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"Plunging Confidence Highlights Fragility Of Econ Recovery" (INVESTORS BUSINESS DAILY - February 23, 2010):

http://finance.yahoo.com/news/Plunging-Confidence-ibd-2427715934.html?x=0

"Consumer confidence plunged in February to a 10-month low and the number of "problem" banks jumped 27% last quarter to a 17-year high, according to separate reports Tuesday, overshadowing a gain in home prices.

The Conference Board's sentiment gauge dived 10.5 points to 46, the lowest since April, on concerns about the economy, income and jobs. Wall Street expected 55. The current conditions subindex crashed to a 27-year low.

Consumer spending accounts for about 70% of economic activity. Gloomy confidence data don't bode well for the world's No. 1 economy. Earlier this month, the less-volatile IBD/TIPP Economic Optimism Index sank 4.1%, matching its lowest level since July.

'The recovery is still on track, but the data do suggest the recovery will be a relatively modest one,' said Nariman Behravesh, chief economist at IHS Global Insight.

The 10 a.m. EST report spooked investors. The Dow fell 1%, the S&P 500 1.2% and the Nasdaq 1.3%. The 10-year Treasury yield fell 11 basis points to 3.69% as demand for safe-haven U.S. debt rose.

'Traders will now think about the revisions (to previously released economic data), as well as the outlook over the next couple of months. It's bleak, so investors should not be surprised to see a move out of equities and into Treasuries,' said Todd Schoenberger, managing director at LandColt Trading.

On a positive note, the S&P/Case-Shiller home price index for 20 major cities rose 0.3% in December, the seventh straight seasonally adjusted gain. Vs. a year ago, prices fell 3.1%, the smallest decline since May 2007. But prices fell month-to-month unadjusted.

Robert Shiller, an economics professor at Yale who co-developed the index, said the outlook for housing remains uncertain.

'It's really ambiguous right now as to where this market is heading,' Shiller said, according to Reuters. 'We've been through a major boom, a major bust and then, since April of 2009, the most dramatic turnaround that we've seen in our data all the way back to 1987.'

Housing could stagnate or turn south after the government ends supports this spring, some analysts fear.

The number of problem banks ? those with weak liquidity, capital or asset quality ? jumped 27% to 702 in Q4, the most since 1993, the Federal Deposit Insurance Corp. said Tuesday. Assets at troubled banks totaled $402.8 billion on Dec. 31 vs. $345.9 billion on Sept. 30.

The Deposit Insurance Fund, which insures depositors for up to $250,000, fell another $12.6 billion in the red to -$20.9 billion as the FDIC set aside an added $17.8 billion for bank failures. A total of 140 banks failed in Q4, the most since 1990. Twenty banks have failed so far this year.

Yet the agency said it has enough cash to keep operating and insure depositors' accounts. It could also tap a Treasury credit line if necessary.

The annualized net charge-off rate on bank loans rose 17 basis points in Q4 to 2.89%, the highest since records began 26 years ago, led by losses on residential mortgage loans, credit cards, and commercial and industrial loans.

Banks, burned by soaring losses, cut lending by 7.5% in Q4 vs. a year earlier. Small businesses have been hit especially hard by the credit crunch, according to a survey released Tuesday by the National Federation of Independent Business.

'For those seeking to borrow, conditions have deteriorated,' said Denny Dennis, a senior fellow at the NFIB Research Foundation. 'Not only have banks changed the terms and conditions on loans and lines of credit, but poor sales and real estate values have damaged balance sheets, making it difficult to qualify for loans.'

Euro Stagnation

Meanwhile, there was more evidence that Europe's recovery may stall out entirely. The Ifo think tank's German business sentiment index fell 0.6 point in February to 95.2, the first drop in almost a year as cold weather hurt retail sales. French consumer spending fell in January at its fastest pace in two years; Italian consumer confidence unexpectedly fell in February to its lowest level since July. Also, Bank of England Gov. Mervyn King warned the central bank may have to resume its asset-buying program.

And all this is separate from Greece's festering debt crisis. An explosion there could have huge ramifications for Europe and the world.

'We're in what I'll call a multispeed world,' Behravesh said. 'In the U.S., we're sort of in the moderate lane. Asia is in the fast lane, and Europe is in the slow lane.'

Presently Pessimistic

The Conference Board's index of how consumers view their current circumstances sank 5.8 points in February to a 27-year-low of 19.4 amid job worries.

The share of consumers who said jobs are plentiful fell 0.8 percentage point to 3.6%, while 47.7% of respondents said jobs are hard to get.

With unemployment expected to stay near 10% all year, dozens of Democratic incumbents could lose their jobs in November, even if the economy expands modestly.

Meanwhile, the six-month outlook plunged 13.5 points to 63.8, the lowest since July. The outlook for jobs and incomes also dropped.

Still, Behravesh noted that consumer spending has so far held up 'reasonably well' despite weak confidence, a good sign for the economy. Retail sales rose 0.5% in January while spending edged up in December for a third straight month.

'Being in a bad mood doesn't necessarily stop Americans from spending,' he said."

It may be true that being in a bad mood won't necessarily stop Americans from spending - but not having any money will.

- Ed Smith, Publisher
The EHS Letter Manual