Major U.S. stock indices ended mixed on Tuesday as the Dow Industrials and S&P 500 gained some ground, while the NASDAQ Composite gave back early-session gains.  And even for the Dow and S&P, it was hardly a day of conviction as trading was shaky – losing all of its pre-market steam and again late in the day.

Yesterday’s winners were a mix of cyclical and safety sectors as energy shares led the way (crude closed up $1.55 to $99.76/bbl -- and is over $100 this morning as China had to reduced its RRR, I’ll explain tomorrow) with utilities and consumer staples also outperforming.  Tech, financials and industrials were the laggards.

So here’s how the day progressed: In pre-market activity, futures were up early as EU leaders continued to talk about their next great solution to their debt problem (the 15th attempt in 22 months).  Much of it was more of the same, such as leveraging up the EFSF by providing guarantees to investors to buy government debt.   However, that pre-market move fizzled as talks over leveraging the EFSF broke down yet again and that led to a lower open.  (Last night they appeared to agree to leveraging the bailout fund, but because of the harsh market conditions, they’re not able to make it large enough to matter.)

So this leaves the ECB, and word is EU ministers will go begging Draghi to take a Bernanke-style approach -- by law the ECB can’t buy bonds directly from governments so EU officials will put pressure on the central bank to channel money through the IMF in order to accomplish this goal, but I digress.

Then about an hour into trading we received the most-watched consumer confidence survey for November, which showed quite the jump.  Now, since it rallied from historic depths doesn’t exactly say much, but traders found reason to bid the market higher on the news (more on this data below the click).   This rally also lost momentum, but held onto enough of the gains for most stocks to close higher.

And for more out of Europe hit the click…

Market Activity for November 29, 2011

Sector Activity for November 29, 2011

We did receive news that just wasn’t about EU ministers scrambling to find a way out.  There was an Italian bond auction and it showed that Italy can still go to the market to borrow money as they found the demand to sell all of the €7.5 billion of three-year bonds for which they intended (although, it’s unclear just how much of this was organic as the ECB is buying this paper up in the secondary market).  However, they had to pay for this demand as the yield hit 7.89%.  That’s up from the 4.90% they paid just a month ago, which shows how quickly the market can punish financially wrecked governments – and again, who knows how high these yields would be without the ECB or governments pressuring their banks to keep the selling to a minimum.

It’s funny, six weeks ago the market slid when the Italian three-year hit a yield of 4.50% and the 10-year backed up to 6.00%.  Now (real time, as I type) that three-year is 7.52% and actually higher than the 10-year at 7.30% -- so it’s an inverted curve, which is signaling an increased chance of default I believe.  For the time being though, the equity markets now see such action as a positive, simply because the Italians were able to borrow at these higher rates.

CaseShiller HPI

The CaseShiller Home Price Index measured a decline of 0.57% on a seasonally-adjusted basis for September, which follows a downwardly revised 0.29% decline for August (previously measured at just a 0.05% drop).  This marks the fifth-straight month of decline and the 15^th month out of the past 16.   Fifteen of the 20 cities/districts tracked posted prices declined for September, which is really July, August and September as this measure is a three-month average.  This seasonally-adjusted index has now hit a new post-bubble low.

On an unadjusted basis, home prices fell for the first time in six months, down 0.64%.  So no matter the measure, CaseShiller is showing home prices are rolling over again.   Seventeen of the 20 cities/districts posted declines when not adjusted for seasonality.  This measure has yet to take out the post-bubble low, but it’s only a matter of time – which is exactly why QE3 will acutely focus on driving mortgage rates even lower.

Conference Board’s Consumer Confidence

The longest-running and most-watched measure of consumer confidence jumped 15 points to a reading of 56.0 for November (whipping the expectation for a 44.0 print).  This is a large jump, but it is off of the worst level in the measure’s 44-year history, save the 2008-09 peak of the financial crisis.

The present situation component of the index rallied 11 points to 38.3…

…the expectations measure (respondents’ view of their financial position six months out) jumped 18 points to 67.8.

A few days back when we received the U of M’s confidence reading (which rose nicely), I showed the Conference Board’s and Bloomberg’s confidence charts, which remained pegged at historic lows and said you be the judge which measures most accurately portray the consumer mindset.  Well, now we see the Conference Board’s survey has pretty much mirrored the move we saw in U of M.

Let’s hope confidence continues to rally.  Some people say these confidence measures don’t matter, the consumer will continue to spend (and it’s more than just spending more, which always occurs outside of the worst economic conditions, but what matters is the rate of increase).

During normal economic situations I agree with that assessment – when things go awry consumers can rely on more credit to offset flat-to-declining real incomes.  However, at current debt levels, the reliance on more debt is not an option and confidence measures become much more predictive.  The data bears this out as the personal consumption measure within GDP is averaging less than half the rate it had during previous recoveries.

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900