Everyone is down on the GDP all of a sudden.
As I related Wednesday, the GDP, like the Beige Book report (which we expected to be poor), is made up of many factors like Trade Balance (same), Government Spending (up due to census), Personal Consumption (earnings reports indicate up), Residential Investment (HD and LOW indicate up), Corporate Earnings (way up), etc. The biggest etcetera is Inventories and they are a major wildcard. As near as I can tell, April was a very enthusiastic month and we began May with the "flash crash" but that was shaken off, so I have no reason to think orders didn’t continue to outpace inventory through mid-May at least.
We did, as we discussed, get the best Beige Book in two years in early June so I’ve gotta go with expecting two months of inventory builds that trail off sharply as merchandise went unsold in early June as the market collapsed and even the top 10% stopped shopping for a couple of days. Still, it seems to me that that was too late in the month to knock GDP below 2.7%. (See update below.)
We’ll find out shortly but Asia didn’t wait and had a pity party this morning with the Nikkei giving up all of the week’s gains, back at 9,537 so I’m still loving EWJ if we head higher but, if not, look for the Dow to begin filling that gap! The Hang Seng was choppy but held 21,000 and the Shanghai can afford to take a break at 2,637. India continues to be our top global concern as the Bombay Sensex continues to move to test the rising 50 dma as they fall to 17,868 and it looks like they’ll meet up next week in the 17,600s and that will be a very critical test.
Samsung knocked the ball out of the park with an 83% jump to record profits on amazingly strong memory chip sales. We can probably thank 64-Gig Smartphones and iPads for much of that gain but, holy cow! Net income climbed to 4,280,000,000,000 - too bad that was Won ($3.6Bn) but not bad considering our own chip giant, Intel (INTC), only hit $2.4Bn last Q. Despite lower chip prices, revenue was up 17% and I’ve already mentioned that Samsung has pledged $20Bn to become the World’s #1 solar power provider so you’ve gotta love these guys - unlike US companies, they "get" Capitalism and the concept of building towards the future…
Europe is trading down half a point ahead of our GDP and our own Futures are down about the same, as a wall of worries once again trumps 86% of companies reporting so far beating earnings estimates. Euro-zone Inflation is at a 20-month high (1.7%) as is Unemployment (10%) despite Germany’s extremely good numbers. As is typical globally, it’s the difference between countries that made infrastructure investments and the ones that didn’t.
8:30 Update: Damn, 2.4% GDP. That’s not good. On the other hand, Q1 GDP has been revised up a full point to 3.7% so you can take this preliminary estimate with a 40% grain of salt as our government is THAT CLUELESS in estimating growth -- which should not be giving you the warm fuzzies about their policy decisions… Consumer spending was 1.6% vs 1.9% in Q1 and that has a huge weighting, while business spending was up 21.9%, accelerating from 20.4% in Q1. Prices were up just 0.1% so inflation is contained to the point of deflation; and employment costs, which I said mattered more than GDP yesterday, were up 0.5% and it’s not good for companies if production costs go up while prices stay flat.
I’m very disappointed by this report but happy we can get a nice test of our rising 20 dmas to see if they hold up. Fortunately, my morning Alert to Members yesterday was to pick up the DIA Sept $102 puts for $1.95 and we added the USO Aug $33 puts at .35 and hung onto those as a GDP hedge. We added a Boston Properties (BXP) short play to our ongoing vornado Realty Trust (VNO) short and we weren’t suckered into any bullish positions all day, so, now that I’m looking back at it - I guess we weren’t all that bullish yesterday (but we did pick up a bunch of long-term bull plays on Wednesday, so it was a balancing day). As you can see from the chart, it’s likely to be the Nas and the Russell giving us the big test today but it was the SOX failure (which we expected) that kept us from being bullish about yesterday’s bounce (click to enlarge):
We’ll likely see oil test our $77.50 line once again and that’s going to be critical for them to hold. Gold took a bounce just over my $1,150 target but not enough to draw us in as they are down from $1,260. Watch that 2,200 mark on the Transports and, of course, Dow 10,200, S&P 1,070, Nas 2,200, NYSE 6,800, and Russell 635, but I’m not expecting any of those to break down unless the Transports lead us lower, so doubtful. More likely we will be holding our breath over the weekend where global markets could flush down the drain over worries on the US economy, or the Government could announce QE2 and we’re off to the races once again.
Timing is everything with these announcements and the Fed’s Jim Bullard floated a trial balloon for the markets yesterday, saying that the US is "closer to a Japanese-style outcome today than at any time in recent history." Bullard argues in a new paper that if deflation risk grows, the Fed should resume Treasury buys. Quantitative easing would be a better reaction to a negative shock than yet another promise to keep rates near zero, he says. Today’s GDP report will give the Fed additional firepower on Bullard’s side of the argument, for sure.
In other bad data news: We got the July New York ISM Business Index and that was down to 58.4 from 69.3 in June - very sucky. We get the Chicago PMI at 9:45 and that will send us to new lows if it’s as bad as NY, and then we get hit with the U of Michigan Consumer Sentiment at 9:55, also probably down [Ed note: nope, it's up] so the hits will keep on coming this morning and that makes for an excellent test day. I love test days - my long-term premise remains bullish if we hold up and we’ll discuss that on the weekend. So come on, bears - give it your best shot - you ain’t so bad!
Have a great weekend,
- Phil
