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Data vs Greenspan By: Brian Sozzi

By: Brian Sozzi, Equity Research Analyst

It was not long ago that Alan Greenspan was a de facto market mover. The Maestro seemingly had his way with markets as they advanced or declined at the very utterance of the then Fed Chairman's mumbo jumbo type economic commentary. Fast becoming apparent to me is that Greenspan's sway was a result of him perhaps holding the most important position in the world rather than markets loving his approach with the English language. Despite Greenspan continuing to maintain a healthy work schedule, and of course he does not hold court with the average Joe, his words remain but a speck on the radar screen of market goers.

For example, can you imagine the market response to the following Greenspan commentary this weekend, say, when he was one week removed from the Fed post (obviously as Fed Chairman he was kept under wraps; Bernanke could learn a thing or two on this front as he all but rattled markets a few weeks back when noting the economy was "unusually uncertain")?

Greenspan: "U.S. is in a "quasi recession"
* Meaning: we may be adding jobs, but not at a breakneck pace; wages still an issue

Greenspan: U.S. is in a "pause" in the recovery
* Meaning: pause may be the start of a leg down

Greenspan: U.S. financial system is "broken"
* Meaning: banks should start lending given the stimulus they have gotten

These are powerful statements from a man that ran the Federal Reserve and continues to boast an impressive Rolodex (I doubt he carries a Blackberry). I found the second bullet point to be the most interesting for it's the "pause" in economic output that gets the market worried. As the 2Q GDP demonstrated last week, growth in the U.S. has slowed even though corporate investment picked up strongly. Consumers have retrenched modestly, and can you blame them? Household decision makers continue to fret over their job prospects (peep the latest consumer confidence measures) and wrestle with the reality that the recession altered the structure of their industries of choice (this creates uncertainty). In fact, what is the message underneath the eye-opening capital investment numbers in the 2Q GDP report? I will tell you; it's that businesses see a faster payback period on a new IBM computer or a conveyor belt system than investing in workers. Workers demand higher wages, workers require health insurance, and workers need sick days. Moreover, investing in machinery has tax advantages.
Overall, labor is a major expense for any corporation, an expense not easily ridded of if demand heads south (you could lay a person off but remember, the company put substantial investment behind developing that person's skills). Another reason for the investment in machinery or computers is it hopefully improves the efficiency and productivity of the workers it already has. Eventually, demand will pick up again, and companies are hoping that the new computer or conveyor belt will help delay the need to hire another worker.

So, while the market ended up taking the 2Q GDP report in stride, there are aspects that question where we are as a nation (big government, big deficits, work hard and get flipped the bird by Uncle Sam) and where we are at this point in the recovery (recession began in December 2007...technically the recession is already over, but it sure doesn't feel that way).

Color on Crude
By: Conley Turner, Research Analyst

Crude oil futures are trading markedly higher today as the broader equity markets are posting sharply higher gains. The rise in stock prices is proving to be the impetus for market participants to bid up the price of crude. The strength in the stock market is coming from positive earnings reports from major banking institutions HSBC Holdings PLC (HBC) and BNP Paribas. For the most part, there has been a positive correlation between the price of crude and the equity markets for some time now. Oil traders and investors have the stock market as a more accurate barometer for overall economic health and this has led to significant price volatility in the commodity. Also contributing to significant price swings in recent months has been news ranging from the sovereign debt crisis in Europe to higher inventory levels in the U.S. All of these factors put into question the prospects for an increase in near-term demand.

Nonetheless, recent economic data has conveyed that although the economic recovery may be slowing, it is still a recovery. A significant number of market observers have taken the position that economic growth is still in positive territory and the broader equity markets, along with the oil market, is responding positively.

After falling dramatically over the past few weeks, crude is now approaching the key level of $80.00 per barrel level. This level is important as it has become a key point of resistance for the commodity. As such, a breach above this level could set off some technical buying and provide the momentum for the next leg up.

Ahead of the Bell

The market looks to start the week on a happy note as it digests the fact that of the 300 companies in the S&P 500 that have reported 2Q earnings, 76% have beaten estimates. Many pundits are labeling 2Q as a "blockbuster" earnings season. To investors, I say be careful of buying into the hype (and when I say be careful, it means focusing on high quality companies as opposed to ones with questionable fundamentals and excessive valuations). Earnings comparisons for 2Q were quite favorable, comparing to a significant drop off in demand and still bloated operating expense lines last year. I maintain that the true test of the U.S. recovery and sustainability of overseas demand will start in the current quarter where comparisons for most companies will be to the beginning of the recovery and less operating expenses (fewer employees, fewer facilities, etc.).
Management at companies are well aware of this dynamic, the pause in U.S. demand now evident, and cooling in overseas re-stocking, which explains mostly soft fiscal year guidance ranges in the face of "blockbuster" beats on the earnings line.

Nevertheless, I appreciate the feel good vibes this morning, but I am also mindful sentiment could turn on a dime in front of Friday's employment report. Private sector jobs were supposedly added at a faster pace in July relative to June (ADP report is released this Wednesday); this seems valid to me given the inventory restocking that took place in 2Q overseas and companies loosening up on capital investment. After all, someone needs to unpack the new computers and flip on the lights at a manufacturing facility that is experiencing increased demand from government induced orders (and this is globally as stimulus measures are not solely a U.S. thing). However, is it all sustainable? If you can answer that million dollar question, send me an email.

Disclosure: none