U.S. stocks ran into a little trouble on Tuesday as a couple of earnings reports missed expectations (P&G and Dow Chemical), the latest data on personal income and spending came in weaker-than-expected, and June pending home sales (precursor for official existing home sales for July and August) illustrated that the housing-market rout continues. 

But you can’t keep a good market down, too much at least.  Or is it a market largely propped up by the prospect of more liquidity pumping by the Fed as expectations rise that some form of QE2 is in our not-too-distant future?  And the data over the past six weeks has certainly increased those expectations.  Nevertheless, there will come a time in which additional monetary easing will turn and hammer the market.  At some point even traders are going to fear the carpet will be pulled out from under them. What exactly does it say for the state of things when we’re talking about additional, and highly unusual, monetary stimulus just four months since the Fed halted their previous round of bond purchases and the fed funds rates resides at emergency levels?  It says that something is very much wrong with this economic picture, and that cannot be ignored for long. 

Health care and energy shares were the best performing groups, the only two up on the session, as pharmaceuticals got a boost from Pfizer’s pretty strong profit results and oil-related stocks were fueled by crude’s continued move beyond $80/barrel – finishing at $82.39.  The laggards were basic material and consumer discretionary shares, yesterday’s big winners. 

It’s going to be all about the jobs data for the rest of the week.  Today we get ADP’s preliminary payroll report, followed by jobless claims on Thursday and the July jobs report on Friday. 

Market Activity for August 3, 2010

Personal Income and Spending

The Commerce Department released disappointing data on income and spending as both came in unchanged for June, the consensus expectation was for a 0.2% increase in income and a 0.1% rise on the spending side.  To make matters worse, May’s data was revised down to show a 0.3% pick up in income (formerly estimated to have risen 0.4%) and spending up just 0.1% (the prior look had it up 0.2%).  These latest results don’t appear that they’ll have a downward effect on the revision to second-quarter GDP as the price-adjusted spending quarter-over-quarter looks like it rose 1.6%, which is what was estimated.  (However, the factory orders report, which we touch on below, does look it’ll result in a weaker revision to Q2 GDP.)

On the income side, total compensation was flat; wages & salaries fell 0.1% (driven by a significant 0.9% drop in manufacturing-sector pay); proprietor’s income was down 0.4% (first decline since hitting the cycle low in May ’09); rental income rose for a sixth-straight month, up 0.6%; personal income from assets rose 0.1% (interest income was flat as dividend income rose 0.2%) and transfer payments rose 0.3%.  So rental and transfer payments made the figure look a bit better than it actually was as wages & salaries is what counts for most people.

The good news on this side of the household ledger is that real disposable income has bounced of late, thanks to the flat inflation figures and tax rates. But these tax rates are still scheduled to change in 2011, and even if they are allowed to rise for only the top two tax brackets it will adversely affect this vital measure of income.

On the spending side, consumption of goods fell 0.25% (durables were flat as non-durables fell 0.4%) and purchases of services were about flat, up just 0.08%. 

The cash savings rate has made considerable progress, much changed from what these figures were stating just last month as spending over the past several months has been revised down.  (Frankly, I don’t view a pullback or easing in spending as a bad thing, it’s simply something that must happen.  But the markets don’t like this scenario for what it means to the direction of the economy and stock prices over the short term.)  The current level of cash savings sits at 6.4% of disposable income, up from 6.2% in May.  To offer some clarity as to the degree in which spending has been revised lower, last month the data showed the savings rate stood at just 4.0% for May. 

I think we’re about where we need to be here on cash savings as households see an economic environment that will fail to fire up a strong job market.  But we also need meaningful income gains in order for the debt pay-down situation to run its course.  And if a meaningful level of jobs growth fails to become a trend, then that cash savings rate may just go higher as households view such a cushion as necessary.

Factory Orders

June factory orders fell 1.2% (expected to drop just 0.5%), following May’s large 1.8% slide (revised down from the previously reported -1.4%).  Some of the June decline was due to a 2.0% drop in non-defense capital goods (pushed lower by commercial aircraft orders) but even excluding transportation, orders fell 1.1% for the month – down three months in a row.

This report also brings with it the revision to durable goods orders; they were revised down to show orders fell 1.2% last month – originally reported as a 1.0% decline.

And speaking of revisions, the inventory figures within the consumer goods segment of this report fell 2.3% in June and the May figure was revised lower.  That downward revision to May already suggests that the boost GDP received from the building of stockpiles will be revised lower.  On top of that, an economist at JP Morgan noted that the government estimated a build in these inventories for June but the report showed a decline.  Q2 GDP will be even weaker than the weak 2.4% estimated in the initial estimate when we get the next revisions at the end of the month. 

Pending Home Sales

The National Association of Realtors (NAR) reported that pending home sales fell 2.6% in June, following May’s record 29.9% record plunge.  The consensus expectation was for pending sales to rise 4.0%, but I’m not sure why as the more timely mortgage apps numbers had suggested another decline – those apps currently show we should see some mild bounce when July’s pending sales are released. 

This pending sales data suggests that July’s official existing home sales will mark the third-straight monthly decline – existing homes sales are not counted until the contract closes, the pending data measured contract signings.

Home prices have held up of late.  Well, that’s an understatement as they’ve actually increased over the last four reporting months even as the number of distressed properties hitting the market continues to increase and sales have slumped.  These prices cannot defy gravity for long, and with this latest slip in sales they are destined to endure another round of decline. 

Yesterday’s data are the pieces that complete the June puzzle, corroborating that the economic environment has weakened of late.

Have a great day!