U.S. stocks began the session deeply lower, following another ugly session in overseas trading – European and Asian bourses down 2.0%-3.0% -- as a couple of risks jumped out to drive the safety trade.  But as the day progressed U.S. stock traders got the nerve to look the debt and geopolitical risks in the eye to say: You’re not so scary.  Now, whether that confidence is due to naiveté or just a willingness to look past what is right in front of our faces right now doesn’t matter, the reversal was extraordinary.

Here’s a quick commentary on some of the news stories that appeared to move the market during the very volatile session – a 3% decline at the open for the S&P 500 that was completely erased by the close.

Stocks bounced from an opening plunge, fueled at least partially by the latest reading on consumer confidence (there are a few different measures but yesterday’s look from the Conference Board is the most-watched), but then dipped back below what technicians are calling the key 1050 level on the S&P 500. 

The market then staged another move higher after Federal Reserve Bank of St. Louis President Bullard gave a speech stating that the European debt crisis probably won’t lead the world back into recession, but then fizzled again to remain 2.0% below the opening price. 

The third time proved the charm, a rally that made it to the close, helped by news that House Financial Services Committee Chairman Frank believes the Senate’s FinReg language on swaps-trading operations “goes too far.”   This boosted the view that one of the most harmful aspects of FinReg, with regard to future credit availability, would be struck from the bill. 

Basic material, consumer discretionary, financial and telecom shares closed higher for the session.  It was a 5% intraday swing for basic material shares, ending higher by 1.6% after an opening 3.3% slide – even as underlying commodity prices were down yesterday; figure that one out.  Consumer staples led the six of the major 10 industry groups that closed down on the session.

Market Activity for May 25, 2010

Half the Story

The financial press only reported on the first segment of that Bullard speech, the part where he compared the European debt crisis to that of the 1998 Russian default.  This is a ridiculous comparison as the euro-zone accounts for 25% of world GDP and Russia just 3% (and that’s now, it was less in 1998 as oil was trading at $14/barrel -- Russia’s major revenue source.  In addition, the economic environment in 1998 was just slightly different from today’s – yes, that’s biting sarcasm. 

But beyond that, the entire second segment of the speech, which was ignored by the press, focused on the increased likelihood that a new, more volatile macroeconomic era is upon us.  He cited two reasons for this: One, the numerous and unprecedented actions taken by governments have reduced credibility and it will take time to return to the type of policies that will “deliver high quality economic outcomes.”  Two, regulatory reform will go too far.

Those comments appear to have significant importance, but I guess it should be of no surprise that the press corps omits what they want at will.

Case-Shiller HPI

The S&P/Case-Shiller Home Price Index showed prices within their 20-city composite fell for a sixth-straight month in March, down 0.49% after a 0.86% decline in February.  From a year-over-year perspective, prices are up 2.35%. 

Odds are the y/o/y readings will post price increases for another two months as it was April 2009 when the index hit its cycle low and remained floored in May of 2009 – and the sales sparked by the tax-credit expiration should also provide a boost to prices for the next two-three reports.  By the time July rolls around though, something pretty special better happen within the housing market or these y/o/y readings will roll over again.

These figures are on a non seasonally-adjusted basis, which is the way Case-Shiller has historically been reported. 

Six cities posted price increases – San Francisco, San Diego, Cleveland, Denver, Dallas and Seattle.  So clearly a West-region bent, which is where many of the largest declines occurred.  Of the fourteen cities posting price declines, Detroit led the way (down 4.10% for the month) followed by Minneapolis (down 2.70%), Chicago (down 2.33%) and Atlanta (down 1.81%).  The rest posted declines of less than 1% for the month.

Case-Shiller also began posting a seasonally-adjusted look several months back and on that basis the index showed prices fell 0.5% in March, the second-straight month of decline.  Nine cities posted price increases for the month, up from six in February.  (S&P has cautioned that the seasonally-adjusted readings may be distorted by unusual factors, which may include the unusually sharp price declines during the slide and the following government programs that have attempted to stem the housing mayhem.) 

Consumer Confidence

The Conference Board’s survey of consumer confidence came in better-than-expected, rising to 63.3 in May from 57.7 in the prior month – this marks the third-month of increase.  The index hasn’t been able to mount more than a three-month streak of improvement since hitting its 26-year low in February 2009.  Each decline that has ended those streaks has been a big move. 

The Present Situation index, meant to gauge respondents’ appraisal of current business and employment conditions, rose to 30.2 from 28.2 in April.  But the increase is of little consolation, as the chart below illustrates. 

The Expectations index, meant to gauge respondents’ appraisal of business, employment and family income six months out, jumped to 85.3 from 77.4 in April.  This is the highest level since August 2007.  The recent labor-market improvement has surely helped consumers’ view of the economic landscape six months from now.  It will be interesting to see how respondents react in June as stock prices have stumbled and the overall realization of late that the economy is weaker than was conventionally believed just a couple of weeks back.  (Yesterday’s $42 billion 2-yr Treasury auction sold at the lowest yield on record. 0.769%.  That doesn’t portend that things are anywhere near normal.  In fact, it says that the global economy has serious challenges that must be confronted.  This will continue to affect consumer sentiment.)

The jobs “plentiful” less jobs “hard to get” gauge, my favorite within this overall report, improved to -39.0 from -40.1 in April – also the third month of improvement.  Those stating jobs are “plentiful” fell to 4.6% from 4.7% but those stating jobs as “hard to get” fell to 43.6% from 44.8%.  I suspect we’re going to run into another period here over the next few months in which this gauge begins to deteriorate again, but the worst levels are likely, and hopefully, behind us. 

Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900