U.S. stocks traded pretty much flat on Friday as the latest income data combined with some doubts over the implementation of Europe’s latest, and unofficial, master plan.  For the week though the bounce was large, up 3.8% -- marking three-straight weeks of rebound.

Basic materials, energy and telecoms outperformed.  Consumer discretionary, utilities and financials were the laggards.

The commodity complex has bounced back too, the CRB Index is back above the 320 level, up 40 points in three weeks after plunging nearly 100 points April-September.  So that explains the basic materials and energy run of late (the two best-performing sectors for the quarter thus far).

It wasn’t especially apparent via stock-market activity, but the bloom is coming off the rose a bit as people are beginning to wonder if a fumbling Europe can really implement the plans they laid out on Wednesday night -- why this thought didn’t arise immediately is beyond me, more hopium I guess.  Besides, the announcement wasn’t even official as they delayed actual details until November.  This uncertainty was more obvious within the bond market as a little run for safety sent those prices higher (yields lower).

And despite all of the talk about a boosted, leveraged and more flexible EFSF, Italian govies have seen their yields rise again – the 10-year is back above 6%, which is seen as a dangerous level because of their economic stagnation.  If these bonds sell off much more we’ll see some real concerns that contagion has spread to a country that’s too large for current bailout plans to cover.  And this occurs even as the ECB provides massive support.

The strange and amateurish belief that a vague plan to pile more debt on top of a debt problem is going to solve Europe’s problems is getting plenty of firms in trouble.  The poster child is MF Global, their outsized (relative to the size of the firm) positions in euro-zone bonds has caused that firm’s collapse.  They’ll be filing for bankruptcy in the coming days as their short-term funding evaporates, ala Lehman Brothers.  Thankfully, MF Global is a much smaller firm and money funds have learned their lesson from the initial stages of this financial crisis back in 2008-2009.

Market Activity for October 28, 2011

Sector Activity for October 28, 2011

Personal Income & Spending

The Commerce Department reported that personal incomes rose just 0.1% in September (expected to come at 0.3%) after the decline of 0.1% in August.  Over the past four months, income growth has been virtually nonexistent while inflation (boosted by food and energy prices) refuses to pullback – real disposable income (after-tax and adjusted for inflation) is down 3% at an annual rate over the past three months and has advanced just 0.2% over the past year.

But on the spending side, the data met expectations of a 0.6% increase for the month, following the 0.2% increase in August.  Spending has outpaced incomes for three-straight months, which is why I stated on Friday that the GDP report wasn’t nearly as good as mainstream economists portrayed it to be.  There will be a payback effect to this overspending – maybe not in the current quarter due to Christmas spending, but one should be concerned about the GDP prints we’ll see in the first-half of 2012.

As a result of spending outpacing incomes over the past few months, the cash savings rate has dropped back to 3.6%.  That’s the lowest level since 2007.  That’s when credit was widely available and the stock market was 18% higher.  Today things are different and cash savings are vital.

University of Michigan Confidence

The final print to the U of M’s gauge of consumer sentiment for October was revised up to show a gain for the month – it reported a decline via its preliminary print two weeks ago.  The measure improved to a reading of 60.9 from 59.4 in September.

Both segments of the report contributed to the increase as respondents’ views of current economic conditions ticked higher to 75.1 (from 74.9 in September)…

…and their expectations of conditions a year out rose to 51.8 (from 49.4 in the prior month).

So this gauge of consumer confidence looks better than the one the Conference Board puts out, which has returned to peak-of-the-crisis lows.  But the charts above illustrate pretty deep concern; to the extent that the low level of surveyed confidence shows up via actual spending depends upon who exactly is responding to these surveys.  What we do know is that real consumer spending is running at half the rate of prior recoveries.

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900