.(This is why accelerated business equipment expensing and a slashing of corporate tax rates are needed. We may have a populist wave rolling right now, a view that despises the business community, but without business confidence it’s kind of difficult to get job growth moving. Policy makers need to understand that business spending is a major job creator. As firms place orders for plant and equipment, it increases capacity utilization rates in order to produce these goods and that eventually leads to more hiring. Place more burdens on business and they will shrug; the unemployment rate will remain high as a result.)
The overall consumer confidence reading is a collection of respondents ‘ appraisals of current and expected (six months out) business conditions, current and expected employment conditions and expectations regarding household incomes six months out. Here are how a couple of these segments came in.
The present situation index made a new cycle low, posting 20.7 for October after 23.0 in September. For reference, during the market low in March this figure bottomed out at 21.9. The all-time low is 15.8, hit in December 1982.
The expectations reading (view of economic prospects six month out) fell to 65.7 from 73.7 in September. At least the reading seems to have left the cycle low (also the all-time low) in the dust.The most important segment of this report is the jobs “plentiful” less jobs “hard to get” reading. This is the confidence index’s best indication of future consumer activity trends. The measure made a new cycle low of -46.2. The all-time low is -58.7, hit in December 1982.The share of consumer stating jobs are “plentiful” fell to 3.4% from 3.6% in the previous month and those stating jobs are “hard to get” increased to 49.6% from 47.0%. Policy makers that believe their efforts will stoke consumer activity, and confidence within the business community, are living a fantasy.
Richmond Fed
The Richmond Federal Reserve Bank’s gauge of factory activity in the region slipped to 7 in October from 14 in the previous month – so the reading remains in expansion mode, but the rate of growth slowed. Another reading of 14 was expected.
The new orders index fell to 7 from 13; the order backlog reading declined to -11 from -5; the average workweek got crushed, falling to -1 from 15 in September. The labor market desperately needs the average workweek numbers to trend higher because until current workers are pushed to the limit, firms obviously are not going to add new ones.
Unfortunately, this reading doesn’t provide an actual gauge of inventories, which is about the most important things to watch right now – the next couple of GDP reports will need a rebuilding in stockpiles in order for the figures to meet expectations.
Have a great day!
Brent Vondera, Senior Analyst
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