Markos Kaminis'  Instablog

Just a week after the anomalous reporting of jobless claims - less some of the reporting regions, claims climbed by 46,000, to 388K in the latest reporting. The funny thing is, the anomalous report from the week before was only revised higher by 3,000, to 342K. The Labor Department blamed seasonal swings and adjustments. My advice, look to the four-week moving average for better guidance. The 4-week average was 365,500 this week, and only changed by +750.

If all were logical in the world, or at least made sense in our climate controlled American environment, stocks should absorb a significant shockwave Monday. The blast would emanate from a series of new WikiLeaks on hot topics centered around Iran and North Korea. Information has been released offering many troubling insights on these two points in the Axis of Evil.

The information made public in many cases was already generally known, and not just in the common subconscious, but in plain sight of the stock market for years. Yet, perhaps due to its duration overhanging global order, the potential Iranian event has become something we have grown too accustomed to. The documents show intense Middle Eastern pressure on both the Bush and Obama Administrations to wage war on Iran. Meanwhile, those same Islamic nations have held subdued stances publicly, even perhaps appearing to Iran as allies. As a result, depending on how Iran interprets the leaked information, world order looks to have been reshuffled overnight. Thus, Iran, Israel and the US start the new week with completely different perspectives and images, and that is a frightening consideration for investors to ponder.

WikiLeaks was smart in its distribution methodology, releasing to several select major media organizations, so as to prevent the knock-down of its website today. This information is public and going to stay that way, like it or not. So the US is now engaged in damage control, with some analysts calling the damage catastrophic. The US is concerned that its allies may temper future candor in their communications with US representatives now, given this lesson served.

The WikiLeaks information itself is vast, and so I cannot cover it completely, but I can cover some of the key points of impact to US diplomacy and Iranian perspective (see www.wikileaks.org for details). Europe is flustered this morning, given revealed American intelligence indicating a potential sharing of missile technology between North Korea and Iran, passed down from Russia initially. The info expands Iran's missile strike range to 2K miles, from 1,200. That puts Berlin within range with about half of Europe. Iran could already touch all of the Middle East.

Information has been released showing Israeli interest in aiding the Palestinian Authority to wage a war against Hamas for Gaza. There are also indications that Iran provided secret aid to Hezbollah in its war with Israel. Clearly, with all the cards turned up, the game has changed globally.

What Iran should find most troubling is the allegations that its Islamic neighbors have been some of the harshest critics of it behind the scenes. Reports indicate that Saudi Arabia has been aggressively lobbying the US to use its military might against Iran before long. Reportedly, Saudi Arabia is even engaged in the weaning of the Chinese off their dependence of Iranian oil, committing to provide a new source flow in exchange for China's support against Iran in the UN.

Now, given the changed Iranian lens of perspective of the situation, and the realization of this by Israel and the US and its allies, you might have expected stocks to reflect a sort of wake-up call sounded in the investment community Monday (we did). After all, war could now be days away originated by any party, given the bluff is up. However, in early trading through 2:00 AM ET, Asian shares did not reflect such concern, outside of South Korea. However, these markets often simply follow the lead of US shares. European stocks better reflected a paradigm shift in geopolitical factors today. American shares have definitely done so, with the broad indices down more than 1%. As the WikiLeaks information is sifted through and understood more perfectly, most equities are at significantly greater risk, along with global order.

This article should interest investors in the shares of Barclay's (NYSE: BCS), Lloyds Banking Group (NYSE: LYG), Allied Irish Bank (NYSE: AIB), British Airways (NYSE: BAY), BP (NYSE: BP), British Sky Broadcasting (NYSE: BSY), Currency Shares British Pound (NYSE: FXB), DFA United Kingdom Small Company Fund (Nasdaq: DFUKX), iShares MSCI UK (NYSE: EWU), NYSE: BAC, NYSE: JPM, NYSE: GS, NYSE: MS, NYSE: C, NYSE: DB, NYSE: CS, NYSE: UBS, NYSE: STD, NYSE: WFC, NYSE: NBG, NYSE: AIG, Korea Fund (NYSE: KF), Korea Electric Power (NYSE: KEP), Korea Equity Fund (NYSE: KEF), The Korea Fund (Nasdaq: XKFDX), iShares MSCI South Korea Index (NYSE: EWY), Samsung (Korea: 005930.KS), Posco (NYSE: PKX), Hyundai Motor (OTC: HYMTF.PK), Shinhan Financial (NYSE: SHG), Lg Chem (OTC: LGCEY.PK), LG Electronics (OTC: LGERF.PK), Hynix Semiconductor (Korea: 000660.KS), Northrop Grumman (NYSE: NOC), Raytheon (NYSE: RTN), Alliant Techsystems (NYSE: ATK), Lockheed Martin (NYSE: LMT), Boeing (NYSE: BA), NYSE: IWM, NYSE: TWM, NYSE: IWD, Honeywell (NYSE: HON), General Dynamics (NYSE: GD), Rockwell Collins (NYSE: COL), Goodrich (NYSE: GR), L-3 Communications (NYSE: LLL), SAIC (NYSE: SAI), FLIR Systems (Nasdaq: FLIR), EMBRAER (NYSE: ERJ), Spirit Aerosystems (NYSE: SPR), BE Aerospace (Nasdaq: BEAV), TransDigm Group (NYSE: TDG), CAE (NYSE: CAE), Hexcel (NYSE: HXL), Esterline Technologies (NYSE: ESL), Teledyne Technologies (NYSE: TDY), Curtiss-Wright (NYSE: CW), HEICO (NYSE: HEI), Triumph Group (NYSE: TGI), Orbital Sciences (NYSE: ORB), AAR Corp. (NYSE: AIR), Kaman Corp. (Nasdaq: KAMN), AeroVironment (Nasdaq: AVAV), Smith & Wesson (Nasdaq: SWHC), DigitalGlobe (NYSE: DGI), GenCorp (NYSE: GY), Hawk (AMEX: HWK), LMI Aerospace (Nasdaq: LMIA).

Disclosure: No Positions

The second quarter GDP release was as expected, but we examine the factors behind the Q2 expansion and direct your attention to which of those drivers could disappear in the quarters ahead. With their absence, the economy should stall, and could very well slip back into recession.

The first news of second quarter GDP arrived in the "Advance Report" last week. This highly anticipated proof-to-the-pudding type of release produced the anticipated decline in the pace of economic expansion, to +2.4%. However, that slower pace came against a revised higher first quarter growth rate of +3.7% (revised a point higher after two previous revisions lower to 2.7%). This looks about as shady as it possibly could, but it's misleading in its graying.

A change to first quarter economic activity was not so much to blame as were benchmark revisions to 2007, 2008 and 2009 economic activity. The percent change from the preceding year in real GDP was revised down for all 3 years: from 2.1 percent to 1.9 percent for 2007, from an increase of 0.4 percent to 0.0 percent for 2008, and from a decrease of 2.4 percent to a decrease of 2.6 percent for 2009. The initial legs of economic recover were tempered significantly, bringing down levels of activity to an even more concerning point. Because of these revisions, Q1 only seems stronger than when it was initially reported. Q2 looks about in line, versus the Q1 level of activity.

What troubled investors was that last year's final two quarters, now old news and long forgotten (perhaps the gov't thinks so), have been revised to lower levels that reflect more moderate growth. Likewise, the first quarter of 2009's economic contraction was revised to a more moderate mark.

The "benchmark revisions" are what drove Q1 to look stronger than it initially did. Q1 was hardly changed in fact, but is now being compared to a significantly lower fourth quarter of 2009.

Q2 GDP Detail

The details of the report and anecdotal evidence reinforce our concerns about the second half of 2010. Q2 GDP growth was impacted by factors we see disappearing in the quarters ahead. Firstly, Q2 received a +0.59 percentage point benefit from residential housing, greatly due to the closings of First-Time Homebuyer Tax Credit assisted purchases. The impact of residential fixed investment on the first quarter was -0.32 percentage points. We expect this housing factor will at least offer a net zero impact to Q3, if not negative.

Government spending added 0.88 of a percentage point to Q2 GDP. Political pressure is building against the Administration with regard to its fiscal imprudence. Future spending must be funded by law now. Stimulus is running out, and is being allowed to expire instead of renewed. States are already cash-strapped, as evidenced by highly public troubles in California and New Jersey. Government help is going away, so this positive driver should see further limitation in the quarters ahead.

One positive of the GDP report was apparent business investment, especially in the IT sector. Equipment & Software spending by non-residential investors contributed 1.36 percentage points to quarterly GDP in Q2. This followed a 1.24 point impact in Q1. We continue to view pent-up demand as the key catalyst here; more so than organic growth on economic revival. Therefore, it cannot last for long without economic revival. However, we suspect it can last a bit longer and may still provide support to Q3, though perhaps less of it.

The impact of the change in nonfarm private inventories contributed +0.97 points to Q2, after a 2.57 point contribution to Q1. Inventory restocking looks to therefore be complete, and this driver should be a less significant factor in Q3 (nearing zero perhaps).

The important driver of the economy is Personal Consumption Expenditures, as this is the natural driver behind all things. Without it, we feel comfortable saying, little or nothing else could occur. PCE added 1.15 points to Q2, after a 1.33 contribution to Q1, +0.69 to Q4 09, +1.41 to Q3 09 and -1.12 to Q2 09. Spending is slowing folks, and as long as businesses are not hiring full timers, banks are not lending, and the global market place offers little outside support, this factor looks to moderate further.

Now, exports jumped in Q2, contributing 1.22 to GDP. This follows +1.3 and +2.56 contributions to the preceding two quarters. So, even while Europe struggles, Asian and other demand is holding up. We expect exports to continue to contribute, but we see a real tug of war between European weakness and Asian strength continuing.

Over the last few months, individual data points in key economic segments have offered this columnist enough anecdotal reason to raise alarm, and we continue to see the economic fundamentals pointing toward a double-dip, or at least stagnant state of economic development through the second half of the year. The greatest factor weighing against the prospect of double dip recession (and it's significant), especially now that the aggregate level of activity has been adjusted lower, is mathematics. Each quarter is compared against the previous, and so we would need to drop pretty hard to get back to those panic level lows of activity. That said, anchored unemployment, still conservative corporate spending (for the most part), and a highly uncertain geopolitical and political atmosphere offer a confusing environment for a confounded consumer. Look for the pace of GDP through the second half to at least moderate toward a stagnant state, and renewed recession is certainly possible under these conditions.

The worst case scenario remains highly possible as well. War with Iran could drive oil prices and the cost of energy into noose-tightening heights. Potential terrorism threats would also result here at home and in Europe, perhaps burrowing the consumer deeper into his hole. There is certainly enough reason to give weight to caution in investment decision making.


Disclosure: No Positions