The Ugly Economic Secret Is Out

You just can't keep an ugly secret. I've been long discussing the synthetic lift in economic data prominent during the holiday season. At the same time, I've been directing the attention of investors toward the obvious pitfalls in our path, including European recession and stunted global growth. It's been an annoying, pinpricking point to some hoping to keep support underneath stocks. However, the truth cannot be kept secret, and as the weeks and months have progressed, past detractors are fast becoming declarers of new economic trouble. All I can say to that, I suppose, is welcome aboard!

This week, we are hearing that consumers are not quite as enthusiastic as they were when sales promotions and holiday cheer (not to mention eggnog) guided their thoughts. The Conference Board just reported that nascent consumer confidence has gone away, replaced by the truth, a still troubled and now realistic consumer view. The Conference Board's Consumer Confidence Index, which had of course grown cheery in December, suddenly retreated in January, falling to a mark of 61.1, from 64.8. Believe it or not, economists had actually believed things would improve this month, with the consensus view set at 68.0, according to Bloomberg's survey. Needless to say, shares of relative retailers, excluding behemoth and market share stealing discounter Wal-Mart (WMT) were lower on the news. The whole sector dropped, with the SPDR S&P Retail ETF (XRT) off 1.0% Tuesday. The shares of iconic operator Macy's (M) fell 1.8%, as momentum investors missed some of the benefit of my now well-aged guidance to sell the retail sector, published late last year.

Closer inspection of the report shows that consumers weren't at all happy to begin with, and are simply advancing to a new level of disgust. Their assessment of current business conditions, as measured by the Board, dropped. Some 13.3% of those surveyed now see business conditions as "good", versus the blockbuster 16.3% who thought things were wonderful in December. The recently silent majority who thought business conditions were bad enough in December (33.5% of surveyed), increased to 38.7% in January. That news helped to quell all stocks through much of the day Tuesday, with the SPDR Dow Jones Industrial Average ETF (DIA) off fractionally. The SPDR S&P 500 (SPY) was also lower, though stocks recovered ground by the close. The PowerShares QQQ Trust, Series 1 (QQQ) managed a gain.

The survey of the job market looks no better, with those seeing jobs as "plentiful" dropping to 6.1% from 6.6% before. Again, the silent majority seeing jobs "hard to get" grew to 43.5%, from 41.6% in December. As you might have expected, the shares of employment services firms were significantly hampered Tuesday, with Robert Half (RHI) off 0.2%, Korn Ferry (KFY) down 3.9%, Monster Worldwide (MWW) short 2.2% and Manpower (MAN) down 1.7%.

The bad news extended Tuesday beyond the consumer sector, with home prices showing a second consecutive month of decline, according to S&P Case Shiller. The housing value measuring-men said "home prices continued to decline in November 2011." The group's 10-City and 20-City Composites both dropped 1.3% against October's price records. On a seasonally adjusted basis, the 20-City Composite's 0.7% decline was worse than the economists' consensus view, which was set at a -0.4% expectation. As economists drank the Kool-Aid, those investors driving homebuilder shares higher over the last few months may be rereading my recommendation to sell the builders' today. The SDPR Series Trust SPDR Homebuilders (XHB) was down 1.4% Tuesday. The shares of industry players Toll Brothers (TOL), D.R. Horton (DHI), K.B. Homes (KBH), Beazer (BZH) and Hovnanian (HOV) were all off from 1% to 4.5% on the day.

Investor confidence is certainly waning, and State Street's (STT) survey published Tuesday serves as confirmation. The financial company's measure of investor confidence showed its Investor Confidence Index fell to a mark of 94.5 globally in January, from 92.4 the month before. The North American component shows the most risk aversion, with the measure at 89.8, down 0.1 from December. Looking at Europe, which we recently argued is already affecting the U.S. economy, investor sentiment fell off a cliff 10.1 points, to a mark of 91.6 in January. Shares of asset management companies T. Rowe Price (TROW), Legg Mason (LM), Janus Capital (JNS) and Calamos Asset Management (CLMS) were all down Tuesday on the news.

Finally, the Chicago Purchasing Managers Index had a definite negative tone to it Tuesday, with the Institute for Supply Management (ISM) saying, "key aspects of the report pointed towards a weakening economy." The Business Barometer Index dropped to 60.2, from 62.2 in December. Economists surveyed by Bloomberg were expecting the index to rise to 63.0. Each component measure declined to a less expansionary point, with the seasonally adjusted New Orders Index falling to 63.6, from 67.1 in December. Order Backlogs even fell into territory marking economic contraction, at 48.3 now, from 57.3. The shares of important industrials General Electric (GE) and General Motors (GM) were each off about a point Tuesday.

As economic data is published, it continues to show an unfolding economic decline, the most notable news to date being the fourth quarter GDP report. I recently analyzed the report, exposing it for its weakness beyond the headline growth reported. This Friday, we will receive January's Employment Situation Report. While the nascent negative tone of data to date will have the market tense about the labor environment, I expect the report will reflect the moderate layoff environment we reported on through the holiday season. It should therefore reassure those seeking a reason to continue to believe in the American economy and investment in stocks. However, those finding reassurance will likely once again be undermined, as this lagging data point which also benefited from holiday tidings, trends forward into a less than sanguine developing global environment. The ugly economic secret is out now my friends, and it should be clear by the latest economic data points. If not, I expect it will be, based on the forward movement of stocks.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.