So which economic numbers are correct? October has proven to be a very confusing month for investors. Housing bulls are accusing others of cherry picking economic numbers after data proved to be stronger than normal. But in reality the housing numbers are just as confusing. Yes, last week's existing home sales were strong but 24% of those sales were from distressed sales. Now this is not to denigrate the numbers but one has to look through the headline number to the bottom line. Distressed sales are not a true indicator of existing housing demand.
Second quarter GDP has been revised to a slow 1.3% indicating that the economic recovery is spinning its wheels rather than gaining steam. The initial third quarter GDP report came in at 2% but .7% of that was due to the US government opening the spending taps ahead of the election.
Third quarter corporate earnings report are coming in worse than expected, a surprise since estimates have already been ratcheted down after second quarter earnings came in slower than expected.
The technology sector has been especially disappointing with Intel (INTC) revising down revenue estimates by $1 billion dollars, Google's (GOOG) big miss, and Microsoft' s (MSFT) slowing revenue growth.
We have seen that Facebook (FB) and Zynga (ZNGA) were not ready for the public spotlight and it has set social media back. These two failed IPO's will make social media companies reassess if they ready for the public markets now or in the future.
But the good news is right around the corner; the recent refi boom should provide a boost to Christmas retail sales which will flow through to the first and second quarter of next year as inventories are rebuilt.
Sandy reconstruction should provide a temporary boost to GDP next year as well as houses and towns are rebuilt but this bump is temporary.
The key is to watch the Inventory to Sales ratio and the HSBC Market Chinese PMI along with empty containers leaving West Coast ports to be refilled in Asia. Empty containers going back to be refilled are a confirmation that retailers are restocking shelves.
The refi question that I am looking for is how many refis are going to people whose mortgages are still underwater bringing them back up to par and how many are cashing out equity?
In either case we are not going back to the mortgage heyday of a decade ago despite the best efforts of the Federal Reserve to recreate the housing bubble.
Banks are seeing their margins being crushed under the weight of QE. The fallout from Ben Bernanke's master plan is that he expected low yields from US Treasuries would force banks to start lending but low mortgage rates have crushed yields as well leaving banks caught between a rock and a hard place. Neither option, either lending or holding Treasuries, appears attractive right now.
Until then expect the market to trend lower as the some value is put back into the market. Right now investors should be waiting for lower prices as stocks are expensive. The S&P 500 (SPY) is trading close to 16 times earnings; expensive considering earnings growth this quarter is negligible at best. Earnings estimates for the fourth quarter and 2013 do not reflect economic reality.