The first six of these reasons refer to the GDP number that came in last week at a 1.6% growth rate. Down from the 2.4% growth people originally thought, but better than the 1.4% revision people were expecting. Still, it was a great number:
A) It was positive. Certainly 1.6% growth is better than negative growth. We've now had 4 quarters in a row of positive GDP growth. Clearly we are not in a recession. Are we heading for a double-dip? I doubt it. Based on the conclusions below:
B) Personal consumption is at an all time high. In fact, the personal consumption numbers were revised higher. This despite the 10% unemployment. Once unemployment starts to go down, personal consumption (and GDP growth) should skyrocket. And, with inventories heading lower while consumption is increasing, unemployment is destined to fall (else, how will we restock the much-needed inventories).
C) Business investment in equipment and software went up at the highest rate since 1997. Remember what was happening in 1997? Every company was getting ready for Y2K, the Internet was booming, and the economy was great and getting ready to skyrocket for the next three years.
D) Dont forget that "real GDP growth" is the GDP growth rate minus inflation. The actual GDP growth rate was 3.6%. You always want to factor in inflation but I'm just mentioning this to note that growth is growth and I'm not really sure we had any inflation over the past quarter despite what the CPI index suggests.
E) Exports minus imports is factored into GDP. Part of the reason for the revision downward (GDP for Q2 was initially estimated at a 2.4% growth rate) is that imports spiked more than people thought. In other words, people are spending money. They are just buying goods made outside of the country instead of goods inside the country. Actually, thats not quite true. Exports were also revised upwards but imports were revised more. So, without this (i.e. without the fact that people are actually spending money instead of stuffing it under the mattress). GDP growth would've been revised even higher.
F) Corporate profits are up 39% year over year. Certainly thats a lagging indicator but it helps to explain why there is so much cash on the corporate balance sheet. In fact, corporate profits are gaining so fast that this suggests we could be seeing higher GDP numbers in the future as much of that additional cash will get spent.
G) Companies are spending their $2 trillion in cash:
- 162 companies have increased their dividends this year so far versus 2 decreasing
- $150bb worth of share buybacks have been announced this year versus $20bb for this time last year
Meanwhile, despite all this good news, Bernanke is getting ready for QE II: the next round of quantitative easing. This will surely drive stocks up. All ships will rise and I expect a year-end close on the S&P 500 around 1300, give or take. Stocks that could benefit include:
JNJ, a big Buffett pick. Dividends up 48 years in a row.
PG, dividends up 54 years in a row. Plus they supply all my beauty products.
MCD: The largest restaurant in the world (please bring back the McRib) and a dividend that has risen for 38 years in a row.
Chubb (NYSE:CB): Dividend up 28 years in a row. They buy back so much stock that over $7bb worth of stock has been taken off the market in the past 5 years. Insiders are buying the stock. The stock beats on earnings, guides up, etc. What's not to love? I bet Berkshire Hathaway (NYSE:BRK.A) is a buyer here.
Kansas City Southern (NYSE:KSU): More on this in an article coming tomorrow. Suffice to say I think this is a strong candidate to be acquired.
Portfolio Recovery (NASDAQ:PRAA): They buy consumer debt portfolios. These were selling for dirt cheap in 2008 and now PRAA is collecting. Trading for only about 10x forward earnings it's a solid play as people begin to pay back their debts with the economy starting to recover.
Disclosure: No positions