Options Trader Friday Outlook: GDPhew!

Well that wasn’t so bad was it?

The GDP of the United States fell "just" 3.8% in Q4 after falling 0.5% in Q3 and that is way better than expected by analysts who had gone to down 5.5% as the average prediction, with the Whitney/Roubini camp screaming that we would be lucky to be down 7%. We got a whiff of this last night with Amazon (AMZN) earnings and I rushed an update of our notorious "Stocks to Buy" list out to members because, as I said early this morning ahead of the report: "we may want to use it today."

I was all gung ho for a sell-off and we went short on Wednesday afternoon, but we got most of what we expected yesterday and I think now we should hold our usual buy levels (8,066 on the Dow, 820 on the S&P and 1,450 on the Nas doesn’t even seem to be an issue) and it’s time to do a little fishing. We are by no means out of the woods but maybe the woods aren’t as deep and dark as some people think. Exxon (XOM) surprised me with a beat off low expectations but a beat is a beat and we tip our hat to them for doing an incredible job managing a tough quarter. We covered our long puts with the $75 puts "just in case" and thank goodness we did, but I still like shorting them at $80 as the reality of $7.8Bn being the new $14.8Bn (last quarter) finally sinks in.

Before we get all back-slappy about the GDP, let’s note that inventory buildup added 1.3% and rising inventories aren’t always a sign of an improving economy - sometimes it just means things aren’t selling, especially after the holidays. So add that back in and we do have a 5.1% contraction in GDP - either way it’s the worst since 1982. On the other hand, our final GDP for 2008 was UP 1.3%, the weakest since 2001 and 2002 was no party either! Core inflation for the quarter dropped 0.6%, down from up 2.4% in the third and amounting to up 2.2% for the year while headline inflation fell 5.5%, a record due to the precipitous drop in energy prices and the end of the Ag bubble. Consumer spending fell 3.5% with a 22.4% decline in spending on non-durable goods - the worst since Bush the First in 1988.

Thanks to deflation of food and energy, real disposable income rose 3.3% and that money went into the bank as savings rose 2.9% in Q4. Business investment fell 20.1% in Q4 and that alone cost us 2.3% of the GDP. Software and equipment spending was off 27.8% and once again I will point out how amazing Apple (AAPL)’s numbers were given the circumstances. Non-defense spending by the government went up 14.1% but State and Local government spending fell 0.5%. Overall government spending added 0.4%. So, not a good report by any measure, but hardly the end-of-the-world stuff many have been expecting.

Over in Asia this morning, Japan followed us down 3% on news that their own Industrial Output fell 10%, but the Hang Seng gained a point and NEC announced 20,000 job cuts along with Toshiba’s 17% drop as their ratings were cut. I mentioned yesterday that I saw about 100,000 jobs cut in the earnings reports and the WSJ has put up a nice summary chart that shows I was way under - it’s actually 233,000 announced cuts this month! Europe is flat ahead of our open and Pharma stocks led the declines as Roche’s bid for Genentech (DNA) turned hostile as Roche went around the board, trying to push a lower priced offer out to the market.

Europe is mixed, even after our BTE GDP report, and we can expect the same from our own markets most likely as we head into the weekend waiting for more clarity from the government about the next $2Tn in aid for the economy.

Comments

[Jim Hawthorne:]

It's a sad day indeed when as you say, 'we head into the weekend waiting for more clarity from the government about the next $2Tn in aid for the economy'.

Have we really reached the point when we abandon fundamentals, technicals and even our own common sense and simply breathlessly wait for the next Big Government intervention to move the market???

Jan 30 10:46 AM

[Seeking Advice:]

RE: "Have we really reached the point when we abandon fundamentals, technicals and even our own common sense and simply breathlessly wait for the next Big Government intervention to move the market???"

From where I sit, the answer is clearly, 'Yes'.

Jan 30 10:58 AM

[RCA:]

3.8% surely seems better than the expected 5.5%, but it is a frightening number nonetheless! And I don't think we should hold our breath that this will be the "official" number. These things have a way of getting "revised." I dounbt that any revised number would be something to cheer about.

Jan 30 11:30 AM

[constantnormal:]

the 3.8% number exists only because the huge unsalable inventories that did not sell at Christmas counts as "production" in the GDP equation.

Take them out, and 3.8% becomes 5.1%. But Phil knows this.

And the numbers will, of course, be revised downward. The first taste of truth is always sugar-coated, if you can call a 3.8% drop "sugar-coated".

When you consider that this was for the strongest economic quarter of the year, and we are now well into the weakest quarter, with simply unbelievable numbers of unemployed being churned out, our Gross Domestic PRODUCTION for this quarter will make even the revised previous quarter look pretty good. I think that a 5% drop for this QUARTER, not the projected annual rate, but just due to this quarter, is looking possible.

And XOM was not so much "an incredible job managing a tough quarter" as an incredible job of managing refinery output in the face of huge drops in crude prices, to maintain sufficiently high prices of refined products. Slap them on the back and congratulate them for doing a nice job of managing their vertically-integrated oligopoly!

Jan 31 10:16 AM

[WayneS:]

3-7% = oligopoly ?
Many years ago Exxon sold crude to themselves,
refined this and sold at a lower price to the
customers at the gas stations. Texas fined
them for selling gasoline under market price.

Jan 31 10:54 AM

[Moon Kil Woong:]

Yes Jim Hawthorne I agree, too many people have thrown all sensibility out of the window. After all, why should they be sensible? The government's response to the crisis is not sensible. The banks, finance companies including big insurers like AIG, and auto industry aren't acting sensible about reforming themselves because why should they when they get rewarded for bad behavior that sometimes makes them huge windfalls and insures they never loose. So why should the average investor be sensible?

Believing the GDP number is actually how we did is also not sensible. Believing the inflation numbers that can be manipulated by several percentage points depending on how they weigh them is also not sensible. Beliving the Federal Deficit is not bigger is also not sensible. Believing banks balance sheets is not sensible. Believing in honesty and transparency is certainly not sensible. And believing the government's actions will be sensible is not sensible. Must I go on with this littany?

Thanks for the good posts as well. I enjoyed reading them.

Jan 31 02:30 PM

[Jake Berzon:]

If Philip doesn't think that Q4 numbers were bad enough, all he has to do is wait another three months to see the Q1 numbers!

Feb 01 01:32 AM