U.S. stocks lost ground for the first session in four as the broad market slid in the final minutes of the session.  The Commerce Department’s release of February income and spending probably held the market up for most of the session, as the results looked good on the surface (we explain below why the report was weaker than the headline figures suggested), but just the talk of ending QE – which occurred Friday and over the weekend -- may have been too much for stocks to hold onto earlier gains. 

It really is tough to say though what pushed the indices lower very late in the session as volume was close to nonexistent, coming in 30% below an already weak six-month average.  Traders are probably sitting on the sidelines after the ramp up we’ve seen over the past seven sessions, there was one day during that stretch in which the market took a breather.  We’ve got the March jobs report at the end of the week and people probably want to get a better feel before making additional moves.

Telecom shares were the only major industry groups to close higher for the session.  Consumer discretionary, tech and basic material shares were among the worst-performing groups. 

The price of crude has pulled back for three days as there’s some profit taking occurring after a 23% run since mid February, closed at $103.74/barrel – down a bit more this morning on expectations that inventories rose two million barrels this week.  Wholesale gasoline also pulled back by about 2% to $3.03/gallon, but absent a deeper move, I wouldn’t expect much help at the pump as the spread between retail and wholesale has been below the roughly 65-cent average for several weeks.

The Dollar Index is showing a little life after hawkish comments from the Philly and STL Fed Bank presidents over the past couple of days – hawkish meaning they’re talking about cutting QE2 short and laying out a plan to unwind current policy.   Rally mode for the greenback will prove fleeting if this talk doesn’t turn into action as the market has heard this all before only to find that talk is indeed cheap. 

I doubt they actually follow through and cut QE2 short as the big guns within the FOMC (Bernanke, Yellen and Dudley) are QE addicts.  What is likely is that QE2 will be allowed to expire as originally planned on June 30 but the Fed will continue to re-invest paydowns, keeping their balance sheet bloated as they won’t want to actually reduce liquidity.  After that we’ll probably see QE return a few months hence as economic and market weakness sets in again. The Fed, unfortunately, won’t allow the market to work things out for itself – which will only delay ultimate economic repair as risk will continue to be mispriced and debt levels will remain heightened. 

Market Activity for March 28, 2011

Sector Activity for March 24, 2011

Personal Income & Spending

Personal income rose 0.3% in February (just missing the 0.4% increase expected) after a 1.2% jump in January that was revised up from the previously reported 1.0%.  That previous month’s surge in income growth was a one-off event as it reflected the two percentage-point payroll tax reduction that took effect in January. 

While a 0.3% increase income is a good number, particularly as it follows a 1.2% jump, the internals of the report showed things are a bit weaker than the headline print suggests.  The important wage & salary segment posted a nice 0.3% increase, but was mostly driven by the service sector (while this segment includes higher paying financial services, health and utility jobs, it also includes lower-wage retail and leisure & hospitality wages); manufacturing wages fell 0.2% for the month. 

Disposable (after-tax) income also advanced 0.3% in February, but when adjusted for inflation the figure fell 0.1% -- this one’s going to look ugly again for March. 

(We’ve spent time on this topic over the past couple of weeks because rising food and energy costs have sent real weekly earnings negative three of the past four months – and the only reason it hasn’t been four month straight is because the payroll tax reduction allowed the reading to print 0% instead of negative in January when it was initially implemented.  I think it’s about time Bernanke & Co. are forced out from hiding behind their core inflation readings – the core reading excludes the food and energy.)

Personal spending significantly outweighed the income increase as it jumped 0.7%, following the 0.3% increase in January.  Adjusted for inflation though, spending rose just 0.3% after coming in flat for January.  This is the figure that counts for the real GDP reading and on this basis the largest component of GDP is running just 30% of the rate it was in the previous quarter – 1.2% currently versus the 4.0% in Q4. 

The cash savings rate slipped to 5.8% (as a percentage of disposable income) from 6.1% in January.

Pending Home Sales

The National Association of Realtors (NAR) pending home sales index rose 2.1% in February (expected to come in unchanged) after falling in January and December.  Based on year-ago figures, pending home sales were down 9.3% last month.

These pending sales measure contracts signed, while the official existing-home sales numbers are counted when contracts close.  As a result, this figure is generally a good indication of how offcial sales will come in over the following reporting months (in this case March and April).  However, the pending figure may not prove quite the indicator over the near term as the NAR has reported an unusually large number of contract cancellations over the past few months – mostly a function of appraisals failing to support the price negotiated between buyer and seller.   

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900