U.S. stocks spent most of Tuesday’s session in negative territory as it appears the UK economy has run aground again and profit results from 3M and JNJ trailed estimates.  But most stocks rallied in the final hour to push the S&P 500 and NASDAQ Composite to a positive close; the Dow closed fractionally lower.  The shares of 3M and JNJ weighed on the Dow but gains in the shares of IBM and Wal-Mart offset that drag.

Telecoms, tech and consumer staples were the best-performing groups.  Energy (the price of crude has slid back to $86/barrel), financials and industrials were the day’s laggards.

The news out of 3M and JNJ (and the night before Texas Instruments reported a build in stockpiles as new orders slipped and their margins weakened) was a mild setback as quarterly earnings have posted strong results in an overall sense.  (Things will become more difficult for corporate profits in two quarters when year-ago comps become tough to beat). 

The fourth-quarter GDP reading out of the UK unexpectedly decline 0.5% (expected to come at +0.5%), and that’s not an annualized number.  This biggest marks the largest decline since the -0.8% in June 2009 and is the worst GDP result outside of the deep recession that just passed since 1991.  The UK government is blaming the result on the weather, and maybe that’s true – or maybe it’s that 15% VAT (value added tax) increase they instituted.  It seems important to note that this contraction occurred even before the bite from the public-sector austerity program, which has yet to be implemented.

The Dollar Index (DXY), after beginning the session higher on a deep decline in the pound, closed lower on a late-day spike in the euro.  The DXY closed in the 77 handle for the first time since November, which was the start of that dollar rally that was supposed to be all about the improved growth outlook. 

Market Activity for January 25, 2011

S&P CaseShiller HPI

The November results from the S&P CasesShiller Home Price Index continued to suggest the double-dip in housing is unfolding, and with the coming supply of distressed properties that will hit the market over the next couple of quarters all cities in this index may just post news lows.

The index measured that home prices dropped 0.54% on a seasonally-adjusted basis, which was actually better than the -0.80% expected, and marks the fifth-month of decline.  Sixteen of the 20 cities tracked posted price declines on a seasonally-adjusted basis.

On a non-adjusted basis, which is the traditional manner in which this report has been reported, prices fell 0.97%, marking the fourth-straight month of decline.  Nineteen cities posted a monthly decline and 16 metro areas posted year-over-year declines – 13 of which recorded y/o/y declines that ranged 3.48%-7.89%.  Nine of the 20 cities tracked (Atlanta, Charlotte, Chicago, Detroit Las Vegas, Miami, Portland, Seattle and Tampa) hit new lows.  These are important number to keep an eye on as roughly 30% of mortgage are either underwater or have less than 5% equity. 

Consumer Confidence

The Confidence Board’s measure on consumer confidence exploded to the upside in January…just kidding, that’s how the financial press surely portrayed it.   The measure did jump in January, up 7.3 points to 60.6 for the month.  While this marks a nice improvement, the reading remains depressed and still fails to eclipse even the 2010 high of 62.7 hit in the spring when the tax credit-led home buying was in full force. 

The present situations index remains at deep levels.

Expectations look better. 

The jobs “plentiful” less jobs ‘hard to get” reading improved by 3.6 points to a reading of -38.2 – the number of respondents stating jobs are “plentiful” rose 1 point to 5.2% and those stating jobs are “hard to get” fell 2.6 points to 43.4%.  I view this as the best indicator within the confidence readings regarding durable levels of consumer activity.  In this period of de-leveraging, in which households either cannot or will not depend on credit as they have in past recoveries, this reading has to make much more improvement. 

Richmond Fed

The Federal Reserve Bank of Richmond’s gauge of factory activity within the fifth Fed district during January missed expectations, falling to a reading of 18 after the 25 hit in December.  Notwithstanding the miss, the chart below shows the measure remains elevated. 

In terms of the sub-indices, new orders fell 11 points to 17; capacity utilization fell 3 points to 18; and wages fell 3 points to 13.  While all declined, they remain at pretty hot levels. 

The concerns reside in the order backlog and price indices (which are the concerns for nearly all of these regional manufacturing reports).  Order backlog slid 9 points to a reading of 4 (so not much cushion before it falls to contraction mode again) and the prices paid/prices received differential widened. 

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900