U.S. stocks recovered early-session losses as the market pushed aside another day of weak data (touched on below) -- the broad market actually made it back to positive territory in the afternoon. But the major indices slid in the final hour as the White House issued a veto threat to House Speaker Boehner’s debt-ceiling plan (and for that matter many Republicans don’t like the plan either).

Consider the two issues and the weakening economy is ultimately the bigger threat to financial markets than the debt-ceiling theatre – we’re not going to default on debt.  Yeah, the Fed will roll out more monetary stimulus if Bernanke feels the need in an attempt to revive the economy, but it hasn’t helped much thus far and it comes with serious costs down the road.

Most of the major industry groups outperformed the broad market, led by tech and telecoms.  Industrials, basic materials, health care and energy weighed on the market to push it lower.  The Dollar Index lost ground, falling to the 73 handle for the first time since early June.  Crude hit $100/bbl mark midday, but closed just below at $99.45.  

On the debt-ceiling issue, I’ll repeat:  They either get a deal done over the next several days (which I think is the likely scenario), or they don’t; at which point the market sells off by 10% and they then rush to raise the ceiling the following day.  Now, I think it’s reasonable to expect that a deal will be absent any budgetary substance.  This means that there is a risk the vaunted AAA rating will be lost.  I think we can go to a AA rating without roiling Fed lending (collateral requirements) and money markets.  But I also think that the ratings agencies have shown themselves to be a colossal joke and are unlikely to downgrade the U.S. credit rating anyway simply because of the disturbance it may cause – thus the credit rating thing may, may, just be a complete non-issue.  In this wacky financial world of vast manipulation, it’s tough to say. 

UPS reported earnings that looked good on the surface, but at least for the domestic business the report showed it was all about price hikes.  Domestic volume growth was essentially unchanged over the past year (12.63 million packages vs. the 12.62 million a year ago).  Firms can continue to keep profits going with cost cuts (largely via payrolls) and price hikes; but for how long? 

Overseas, the UK economy continues to show it’s on the verge of recession as the Q2 GDP figure came in at +0.2% for the quarter and has risen just 0.7% over the past 12 months. 

Market Activity for July 26, 2011

Sector Activity for July 26, 2011

 CaseShiller Home Price Index

The CaseShiller HPI, which tracks 20 metro areas, showed that home prices rose for a second-straight month in May after prices slid for eight-straight months.  This is on an unadjusted basis, which is the manner in which the measure has traditionally been released and also is the more important figure to watch as seasonal adjustments have been rendered worthless due to a number of government interventions that have manipulated the market. 

The measure rose 1.02% for May (which is actually a three-month average, so March, April and May in this number), after the 0.58% rise for April – a number that was revised down slightly from the +0.66% reported last month.  On a year-over-year basis, the gauge estimates that home prices declined 4.51%, the worst result since November 2009.

On a seasonally-adjusted basis, prices inched lower by 0.05% in May after the 0.44% increase for April – a number that was revised up from the -0.09% decline that was initially reported last month. 

Just three cities posted price declines for the month: Las Vegas, Detroit and Tampa – they are down 51.2%, 59.3% and 47.5% from the peak hit in 2006.  That’s up from five for the April report.   All metro areas tracked printed y/o/y price declines, save Washington D.C.

Consumer Confidence

The Conference Board’s measure of consumer confidence (the longest-running and most-watched gauge of sentiment) rose 1.9 points to 59.5 for July from 57.6 in June.  That June reading was the worst for the year. 

The overall measure got its boost from the expectations segment of the survey (consumers’ views of conditions six months out) as that measure rose nearly four points to 75.4. 

The present conditions segment deteriorated to 35.7 from 36.6 in June.

Richmond Fed

The Federal Reserve Bank of Richmond’s gauge of manufacturing activity in its district fell to contraction mode for the second time in three months as the reading for July came in at -1 (expected to hit +5) – it’s previous two month’s worth of prints were +3 in June and -6 in May.

The reading was pushed lower by a new orders segment that fell five points to a reading of -5 and an order backlog reading that remains deep in contraction mode at -18 (it fell seven points). 

The average workweek ticked up a point to a reading of zero and the wages reading rose a point too to print 10.  But these are lagging indicators and if new orders fail to show strong improvement then these labor indices will erode too. 

That said, one should assume some bounce as we enter year end as the Japanese supply-chain disruptions dissipate as a weight on the manufacturing sector (although not the only problem for the sector) and firms may rush to increase capital outlays before the higher depreciation allowance expires at the end of 2011.  (Congress is likely to extend that allowance into 2012 based on the weakness of this recovery, but firms may still react to meet the current deadline.)

New Home Sales

The Commerce Department reported that new home sales for June missed expectations as 312,000 units at a seasonally-adjusted annual rate (SAAR) were sold.  The May figure was revised down 4K to 315,000. 

Nevertheless, even if the number blew by the 320K units SAAR that were expected to sell by printing a number like 340K it wouldn’t have mattered.  This market is dead for quite some time as it cannot compete with the amount of distressed properties within the existing-home market – a “distressing” reality that crushes home builders’ profits. 

On an unadjusted basis, just 29,000 new homes sold in the U.S. during June – the record low of 28,000 for June (peak of the buying season) was hit last year; the all-time high of 115,000 sales was hit in 2005.

The median price of a new home rose 5.8% last month even as sales remain languid – up 7.2% over the past year and just 10% off the peak hit in 2007.  But this is just the problem, as builders on the whole are still losing money due to the high price of building materials; they’ll have to lose even more to sell homes, or build even less.  

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900