U.S. stocks shrugged off continued weakness in the Chinese market along with worse-than-expected readings on home prices and consumer confidence to trade flat for the session.  A strong reading from the latest regional manufacturing survey may have kept stocks from trading lower, but frankly it’s does appear the market could care less right now about economic releases.  When the masses believe stocks won’t endure substantial damage so long as the Fed continues funnel money to the primary dealers, why pay attention to such things as economic data. 

Regarding the Shanghai Composite, a 6% decline over the previous five sessions has that market back into bear territory, down 21% from its post-crisis high hit in the summer of 2009.  In terms of its pre-crisis all-time high, hit in October 2007, the Shanghai is down 55%.

Energy, basic materials (the CRB Index hit another post-crisis high) and utility shares led seven of the top 10 industry groups higher yesterday.   Consumer discretionary, telecoms and tech were the three industry groups that closed down for the session. 

Treasury yields jumped (prices down) yesterday, although the rate on the 10-year (3.47%), for instance, is holding below the 3.55% hit a couple of weeks back – and well below the 2010 high mark of 4.00%.  The latest auction didn’t go so well; this time it was $35 billion in 5-yr notes.  Monday’s 2-yr auction did go well, but of course the longer the maturity the tougher these auctions are going to get in finding demand at these levels.  To be fair, this isn’t the best week with which to gauge things as liquidity is thin. Although, the Treasury bringing $100 billion in issuance during the final week of the year shows the corner the government has backed its finances into.  It all ultimately hits the fan when rates do rise in a secular fashion and debt servicing doubles to suck up 25% of tax receipts. 

Market Activity for December 28, 2010

S&P CaseShiller HPI

The October results from the CaseShiller Home Price Index showed another round of trouble is upon us, which has been obvious all along based on the current and growing supply glut.  The index measured that home prices dropped a worse-than-expected 0.99% in October (expected to decline 0.60%) on a seasonally-adjusted basis.  This followed a downwardly revised 0.96% decline for September.  On an unadjusted basis, prices slid 1.32% after the 0.82% decline for September.

On a seasonally-adjusted basis, the latest results mark the fourth-straight month of decline; down for three straight on an unadjusted basis, which is the traditional manner this measure has been reported – and I’ll concentrate on the unadjusted figures as a number of policy measures (from tax-credit schemes to foreclosure moratoria) meant to boost the housing market have reduced the usefulness of the seasonal adjustments.

All of the 20 cities tracked recorded month-over-month price declines and on a year-over-year perspective prices fell 0.80% -- the first y/o/y decline in prices since January and the worst result since December 2009.  The best we managed during the very short-lived revival was a 4.64% y/o/y increased back in May.

Bottom line:  The October results showed things are really beginning to deteriorate again as 15 of the 20 cities tracked posted monthly declines of more than 1%, ranging from -1.11% for Miami down to -2.90% for Atlanta.  Washington D.C. and Las Vegas held up the best, posting declines of just 0.20% and 0.20%, respectively.  (For Vegas though, this is inconsequential as it has been the most battered city -- down 57.8% since hitting the 2007 peak.)  The chairman of the index committee stated, “The double dip is almost here, as six cities set new lows for the period since the 2006 peaks.  There is no good news in October’s report.  Home prices across the country continue to fall. ”

Richmond Fed

The Federal Reserve of Richmond’s gauge of factory activity within the central bank’s fifth district surged in December, up 16 points to a reading of 25 (expected to rise just two points).  This is the third-highest reading in the measure’s 17-year history.

The internals of the report were equally strong as new orders jumped 19 points to 29; order backlog raged from three months of contraction, jumping to +14; vender lead times rallied to a reading of 17 from 6 in November (meaning suppliers had a tougher time keeping up with orders).  The employment gauges were also hot as the number of employees reading hit 14 from 10 in November; the average workweek jumped to 15 from 9 (one of the highest readings in the survey’s history) and the wages gauge doubled to 16 from 8 (a level rarely visited). 

This resurgence in the Richmond index comes off of the dip to contraction in September and shows that the manufacturing sector continues to roll.  The regionals (with exception of New York, which showed jobs contracted) suggest that factory employment is strong.  Unfortunately, it’s not showing up in the official data as manufacturing payrolls have declined for four reporting months.  Maybe the December payrolls report will reflect in actual gains what these regionals have suggested.

Consumer Confidence

The longest-running and most-watched reading on consumer attitudes showed an unexpected deterioration for December, driven by a labor market that has yet to show any sign of strong and durable improvement.  The Conference Board’s reading on consumer confidence fell from a level that was already near the worst recessionary levels of every previous contraction going back to 1967 as it dipped 1.8 points in December to print 52.5 (expected to come in at 56.3).

The present situation measure fell 1.9 points to 23.5, remaining at these lowly levels for longer than any time in the survey’s 43-year history.

The expectations index fell 2.5 points to 71.9.  This reading is based on respondents’ answers to questions regarding their expectations of their finances six months out.

The jobs “plentiful” less jobs “hard to get” measure, which I believe is the best measure of consumer activity trends, not two-three months worth of activity but overall longer-term trends, fell to a reading of -42.9 from -42.0.  Roughly 47% of respondents believed jobs were “hard to get,” while just 3.9% believed jobs were “plentiful.” 

The number of respondents stating they intend to take vacation over the next year remains near its 32-year low – unlike the rest of the survey, which goes back to 1967, this question began in 1978.

With consumer spending upbeat to downright strong of late, it doesn’t appear that too many people believe the confidence readings are as meaningful as they once were.  I’ve argued in the past that there is a very questionable relation between these surveys and actual spending trends.  However, this time one must pay close attention to these reading as a way to gauge long-term trends with the jobless rate at levels rarely seen and a reduced propensity to borrow as household debt levels remain at postwar highs. 

For sure, stock market gains, $460 billion in government transfer payments over the past 20 months, and a delayed foreclosure process that’s allowed delinquent borrowers to remain in their homes rent-free for 475 days on average are all for now helping to boost spending.  But when stocks endure their next substantial move lower and foreclosures speed up (the extended transfer payments will remain in play for another year), you can bet that these confidence gauges will more closely align with actual spending. 

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900