U.S. stocks were able to shun rising troubles in the EU and the wacky world of stocks and Treasurys trading in tandem yesterday as strong earnings results from 3M, UPS and Ford boosted investor confidence.   The S&P 500 has finally passed what had been a 32-month high hit on February 18, so we’ve got a new post-crisis elevation on our hands.  

A rising stock market, it’s a funny thing sometimes.  Funny in the way that it causes people to ignore issues that would normally raise alarm. 

One thing that’s getting overlooked is the severity of the EU debt contagion that lives on…but more on that below.  Another development is rising MENA tensions, a situation that is not likely to go the West’s way with regard to who fills the vacuum.  Another is the tightening campaign that’s occurring in Asia, a region that’s been a key area of global growth.  Yet another is the rising price of energy (specifically a pump price of $3.88).  And finally, the rally within the Treasury market over the past few sessions even as stocks push higher.  These two markets trading in tandem is strange (not for the weird trading environment that accompanies a QE world, but strange with regard to virtually any other timestep). 

You can’t have stocks going higher with the Treasury market pushing already historically-low yields even lower without something cracking (the Treasury market rallied again yesterday, pushing the 10-yr yield back to 3.30%).  While people can ignore this situation for now, in time we’ll find that one of these markets will be proven terribly wrong, and it’ll be ugly when that plays out. 

On the earnings front, S&P 500 profits are up 17.7% from the year-ago level (+21.4% excluding financials) as companies continue to dance around higher input costs, but it comes at the cost of employment (got to find the cost savings from somewhere).  As I’ve been harping on for a year now, it is the back-half of 2011 where the concern lies.  This is especially true as higher commodity prices begin to compress margins; you can also see early evidence of lower earnings results by way of NIPA profits, which is the economic profits number within the GDP reports, as the figure has dropped from double-digit increases to -3.3% as of the fourth quarter.   

Market Activity for April 26, 2011

Sector Activity for April 26, 2011

The EU debt contagion was back in the news (again, although ignored by the market) as Greece’s budget deficit exceeded estimates, coming in at 10.5% when their own government had expected 9.4%.  As a result, Greek interest-rate spreads jumped further, to 13-22  percentage points  higher than the German counterpart, depending on the part of the curve.  The Greek two-year note yield is now yielding over 25% with the 10-year yielding over 16% -- that’s massive inversion and evidence that the market knows a restructuring is coming.  More importantly, since Greece is a full-blown basket case at this point, is that Portuguese and Irish spreads continue to widen and Spain had to pay up to get a good auction yesterday morning – although Spain’s cost of borrowing remains low at just 2.3 percentage points above German bunds. 

How long will the market be able to ignore this issue?  It will until it no longer does – or put another way, I have no idea.  But debt restructuring is the ultimate fix and that means a hit to a banking system that holds these securities in mass, particularly as the ECB has encouraged them to keep on buying as it accepts this junk as collateral. 

CaseShiller Home Price Index

The CaseShiller HPI (CS) for February showed the housing market’s second round of price declines continues.  On an unadjusted basis (not seasonally adjusted), 10 of the 20 markets tracked continue to make new cycle lows. 

On a seasonally-adjusted basis, the CS measured that home prices dropped 0.18% in February (better than the -0.40% expected).   The decline marks the eighth-straight month of decline.  Sixteen of the 20 cities tracked posted declines. 

On an unadjusted basis (which is the traditional manner in which this index has been reported), prices slid 1.09% for the month and are down 3.33% from the year-ago period (worst y/o/y decline since November 2009).  Nineteen of the 20 cities tracked printed a decline – Detroit being the only city to post an increase.  On a three-month annualized basis, CS has prices down 11.90%.

From the peak CS hit in July 2006, the index is down 32.5%. 

Richmond Fed

The latest regional manufacturing gauge showed meaningful deceleration in April – all four regionals we’ve seen for the month have decelerated from the hot pace of the previous two months 

The Richmond Fed index fell to a reading of 10 (20 was expected) after printing 20 for March.  The level on Richmond remains a good one, but just as the New York, Philly and Dallas measures of factory activity illustrated, activity chilled from a robust pace – extremely evident in the Philly number, which was more than halved.   

Consumer Confidence

The Conference Board’s gauge of consumer confidence (the longest running and most watched measure on this topic) rose 1.6 points to 65.4 in April (64.5 was expected) after sliding in March as the initial shock of gasoline prices hit. 

Overall the gauge remains at a low level, more than 30 points below average and in past-recession territory. 

Consumers’ outlook of the future (both for business and their financial conditions six months out) is looking much better than their position on the current situation.  The present conditions index remains very weak, as you can see below.

The expectations measure (outlook on things six months ahead), while down from a couple of months ago, is not too much below the long-term average. 

Maybe the best news came from the jobs “plentiful” less jobs “hard to get” reading, which improved by 3.2 points to -36.6.  Those respondents that believe jobs are “hard to get” fell to 41.8% from 44.4% in March.  Those that believe jobs are “plentiful” improved to 5.2% of respondents from 4.6% in March.  Still, this measure remains near the lows of the 1969-70, 1974 and 1990-91 recessions. 

We’ll Watch History

For the first time in the Federal Reserve’s 98-year history the chairman will engage in a press conference, which will all FOMC meeting for now on. 

The press continues to express that the decision to begin taking question is all about Bernanke’s desire to make the Fed more transparent.  Yet, financial reporters also explain that the chairman continues to get better at dancing around questions.  What?  So which is it, transparency or obfuscation?

Bottom line, these press conferences (which will follow FOMC meeting from here on out) are more about trying to assuage concern than anything else -- concern that is beginning to rage among our international counterparts. 

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900