So stocks gained ground yesterday even after the latest manufacturing survey slid to contraction mode (the third of the four factory reports this month to do so) and the September consumer confidence reading fell back to past-recession lows. 

What’s bad is good has certainly returned; the pummeling the latest consumer confidence reading took for September would have hit stocks if this weren’t the case.  Now even the conventional wisdom acknowledges that QE2 is coming down the pike, and as we discussed last week the Fed has boosted the degree of its open market operations, which pumps liquidity to the primary dealers – yesterday it was an outright purchase of TIPS.   From there the money finds its way into stocks, bonds, base metals, etc. (10-year Treasury yield was down 6 basis points yesterday, on a day stocks were up – in a normal environment that would have the entire marketplace in disbelief).  When the Fed intervenes “everything” goes up, as David Tepper stated on Friday.  But it’s kind of like that the guy who says, “My dog doesn’t bite…until it does.”  Everything goes up...until it doesn’t.

The following chart shows how stocks turned higher yesterday as the Dollar Index (DXY) turned lower – the dollar gets hit (other things held constant) when the Fed creates money, or is expected to, out of things air.  And ever since the market began to acknowledge that QE2 is on the horizon about a month ago, the DXY has dropped another 5%. 

Consumer staples and health-care shares led the broad market higher.   Basic material and financial shares were the worst-performing groups.  Overall six of the 10 major groups closed higher; I found it interesting that consumer discretionary shares also outperformed the broad index even after that confidence report. 

Volume was weak yet again, 18% below a falling six-month average.

Market Activity for September 28, 2010

S&P CaseShiller HPI

According to the Case/Shiller Home Prices Index’s traditional measure (unadjusted for seasonally factors), home prices within the 20 cities tracked rose 0.65% in July vs. the 1.01% increase for June.  From the year-ago period, prices were up 3.18%.  From the July 2006 peak, the index has prices down 27.9%. 

Of the 20 cities tracked, 13 cities posted increases for the month.  New York, which makes up 19.4% of the overall index, accounted for 40% of the monthly increase as prices were measured to have jumped 1.33% for the month.

On a seasonally-adjusted basis (which frankly has no use right now as the tax credit-led buying distorted normal seasonal trends), prices declined 0.13% in July after June’s 0.24% increase.  Only four of the 20 cities tracked posted month-over-month increases in July on an adjusted basis. 

From the 2006 peak, the worst-hit cities are Las Vegas (-57.2%), Phoenix (down 51.9%), Miami (-47.1%), Detroit (down 44.4%), Tampa (-42.7%), LA (-36.0%) and San Diego (-35.3%).  The best have been Dallas, (down just 5.7% from the 2006 peak), Denver (-9.2%), Boston (-13.6%) and Charlotte (-14.0%).

In terms of the other home-price measures, the FHFA’s gauge of home prices showed a decline for July of 0.5%, this measure captures most of the mortgage market but is limited to conforming loans.  The latest from the NAR, via the existing home sales data, had prices flat for July but down 2% in August.  The Case/Shiller HPI should follow these figures in the months to come.  The measure is an average of the last three reporting months, so it is still benefiting from the tax-credit buying back in May.  That said, it is a tougher measure to get a handle on in terms of its direction as it is heavily weighted to just a few cities – New York, L.A., San Francisco and Chicago account for 49.2% of the index. 

Only two things will halt the next round of housing price decline: a substantial and consistent improvement within the labor market or further delay in the foreclosure process.  The former would take time because even if big job gains occurred yesterday, it would still take time to repair household balance sheets and then drive sales – although those with cash waiting to bottom fish are watching the job market as evidence of the bottom, so there would be some immediate effect.  The latter is more likely to occur as lenders are being charged with signing foreclosure documents without verification.  This doesn’t change the fact that borrowers are seriously delinquent in making payment, but these bad credits will jump on the lawsuit bandwagon.  This will only delay the housing recovery as we have obviously not yet found the market-clearing prices.

Consumer Confidence

The Conference Board’s measure of consumer confidence fell hard in September as consumers’ expectations of business conditions over the next six months fell to the lowest level since February.

The overall index fell to 48.5 (52.1 was expected) from 53.2 in August.  This reading matches the worst levels of every recession (except for the most recent and let’s hope it doesn’t test that reading of 25, hit in February 2009) since the measure was introduced in 1967. 

The present conditions measure slipped to 23.1 from 24.9 in August and remains floored. 

The aforementioned expectations measure fell 6.6 points to 65.4.  

The jobs “plentiful” less jobs “hard to get” reading declined to -42.3 as just 3.8% of respondents view jobs as plentiful (no surprise there), while 46.1% stated  jobs as “hard to get” – 50.1% of respondents termed job availability as “not so plentiful.”

Richmond Fed

Factory activity within the fifth Federal Reserve district extended the trend we’ve seen for September as the Richmond Fed’s gauge slid to contraction mode.  The measure fell to a reading of -2 (6 was expected) from 11 in August – three of the four regionals we’ve received for the month have posted negative readings. 

The internals of the survey were ugly and the degree of deterioration was abysmal.  New orders fell to 0 from 10 in August; order backlog slid to -11 from 0; number of employees declined to -3 from 12; and the average workweek fell to 0 from 14.

So we wait for the reading out of Chicago this morning.  The results should look better than these others have simply because auto production probably didn’t slow very much in September – and that region is dominated by the auto industry.  But the latest durable goods and industrial production reports hinted at a slowdown.  Chicago PMI will surprise to the downside over the subsequent months, in my view, as it tests that 50 level – the dividing line between expansion and contraction.  And if Chicago deteriorates to that degree then the nationwide ISM report will show the same weakness. 

All of those stating that the risk of double dip has been removed lately are going to get quite the wakeup call  -- if the latest from consumer confidence hasn’t already slapped them back into reality.

Have a great day!

Brent Vondera, Senior Analyst