U.S. stocks gained ground despite another day of weak data as traders anticipate the next round of QE and EU finance ministers began their latest attempt to buy time and delay the next inevitable banking system crisis.  And, as we’ve mused on a couple of previous occasions, the next round of QE may very well take the form of an explicit cap on the 10-year Treasury yield of say 2.50%.  This is not without precedent as the Fed did so in the 1940s, which is when the term “financial repression” was probably created.

Commodity prices continue to make a comeback as the CRB Index was fueled by the prices of cotton, hogs and the energy complex.

All of the day’s economic releases missed expectations -- housing, manufacturing, consumer confidence all misses their number and posted weak results.  Considering we have the nationwide manufacturing gauge and the May jobs report coming later this week, both very likely to miss expectations, we should hit an all-time high on the S&P 500 by Friday. 

Pre-market sentiment was helped by the announcement that EU finance ministers will decide on yet another new aid package for Greece, among others.  Word is that German leadership has decided to drop their demand that Greece restructure its debt and that’s got traders happy as it means the market won’t have to face the music just yet (although it may prove difficult to get through Parliament).  No matter the procedural difficulties, traders applauded as it means the markets won’t yet have to face the music.

So here we are stuck at 2% GDP growth and a housing market that remains in decline a full five years after its depression began in the summer of 2006 even with several iterations of fiscal stimulus and unprecedented monetary easing.  One of these days...or should I say years?  One of these years we’re going to figure out that never-ending rounds of bailouts and Fed-driven ultra-low interest rates/ trillions in bond purchases with Bernanke funny money merely mask over the problems that ail this economy.  There’s a debt overhang that has yet to be resolved and everything the Fed has done only prolongs the point at which that issue is cured.    What we need is sound money, some sort of fiscal sanity and a “permanent” pro-growth tax policy.  Alas, we’re not there yet.

Market Activity for May 31, 2011

Sector Activity for May 31, 2011

 So the EU brain trust is working on rolling out the third “new” aid package, which should signal nothing other than the reality that the kick-the-can-down-road approach isn’t quite working.  It also shows that the risk trade will grasp to anything, even if it is part of a process that’s resulted in no cure or finalization of the debt problems that plague developed economies (and as a result will have an indirect corollary on emerging economies) just to keep this party going. 

And while we’re talking about fantasy, it was reported over the weekend that the Germans are going to drop nuclear energy just about altogether by 2022 with half of the plants being decommissioned immediately.  German Chancellor Angela Merkel says they’ll increase their focus on “green” energy.  But by shutting down a source that delivers nearly 25% of the country’s power we’ll find the result is anything but “green” as coal (which currently delivers 42% of Germany’s power) will be have to fill the gap.  A fantasyland mentality continues to grip Western leaders. 

S&P CaseShiller Home Price Index

The CaseShiller HPI (CS) for March showed that housing entered official double-dip mode (the NAR’s existing home data entered double dip in February) as the index has declined to a new cycle low.   On an unadjusted basis (not seasonally adjusted) 12 of the 20 cities tracked continue to make new cycle lows. 

The seasonally-adjusted figure measured that home prices declined 0.23% in March (slightly worse than the -0.20% expected).  This marks the ninth-straight month of decline.  Thirteen of the 20 cities tracked posted monthly declines.

On an unadjusted basis (the traditional manner in which this index has been reported, and frankly the most important as seasonality has been rendered worthless in this environment), CS measured that prices fell 0.77% in March.  That marks the eighth-straight month of decline.  Over the past year, the unadjusted index has home prices down 3.61% – that’s the worst y/o/y result since November 2009.  Eighteen of the 20 cities tracked printed price declines – DC and Seattle being the only cities/districts to post increases.  On a three-month annualized basis, CS has prices down 11.29% -- a slight improvement from the -12.00% posted in February. 

From the peak CS hit in July 2006, the index is down 33.10%.

I suspect we’ll see CS post a slighter decline when the April number is released and possibly a slight increase for May but most probably for June as the existing-home sales data has shown a rebound after hitting its cycle low in February – the CS index is a three-month average so the June number should have two of the three months measured posting positive results.  Unfortunately, the declines will resume as there a millions (four-million seriously delinquent mortgages) that must eventually hit the market.  Those seriously delinquent properties have been delayed from completing the foreclosure process, but it’s only a matter of time until even more distressed properties drag prices yet lower.  It’s a bad scene that could have played out by now if not for repeated acts of government intervention.  It is playing out, just in slow motion. 

Chicago PMI

The Chicago Purchasing Managers Index (the mother of all regional manufacturing surveys) followed the other regionals in posting a serious activity deceleration for May. 

The survey slid 11 points (fourth-largest decline in the survey’s 43-year history) to 56.6 for May (much worse than the 62.0 print that was expected).  This is the weakest reading since November 2009, so mark that as two numbers yesterday that had that date in common. 

Now, this region is most affected by the Japanese supply-chain disruption (mostly auto-assembly disruptions) so the claims that the quake/tsunami is the main factor in the recent weakness we’ve seen has a lot of merit for this number.  However, those claims have much less merit for the other regional surveys (all of which decelerated big time with two hitting contraction mode) that are not dependent on the auto industry. 

We’ll just have to wait a few months to see how things play out to ultimately know the extent to which the Japanese disruptions have had on U.S. manufacturing.  But considering a number of economic data points have worsened, it appears to be more than just Japan related. 

Consumer Confidence

The longest running measure of consumer confidence slid in May even as the price of gasoline declined – apparently consumers aren’t all that inspired by $3.77/gallon (national average) as it only looks good against $4.00.  Hear that Mr. Bernanke?  No, that comment falls on deaf ears as propping up stocks and monetizing the debt is more important to the Fed right now. 

The Conference Board’s gauge of consumer confidence slid 5.2 points to 60.8 in May as the present situation segment remained at deep-recession lows and the expectations index took a good beating. 

The present situation index slipped a point to 39.3 – I’ll let the charts speak for themselves. 

The expectations survey, which tracks respondents’ view of their finances over the next six months, fell eight points to 75.2.

And here’s an interesting aspect of the report, the plans to buy an automobile segment of the survey remains at an all-time high, even as overall confidence remains at past recessionary levels. 

What’s up?  Rates have been very low for the large part of three years, yet this number didn’t begin to spike until late 2010.  Is it because those with weak credit scores are now being accepted for car loans?  Is it that 30% of seriously delinquent mortgages are 18-24+ months past due and thus have the funds for the monthly “sweet ride” payment?   Either way, it doesn’t seem like a healthy reality. 

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900