There was a lot to digest yesterday, in what should have been a fairly benign trading day. Federal Reserve Chairman Ben Bernanke goes before Congress today, in the first of two days of hearings. That should have put many on hold. However, the Treasury made an announcement at noon, increasing its supplementary Financing Program, SPF, to $200 billion from $5 billion. There will be eight $25 billion, 56-day SPF bill sales, each Wednesday at 11:30 am. This is a monetary policy move. It should drain reserves from the banking system in small installments. They made this announcement prior to the $44 billion in 2-year notes. Indirect bidders took 53.6%, a very solid number. The yield of 0.895% was close to the when-issued yield of 0.90%. The announcement on the SPF was interesting to hear, just a day before Bernanke’s speech.

There were two economic reports out yesterday. Housing prices have stabilized somewhat. The S & P/Case Shiller Home Price Index slipped just 2.08% in December to 145.90 from 146.25. That was pretty close to being in-line with expectations. Year-over-year, we’re getting to a level of price stability, with the index down just 2.51% since last December. However, there were interesting areas of strength within the regions. It was mainly a bounce in the hardest hit areas of the country that provided the upside. The rest of the country was showing signs of weakness. Given the Fed’s attempts to artificially hold mortgage rates down, we view the “stability” with some skepticism. In addition, the government has extended its Homebuyers’ Tax Credit until June. This may have spurred interest by buyers in those areas badly beaten down, jumping on what is perceived as temporary price stability. If we do not have a good Spring/Summer in home sales, there is risk that prices fall again, weighing on consumers.

Speaking of consumers, the Commerce Department’s Consumer Confidence Index proved to be that catalyst we were looking for to start the “test” phase of the current market action. February Consumer Confidence fell to 46.0 from 56.5 in January. That was well below the 55.0 anticipated. It wasn’t just one component. The Present Situation Index dropped to 19.4 from 25.2. The Expectations Index fell to 63.8 from 77.3. There were negatives throughout the report. Those saying that business conditions were “bad” rose to 46.3 from 44.7 and those saying jobs were “hard to get” rose to 47.7 from 46.5. A report like this can often be skewed by one component or another, but that wasn’t the case. This report is quite clearly stating that the average consumer isn’t “feeling” the recovery that we keep talking about. Unfortunately, the terms “recession” and “recovery” are economic terms, based on GDP not jobs. When economists officially declare the recession over, as we did back in our June 2009 report, we’re talking about seeing a positive GDP number.

Jobs not only lag, traditionally, but also we don’t expect them to recover quickly. Even the FOMC minutes had the unemployment rate staying above 9% in 2010 and above 7% through 2012. That’s not good news for the consumer, but it doesn’t mean that companies that are lean and mean, well funded, and have realized the benefits of tighter cost and inventory controls won’t make solid profits. The economic expansion, one that would benefit the employment rate, will have to come from new industries, not old. It was good news that the jobs bill overcame one hurdle, but it exposed the unseemly underbelly of politics. We have a moderate Republican that just won the Senate seat in Massachusetts. Senator Brown forgot that he was supposed to “just say no”. The bill moved forward and the Republicans were quick to show anger at Brown’s dissent. Part of this bill is to give incentives to new businesses, something Republicans favor. However, this is an election year. Success gives credit to the incumbent party. Failure is a weapon. What came out of this vote was a little more realization that the political aspirations favor “isle warfare”. The loser in this battle is the economy and the American people. If you think that this is a politically biased statement, it would be the same if the party roles were reversed! This is about politics and a horribly misguided political structure. If you don’t believe me, then watch today’s Congressional testimony and subsequent “tar and feathering” of our nation’s highest banking official on public TV for all to see.

Confidence clearly played a major role in the market’s reaction yesterday. We needn’t look any further than the Retailers, which had to fight for gains despite several positive earnings reports. The most notable were Home Depot HD (+1.4%), Macy’s M (+1.1%) and Sears Holdings SHLD (-1.9%). All three beat expectations, but the lack of consumer confidence suggests that the future may be more difficult than a positive past quarter. Missing the target, as was the case with Barnes & Noble BKS (-6.0%), sent the Retailers as a group lower. The S & P Retail ETF, XRT, fell 1.1%. Tech struggled after Brocade Communications BRCD (-23.0%) forecasted sales below expectations. Financials turned tail, as well. The S & P Financial SPDR, XLF, dropped 1.8%. Concerns over a bond issuance to cover Greek debt bolstered the Dollar Index, which weighed on the Basic Material and Energy sectors. In short, the very sectors that supported the rally, led on the downside. Technically, all we needed was a catalyst to start seeing the bounce for what it was, a very nice bounce off of support, but one that needs to be tested. The test has begun.