The headlines read that bank failures climbed 25% for the year last Friday, which is a little misleading. What's not misleading, however, is the fact that banks continue to be vulnerable as acknowledged by the so-called "Problem List" of banks released by the FDIC today. The surge in problem banks doesn't bode well for the overall economy. Small business lending picked up at small banks (with $1.0 billion or less in assets) but not enough to offset the abandonment of the large banks ($100.0 billion+ assets). Then there is the double-edged scrutiny that has accompanied all the talk of new financial regulation. But also let's not forget things are still tough and maybe getting tougher. All of a sudden consumer confidence takes a plunge, and home prices are down for the second month in a row on seasonally adjusted basis.

I will get into details on consumer confidence in the morning report and David Urani, our homebuilder sector analyst, reviews the Case Schiller home price report below.

As for the banks, on one hand the FDIC continues to lobby for small business lending, saying if its "prudent" after performing a comprehensive review of the borrower's the lender will "not be subject to criticism." Still, the situation at banks goes hand in hand with the situation of confidence on Main Street. According to David Rosenberg of Gluskin Sheff, bank lending in the United States is down $100.0 billion this year or an annualized rate of 16%. It's all about a lack of belief.

Case-Shiller Review
By: David Urani, Housing Sector Analyst, Wall Street Strategies

The Case-Shiller home price index decreased by 0.3% month to month in December, and by 3.1% year over year. The December results largely reflect the fact that the nationwide tax credit was set to expire at the end of November (before being extended), leading to some pricing power for consumers. Nevertheless, the housing market is still in very shaky condition to say the very least, and pricing is not particularly strong, even with the full effect of the tax credit. Similar to previous months, all regional indices showed month to month drops except for the harder hit regions such as Phoenix, Las Vegas, and Los Angeles which are coming off of severely depressed levels. The biggest decliner was Chicago, with a 1.6% drop month to month, followed by Dallas with a 0.9% drop.

Perhaps the only good news from the report is that the year over year decline are getting smaller, although it is now cycling over the market crash of last year. Otherwise, the falling prices may only continue to hurt consumer confidence and put homeowners more underwater on their mortgages. In the months ahead, we are looking for some modest strengthening as the tax credit approaches its April deadline and consumers rush to buy homes. However, the market is likely to weaken again afterwards, assuming the credit is not extended again.

Color on Retail Sector Earnings
By: Brian Sozzi, Research Analyst

Soft consumer confidence data is overshadowing generally positive reports from retailers Macy's (M), Target (TGT), and Home Depot (HD). Comments on the conference calls have also been positive, with the collective group of companies realizing higher customer traffic and willingness by consumers to buy non-essential goods.

I have revised my piece on Home Depot on our website, www.wstreet.com. Also, please check back later for an overview of the results from Target.

Final Note

We are not panicking, but we closed out many positions today as cash is important and everyone should be positioned to take advantage if the wheels come off. Earnings reports were on balance pretty good, with impressive guidance from several companies including Home Depot, which lifted guidance on positive comps and pumped its dividend by 5%. On one hand, we could say the news today is mixed, but that wouldn't be the truth. The news was a sobering reminder that now isn't the time to play games with the recovery, not the time to play politics, and not the time to take victory laps.