Market Commentary

Yesterday’s data was conflicting.
October 28, 2009

Yesterday’s data was conflicting.  Home prices in 20 US cities rose in August for the third consecutive month.  The three month gain is the strongest since the three months ended in December 2005.  Year over year prices are down 11.3% versus last month’s year over year decline of 13.3%.

Consumer confidence fell in October instead of an expected increase primarily because of the “Employment Availability” sub index deteriorating to a 26 year low.  A regional manufacturing index also posted a lower than expected reading.

Obviously there are many questions posed by yesterday’s statistics.  For example what impact will the ending of the $8,000 credit for first time home purchasers have upon the market?  Will sales and prices again begin to fall?  On the other, Consumer Confidence is regarded as the “Ultimate Feed Back Indicator” with little predictive abilities as it only tells us where we have been but not where we are going. 

What about a poor reading for a regional manufacturing gauge?  As noted many times these regional indices must be taken in the aggregate, an aggregate that is suggesting a rising manufacturing sector.

No recovery is ever linear, an environment perhaps amplified given the incredible events of the last 12-18 months.  Consensus is expecting the third quarter to grow by 3.2%, snapping four consecutive quarters of declining growth, the longest streak since the 1930s.  Analysts as per Bloomberg believe the fourth quarter will expand by 1.0% and first quarter by 1.5%.

How accurate is this assessment?  Most have been wrong about this crisis since it first began in February 2007, massively mis judging the issues at hand.

As written a bazillion times for the exception of bank lending, where bank excess reserves now stand at an astronomical $1 trillion, the credit markets have returned to normal.  Corporate debt issuance is at a record, LBO financing is returning and every other measurement or risk has declined to pre Bear Stearns—that is February 2007 when the two questionable hedge funds first begin to experience issues—levels.  Six months ago to suggest such change would have been outlandish at best.

I reiterate my long standing rhetorical question, what are the odds bank lending will return at a pace greater than expected?  Such an increase would be consistent with this crisis.

Turning briefly to yesterday’s market action stocks were relatively quiet ending nominally lower.  Treasuries rallied as a record $44 billion sale of two-year notes drew the strongest demand since the financial crisis began.  I ask are banks buying the two year with some of their massive excess reserves?  Probably. 

Incidentally the yield on the 2-year treasury is 0.93%.

What will occur today?  Durable goods orders and new home sales are released.

Last night the foreign markets were down.  London was down 1.71%, Paris down 1.53% and Frankfurt down 1.51%.  Japan was down 1.35% and Hang Sang down 1.84%.

The Dow should open moderately lower partially over concerns of a potential change in monetary policy.  The 10-year is off 1/32 to yield 3.45%.