The broad market closed essentially flat on Tuesday as Kimberly Clark missed earnings, citing higher input costs in an environment of zero pricing power, and steel producers warned of soft demand in the months ahead – they also complained higher input costs and an inability to raise end pricing.  A nearly 3% gain for shares of Microsoft helped the NASDAQ Composite manage a nice gain. 

Consumer discretionary, energy, and tech were the session’s best performing groups.  Consumer staples, health-care and basic materials were the day’s laggards. 

Commodity prices extended upon the rally of the past two sessions as the CRB held above that 300 mark we’ve been watching.

I see the yield on the 10-year Treasury has bounced back above where it was on August 26 (the day Bernanke delivered his Jackson Hole speech, which was the first major signal the central bank would engage in QE2). 

This is not at all how it was supposed to play out, and it certainly looked like the Fed had talked rates down (as if the current rates aren’t already ultra-low but we’re redefining what low is by the day here) until this increase in rates over the last few sessions.  What’s obvious is that the market has Bernanke and his colleagues by the…shirt and is in total control.  If Bernanke fails to provide another massive round of QE, then the market will sell off and punish him – and everyone else who’s positioned in risky assets.  Conversely, if they oblige, as they surely will (but likely spread over some time), then they manipulate the markets to a greater degree, making for an even nastier correction when it occurs and the eventual unwind of this aggressive easing experiment all the more harsh.  As I’ve said before, the Fed has backed itself into a corner; it’s backed us all into one.

Market Activity for October 26, 2010

S&P/CaseShiller (August)

According to the Case/Shiller Home Prices Index’s traditional measure (unadjusted for seasonally factors), home prices within the 20 cities tracked fell 0.21% in August vs. the 0.61% increase for July.  The decline ends a four month streak of increase. 

From the year-ago period, prices were up 1.70%, but 12 of the 20 cities tracked have returned to negative territory on a y/o/y basis. 

From the July 2006 peak, the index has home prices down 28.05%.  All of these numbers were slightly lower than expected.

Of the 20 cities tracked, 15 cities posted price declines for the month.  Los Angeles, which makes up 15.1% of the overall index, was the city that placed the biggest drag, as prices fell 0.41%.  But a number of cities showed big monthly declines:  Phoenix posted a large 1.32% decline; Dallas, which had been the best performing city, saw prices fall 1.13%; Portland, Atlanta and Seattle posted losses of 0.88%, 0.85% and 0.75%, respectively. 

On a seasonally-adjusted basis (which frankly has no use right now as the tax credit-led buying distorted normal seasonal trends), prices declined 0.28% in August after July’s 0.21% increase.  Only one (New York) of the 20 cities tracked posted a month-over-month increase in August on a seasonally-adjusted basis. 

From the 2006 peak, the worst-hit cities are Las Vegas (down 57.5%), Phoenix (down 53.0%), Miami (-47.5%), Detroit (-44.7%), Tampa (-43.0%), LA (-36.6%) and San Diego (-35.8%).  The best have been Dallas, (down just 6.9%), Denver (-10.3%), Boston (-13.7%) and Charlotte (-14.4%).

As we’ve talked about, it was only a matter of time until the non-adjusted measure started to turn down.  This reading is based upon a three-month average, so this latest look no longer benefited from the tax credit-induced buying in May.  Home prices will probably not hit bottom until sometime next year as the supply figures will really begin to overwhelm sales activity as more of the shadow inventory (the 4-7 million homes in the foreclosure process) hit the market as distressed properties. 

Consumer Confidence

The Conference Board’s gauge of consumer confidence ticked up to 50.2 in October (little better than the 49.9 expected) from 48.6 in the previous month – although it failed to completely erase the September decline as the reading stood at 53.2 in August.  The charts below paint the historical picture.

The present situation index improved to 23.9 from 23.3 in September – it stood at 24.9 in August.

The expectations index, respondents’ view of things six months out, rose to 67.8 in October from 65.5 – stood at 72.0 in August.

The jobs “plentiful” minus jobs ‘hard to get” figure deteriorated to a reading of -42.6 from -42.0 in September.

Richmond Fed

The Richmond Federal Reserve Bank’s gauge of factory activity rebounded in October, rising to a reading of 5 from -2 in September – expected to come at a reading of 1.  The industry is holding up better than I expected as my assessment was for the waning inventory cycle to weigh more heavily on production.  Yesterday’s survey out of the Dallas region bounced back from contraction mode, but the internals of that report were pathetic.  Not so for Richmond, as the internal indices posted nice results.

New orders rose to a reading of 8 from 0 in September; capacity utilization rose to 6 from 0; the number of employees index improved to 4 from -3; the average workweek was unchanged at 0, but wages rose to 12 from 8.  The backlog of orders deteriorated to -12 from -11, which is a clear signal that production over the next few months will run into a little trouble, but all things considered this is a pretty good report. 

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