The markets rebounded Tuesday in the face of some serious negative economic news. The Conference Board’s Consumer Expectations Index fell to 47.9, the lowest reading in over 35 years and the second lowest number in the history of the index. The index is now below the levels of the last four recessions.
Figure 1
Source: Conference Board
Also damaging to the Goldilocks crowd was the S&P/Case-Shiller house price indices data released yesterday that showed home prices in freefall. In January, the 10-city composite fell by 2.3% and the 20-city composite fell by 2.4%, representing the largest declines in both indices on record. The year-over-year declines also posted records, falling 11.4% and 10.7% for the 10-city and 20-city composites respectively.
Figure 2
Source: DismalScientist
What was amazing was the market's ability to stage a recovery after initially selling off in early morning trading with the release of the above mentioned economic reports, rallying 117 points from the morning’s lows into positive territory before closing only 16.04 points lower on the day.
Figure 3. Dow Jones Industrial Average (03/25/08)
Source: StockCharts.com
Today was almost a repeat of the same pattern with the markets staging a rally later in the day after initially selling off in early morning trading on the negative economic news. New durable goods orders fell 1.7% in February, in contrast to the consensus expectations of a 0.7% gain. Additionally, new home sales declined 1.8% in February to 590,000 annualized units, down 30% year-over-year.
Figure 4
Source: DismalScientist
Figure 5
Source: DismalScientist
The market's ability to shrug off negative news and stage a late afternoon rally yesterday and today shows the market's current resiliency and supports the notion of a short-term bottom after being relatively oversold. In fact, the markets are showing positive divergences and all three indices have marginally broken through their 50-day moving averages.
Figure 6
Source: StockCharts.com
Figure 7
Source: StockCharts.com
Figure 8
Source: StockCharts.com
Helping to support the markets and turn investor sentiment is the financial press with their spin. Last week I commented on how Maria Bartiromo from CNBC said we were talking ourselves into a recession, and yet we never hear from the press how we can talk ourselves into a bubble. The financial press appears to be predominantly on the optimistic side of the coin and so it’s not surprising to see them spin the negative news in a positive light. For example, last year I remember seeing a “CNBC ALERT” on the bottom of the channel that read, “Two out of 30 Dow stocks up on the day.” What would be the converse? “Twenty-eight out of 30 Dow stocks down on the day!” Talk about the glass being half-full!
Barry Ritholtz exposes the spin in the financial press with an article that appeared in the Wall Street Journal on Monday with his comments provided below:
They (The National Association of Realtors) have been calling the bottom in housing, well, ever since the top 2 1/2 years ago; Their consistent claims of stabilization and price improvements later in the year — as prices have continued to slide — have earned them the title of Worst. Forecasters. Ever. What is more damning, IMHO, is that they are not just wrong, but purposefully misleading for commercial purposes. I believe that is defined as Fraud…
In a front page, 3rd paragraph snafu, the Journal writes: "On Monday, new data suggested that pressures like these are starting to drive prices low enough to attract some buyers back into the market. Sales of previously occupied homes jumped 2.9% in February from the month before, the National Association of Realtors said, the first increase since July."
As we noted yesterday, that was not what the data stated at all: "Changes from January to February are measuring seasonal differences, not actual improvements in house sales." Can you imagine what it would be like if we reported retail sales from December to January this way? Headlines would misleadingly state: "Retail sales plummet 65%!" That is why with highly seasonal data series, the preferred methodology is to report year-over-year data — not month-to-month variations (emphasis mine).
And what were those numbers? The year-over-year data for existing home sales were DOWN 23.8% below February 2007 levels. That data point never found its way into the WSJ article at all. I cannot recall a more blatant misreporting of fact, or a larger or more embarrassing error in a front page WSJ article, ever.
~Barry Ritholtz, The Big Picture, 03/25/08
Despite the markets currently showing some strength, this rally will likely fade as the negative economic news continues to mount and the economy deteriorates further. Delving deeper into the advanced durable goods data shows significant deterioration in motor vehicles and parts new orders that fell to the lowest levels since the last recession. This spells trouble for auto sales and related industries going forward and likely heralds more layoffs to come in the auto industry.
Figure 9
Source: Bureau of Census
Additionally, the inventory to shipments ratio for non-defense capital goods excluding aircraft and parts continues to climb with inventory growth outpacing shipment growth. This points to weakness in capital goods expenditures as the corporate sector reigns in spending. Capital expenditure cutbacks by the corporate sector should come as no surprise as corporate CFOs have been saying that they would do so. As highlighted in last week’s WrapUp, the CFO survey showed that “60% of firms had postponed expansion plans in response to credit market unrest.”
Figure 10
Source: Bureau of Census
The housing downturn and business and consumer retrenchment are beginning to take their toll across the nation. For example, Steve Cochrane from Moody’s Economy.com shows in a recent report (U.S. Regional Outlook: Weakness Is Pervasive)that 28 states expect a budget shortfall in 2009. Not surprisingly, several of the states expecting budget shortfalls were states that saw the biggest housing booms that turned into busts. These states include Arizona, Florida, California, and Nevada, who will see their property tax revenue continue to decline until home prices stabilize.
Figure 11
Source: DismalScientist
The weakness in the nonfarm payrolls is showing up not only in the states hit hardest by the housing decline but now across the entire nation with the central U.S. showing the greatest strength, though still in decline.
Figure 12
Source: DismalScientist
Economic improvement is not on the horizon and supports the argument that any market rally that develops will be temporary. For example, the Economic Cycle Research Institute’s (ECRI) Weekly Leading Index (WLI) shows a strong correlation with the S&P 500. The WLI peaked in June of 2007 at 143.98, one month before the equally-weighted S&P 500 index, and continues to fall. The WLI was an early indicator in 2002 that the economy (and market) was turning around and pointed to future market gains.
Figure 13
Source: Standard & Poor's/ECRI
Figure 14
Source: Standard & Poor's/ECRI
Until the WLI turns positive again I maintain a healthy level of skepticism in any market rally that develops, and it seems I’m not the only one. Jim Jubak from MSN Money is also not convinced that the market's turmoil is behind us, with his comments provided below.
Frankly, I remain skeptical that a Wall Street so near to panic on one day can be completely healed the next. I doubt that the problems in the financial system that were so serious that the Fed had to arrange a forced sale for one of the biggest U.S. broker-dealers can be fixed in a day. And I find it hard to believe that an economy so sick that it requires three interest rate cuts totaling 2 full percentage points in two and a half months can be so easily fixed.
So, I'll wait with half a portfolio in the market and half in cash until I can decide whether we've really moved beyond a margin-call market.
~Jim Jubak, Jubak’s Journal, 03/21/2008
So let the games (spin) begin in the financial press that looks through the economy with rose color glasses. While the media will be cheering the market along as it eventually rallies from an oversold condition, a healthy level of skepticism is in order with the economy still having a lot to prove in terms of stabilization and recovery. Prudence and caution still remain the order of the day.
Today’s Market
Negative economic news and lowered earnings estimates for many in the financial sector sent the markets lower. The markets failed to produce the late afternoon rally that was seen yesterday, though they finished off their lows.
Commodities jumped today with weakness in the dollar. The dollar index fell 1.17% to 71.43, pushing gold up $15.10/oz, silver up 3.43% to $18.41/oz, and WTIC rose $4.78/barrel to $105.90/barrel.
The Dow Jones Industrial Average fell 109.74 points to close at 12422.86 (-0.88%), the S&P 500 lost 11.86 points to close at 1341.13 (-0.88%), and the NASDAQ shed 16.69 points to close at 2324.36 (-0.71%). Declining issues represented 56% and 54% for the NYSE and NASDAQ respectively, reflecting a mostly mixed market.
