Stocks Celebrate Lower Dollar, Not GDP

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 |  Includes: DIA, FXE, KBE, QQQ, SPY, UUP, VTI
by: Carlos X. Alexandre

On Thursday stocks celebrated the latest European patch, and it appears that a recession is not in sight, which doesn't quite explain why over half of the dollar tumble only occurred after the GDP numbers were published. But this a market driven by currencies, and when the bases are loaded with short positions, or long on the opposite side, this is what we get with a home run - and please see "Managing Risk For Successful Trading." Had GDP truly impressed and driven the dollar up, the market would have sunk.

To add some perspective to where we are, I shall refer to a Bloomberg story, "Currency Traders Suffering Worst Year Since 1991 as FX's Taylor Loses 12%." This is truly not our parents market, and the ongoing uncertainty will persist.

Whipsawed by slowing global growth, central banks fighting currency gains, and swings between optimism and despair over the 17-nation euro area's debt crisis, traders are reeling from losses in an environment that should have favored them. "What's really frustrating is that we're supposed to do well in a lousy world market," said John Taylor, the founder of New York-based FX Concepts LLC, the world's largest currency hedge fund.

But good news are always welcome, and 2.5% growth is nothing to sneeze at, considering the conditions. But I have a few problems with the last GDP reading, and we'll get a revision in one month's time. Even with the euro in the background, the dollar reaction tells us that the recent Fed talk about QE3 will most likely materialize in one form or another, although I think that it's a waste of time. But I don't fight the Fed, I just play along.

In addition, U.S. exports will benefit from a lower currency, but we have an economy that is the one least dependent on exports on the face of the planet, and growth pressure will be added to Asia and Europe.

Just recently the Conference Board Consumer Sentiment reading (chart below) showed the weakest number since 2009, yet one is to believe that consumer spending is returning to normal, or even just getting better.

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Retail sales, as published by the Census Bureau on October 14, were up 1.1%, but the chart below highlights the weakness for the preceding months, which contrasts with the strength shown in the GDP numbers. And with savings rates declining as well as incomes, I certainly fail to see how the party will keep going on.

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One bright spot, as Bloomberg reported, was business investment, which grew at 17.4% and added 1.2 points to GDP. But there's a bit of a tax incentive in the background, and it adds an artificial flavor to the real thing.

A rush to qualify for a larger government credit may be contributing to the increase. The Obama administration's tax compromise allows companies to depreciate 100% of investment in capital outlays in 2011 and 50% in 2012. "A lot of the strength is being driven by tax incentives," said Aneta Markowska, a senior U.S. economist at Societe Generale in New York.

Two things are true: business investment takes place when consumer demand is on the rise and/or to extract efficiency from operations, and I can see the latter, but not the former. Lastly, the National Association of Realtor's Pending Home Sales delivered an unexpected 4.6% drop - I take their data with a grain of salt - and coupled with other housing data, the industry is at a virtual standstill.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.