Market Talk

Another red flag was raised on Wall Street, after Conference Board reports consumer confidence fell for a second straight month.

That put pressure on consumer discretionary and tech stocks, dragging down the Nasdaq Comp and S&P 500. DJIA scratched out a slight gain, mainly on strength in Exxon and Chevron.

Consumers are very worried about the jobs picture, and while Wall Street loves to dismiss jobs as a lagging indicator, clearly Main Street views it differently. (And that’s essentially what I said on WSJ.com’s News Hub today.)

DJIA adds 14 to 9882, S&P 500 drops 4 (0.3%) to 1063, Nasdaq Comp falls 26 (1.2%) to 2116. The DJ Transports also fell for a third session, dropping 1.8% today, and 6.1% over the stretch.

Also today, Case-Shiller reported that home prices rose on a monthly basis for the third month, although they’re still off roughly 10% from a year ago. Before this crisis, the idea of home prices dropping at all was unthinkable (and of course that overconfidence led to a couple of problems, you might say,) so it’s telling that people get excited about a 10% drop.

And Case-Shiller noted that the expiration of the home-buyer tax credit as well as higher unemployment could dampen prices.

That jobs thing, in fact, could lag so much that it might just drag the whole economy through the mud for a spell longer than any time frame that looks like the right side of a “V.” Just a thought.

It's still too expensive

So not only are senators close to a deal that will extend the first-time home buyer tax credit, but now the deal may expand to some buyers who already own a home.

Dow Jones reporter Jessica Holzer says the credit could get extended to April 30 and certain “step up” buyers – who’ve been in their current home at least five years – would qualify.

There’s been lots of pressure to extend the tax credit, especially as housing prices are starting to recover. Home prices recorded their third straight monthly increase in August, according to Case-Shiller.

Still, some market observers remain critical. The credit effectively “boosts the price of a transaction that would have happened anyway,” Simon Johnson and James Kwak write on a Washington Post blog.

Sure it may help increase transactions and temporarily stabilize the housing market, but intervening in the economic cycle usually doesn’t end well.

“If someone could not have afforded a house without the tax credit, then what is he or she going to do when the tax credit goes away and the price of the house falls?” the bloggers ponder. “In effect, the tax credit is a way of making houses temporarily affordable that would not otherwise be affordable, and we know where that leads.”

Critics also scoff at the price of the credit. Calculated Risk does the back-of-the-envelop math and figures if 350,000 new sales occur because of the credit, as pegged by the National Association of Realtors, the government is essentially paying $43,000 for every extra house sold.

The tax credit is merely a “weak attempt to price fix a collapsing market,” the Pragmatic Capitalist blogger says.

“The problems in housing are secular in nature and cannot be fixed with some short-term government stimulus,” blog says.

The same thing occurred with cash for clunkers this past summer and auto sales collapsed once the program ended. “The only way to create sustainable economic growth is by promoting good business practices, ethical lending, fiscal prudence and innovation,” blog says.

“We aren’t going to create a short-term fix for a long-term problem.”

Consumer confidence unexpectedly fell in October as the troubled labor market continues to weigh on confidence. Wall Street tends to dismiss unemployment as a lagging indicator, but Main Street clearly thinks differently.

Home prices also rose for a third consecutive month, according to Case-Shiller, but worries about rising unemployment and the expiring first-time home buyer tax credit remain.

Paul Vigna and Madeleine Lim discuss it all and more on Tomorrow’s News Today.

This guy's getting tired

Many market observers predict tops and bottoms, but few successfully get their timing right. Jeremy Grantham and Barry Ritholtz sit in the latter category, so when they offer their forecasts, investors would be wise to take note.

Grantham, the chief investment strategist at GMO, predicted in March that a stimulus-fueled rally would lift the S&P 500 to 1000-1100. Now that his prediction has been fulfilled, he’s turned sour on the stock market and many facets of the economy.

He blasts the continued employment of people like Fed Chairman Ben Bernanke and Treasury Secretary Tim Geithner (“like reappointing the Titanic’s captain for facilitating an orderly disembarkation,”) the home-buyer credit (“blatant vote-buying by Congress,”) overpaid executives (“unjust desserts”) and the “well-managed” auto industry.

But he’s not surprised by the market rally.

“The lessons, if any, are that low rates and generous liquidity are, if anything, a little more powerful than we thought,” he says.

Continue reading…

Big reversal in US stock markets yesterday leaves bulls back on their heels a bit, though since March they haven’t seen a pullback that didn’t look like a tasty buying opportunity.

In addition to the ongoing stream of 3Q earnings news investors get a look at some data this morning with potential to influence market direction.

Case-Shiller August home price index due at 9:00 a.m. ET, still looking for declines vs year ago, just slower. Conference Board’s October consumer confidence index, and Richmond Fed’s Oct manufacturing survey both set for 10:00 a.m.

US dollar index is retreating off yesterday’s strong gain, oil’s moving up moderately. S&P futures up 0.40; DJ futures up six. Treasury sells $44B in two-year notes at 1:00 p.m. today; 10-year a little stronger after yesterday’s selloff, yield at 3.54%.

(Photo: Library of Congress)