U.S. stocks took a little hit on Tuesday after Portugal and Greece had their credit ratings cut by S&P -- Greece thrown to junk category and Portugal down two notches to A-as S&P stated the Portuguese government could struggle to stabilize it relatively high debt ratio through 2012. 

I’m not sure whether it was the credit downgrades of Portugal and Greece, or the assault on Goldman Sachs by members of the Permanent Subcommittee on Investigations  -- a circus event that showed these senators have no clue how market-making or hedging works.  Goldman is not a fiduciary no matter how many times a politician wants to paint them as such; they are a market maker, which means they’re on both sides of the trade.  Not that the ignorance of the political class should come as a surprise, but maybe market participants are finally acknowledging that these are the same rubes creating upcoming regulations on the financial industry, regulations that will have ramifications well beyond Wall Street.  Thus far the go-for-the-gusto market sentiment has blocked clear thinking but it is only a matter of time, the potential peril via this growing wave of populism-by-convenience will be recognized.

Are investors also awakening to the fact that the European debt problems are looking increasingly like contagion?  European economies, heavily dependent on government expenditures, will run into additional growth problem no matter how they react to their debt issues, has to get everyone’s attention.  If the EU countries in the target circle make the tough choices to get their public finances in some sort of order, then intense near-term and intermediate economic damage will result; if they don’t then higher interest rates and debt burdens will crush them both in the short and longer-terms – either way you look at it, Europe is going to work as a large drag on global growth. 

It was a broad-based decline with all 10 major industry groups down.  Financials and basic materials were the worst performers, with health-care and telecoms the relative winners.

Market Activity for April 27, 2010

Richmond Fed (Boom!)

The Richmond Federal Reserve Bank’s survey of factory activity in the fifth Fed district jumped to 30.00 from 6.00, marking both the highest reading in the survey’s history and the most extraordinary monthly increase.  While this history only stretches 17 years, the fact that it hit a reading that’s vastly higher than the levels hit during the period 2003-2006 – a period of gang-buster factory activity – gets ones attention. 

This is a gauge that was posting some of the weakest readings among the regional factory reports, it was just in December and January in which Richmond printed negative readings while all other factory gauges were positive.  I don’t know if that weakness presented some sort of bounce-back effect that led to this massive bounce, but such a move has not been seen in the other regional factory gauges thus far for April.  Possibly it’s just strong mining activity, the Richmond region does cover West Virginia.

As the jump in the overall index suggests, all of the sub-indices rallied big time.  The one that stuck out the most to me was the capacity utilization measure, which hit an all-time high.  This means the Richmond area should post a huge boost in jobs over the next couple of months. 

Consumer Confidence

The Conference Board’s gauge of consumer confidence jumped in April, although it remains below the 60 level – a mark that would show a move out of the lows of previous recessions.  While the gauge remains depressed, the April increase is very welcome, boosted largely by a nice rise in the expectations reading.

So, the overall index gained 5.6 points to 57.9 in April from 52.3 in March – this gets the index to its highest level since the full-blown financial crisis began, the highest reading since August 2008. 

The present conditions index rose 3.4 points to 28.6 last month, the highest level since May 2009 even if it remains lowly.

The expectations index, meant to gauge respondents’ view of their financial conditions six months out, improved to 77.4 from 70.4 in March.  This is a really nice bounce and gets the measure back to where it stood in January.

The jobs “plentiful” less jobs “hard to get” index improved for a second-straight month, rising to -40.2 from -42.3.  Those stating jobs as “plentiful” rose to 4.8% from 4.0% in March; those stating jobs as “hard to get” fell to 45.0% from 46.3%. 

Home Price Data (CaseShiller and LoanPerformance)

The S&P/CaseShiller Home Price Index registered a month-over-month decline of -0.10% in February for the 20 cities the measure tracks.  While a very mild decline, this marks the first monthly price decrease in the seasonally-adjusted (SA) data in nine months.  As we touched on yesterday, the non seasonally-adjusted (NSA) data has been signaling this was about to occur as NSA prices had declined for four months straight before this release.  Yesterday’s reading brings the NSA price decline streak to five months, and the largest since this second round of decline began.  This round of decline has been mild, down just 1.8% since September, but the -0.85% drop in February may indicate something more substantial is about to occur. 

This home price measure is currently 29.3% below the peak hit in July 2006, but still 3.4% above the cycle low hit in April 2009.

In terms of the individual cities, breadth continues to erode as just five cities registered an increase in prices during February, which is down from 10 in January and 14 in December. 

The chart below shows individual-city price declines at six, 18, 30, and the current 32 months following the July 2006 peak. 

Leaving Las Vegas…Dallas Durability

Another home-price indicator came from First American CoreLogic via their LoanPerformance Home Price Index.  This measure showed a decline of 2% in February on a month-over-month basis.  The measure did register its first year-over-year increase off of a six-year low, but as the three-month change chart shows (second chart below) year-over-year gains may prove short-lived. 

The New Bond Vigilante

The bond vigilante is generally a term applied to investors when bonds are sold aggressively, which results in higher yields, as a protest to fiscal and/or monetary policies.  There has been much talk about how the vigilantes have been in hiding – certainly fiscal and monetary policy currently runs amok, yet yields on government bonds remain at very low levels. 

Well, they are still out there and possibly they’re showing up in less conventional ways.  The new vigilante may just be trading a little more in the shadows, presenting themselves via the credit default swap (CDS) market.  They may just see fighting the Fed right now by selling government bonds as too risky for anyone’s comfort, why step out out just to get your pants ripped off as the Fed comes in, manipulates the market, and goes on another buying spree.  But by engaging in their surveillance via the CDS market, they can make bets purely on credit risk and escape other risks that are present via conventional vigilante behavior.  One doesn’t even have to actually own the underlying bonds for which the insurance is priced on, but can profit, or lose, based on the chance of default or bond downgrades. 

This new vigilante is showing up in CDS on European sovereign debt and may begin to whirl in credit bets on U.S. municipality default.   It now costs $835,000 to insure $10 million of five-year Greek bonds, up from $290,000 in March; $375,000 to insure Portugal, up from $110,000 in March; and $191,000 to insure Spanish bonds, up from $95,000 in March.  The cost to insure against state municipality default has come down from the highs of a year ago but may just rise again as the vigilante/bear raid rolls again. 

Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900