Woo hoo!
Get ready for a wild one today. We have the GDP at 8:30 and they're expecting -4.7%, an improvement from last quarter's -6.7% but Q4 started out at -3.1% with the advance figure (which is what we have today) and was revised lower and lower, easing us into the catastrophe. I pointed out to members last night that inventories and other items worried me that we may miss and we did head into the close 55% bearish as planned. We had another good day of turn calling as I send out an Alert to Members at 10:00 am titled: "DIA Adjustment Bullish," catching the nice move up we got in the morning and our 2:49 Alert was: "Back to 1/2 covers on long DIA puts," catching the drop-off into the close.
It seemed like the right strategy given our GDP concerns but the pre-markets are back up to those 2:49 levels but we'll just have to see what sticks. I already sent out an Alert this morning detailing our watch levels for the day and, at the bottom of this post is our new 2.5% rule chart (a mini version of our Big Chart), where I noted that NONE of the US indexes have made it back to the 40% off line while the Nikkei is still 50% off as is the Hang Seng with the Shanghai dancing around that line this week. The FTSE is the only EU index above the 40% line and just by 100 points so they would be most likely to show us weakness and we'll be keeping an eye on the UK until we feel a little safer at our levels.
The markets are up in pre-market trading but mainly because the dollar is sharply down on expectations of another round of quantitative easing by the the Fed in their 2:15 statement. Gold is back to testing $900 and oil popped back to $51 (up 4%) as the dollar has dropped a point against almost every major currency except the Yen, where it is being desperately propped up by the BOJ before it sends the Japanese economy off a cliff. The weak dollar caused the Nikkei to fall another 2.5% today (232 points) but the Hang Seng and Shanghai went 2.5% the other way led by a rebound in Transports, especially airlines, which will hopefully make yesterday's plays on UAUA and CAL look smart. "Swine flu continues to dominate market chatter, if not market action. While the outbreak is thus far small, the potential for expansion is large. Concern could degenerate into fear or panic," said analysts at RBC Capital Markets.
8:30 Update: As expected, the GDP was a miss – a huge miss, down 6.1%. Pretty much for exactly the reasons I laid out in our discussion yesterday at 3:42 with a decline in government spending, declining business inventories (not a bad thing but a negative to GDP), lack of home construction and, of course, residential investment – which fell by 38% as the markets crashed from Jan 1 to March 9th and knocked 1.36% off the GDP. Gee, who could have seen that coming? Certainly not economists, who averaged down 4.6% in their predictions but it's exactly what we were discussing yesterday in member chat! What is surprising is that the pre-markets are taking this number very well, possibly assuming this gives the Fed good reason to shake the old money tree some more and drop another few Trillion onto the economy.
Gold is certainly drawing that conclusion as it popped $900 again and the dollar already dropped another half-point against the Yen, down to 96.70. The PCE was up a manageable 1.5% so not deflationary and not so inflationary as to stop the Fed from pumping more capital into the game. I'd say my biggest worry from this report is that Trade added 2% to the GDP as imports fell (-34%) faster than exports (-30%) declined, but that was due mainly to oil averaging less than $42 for the quarter while it's back to $48 for March and April and that's another $2Bn a month right there. Also the chain-weighted GDP was UP 2.9%, indicating inflation is NOT as tame as the Central Bank would have you believe.
Europe is also holding up about 1% ahead of our open (9 am) but off the highs since the GDP numbers. There is growing pressure on the EU to do more to stimulate the faltering economies but the ugly truth is that the larger nations are keenly aware they need to keep cash handy, letting their own citizens take a hit, in order to have enough money to bail out a nation that is completely failing. It won't do Germany any good to spend $500Bn to give it's own economy a 1.5% boost when Spain completely collapses and sends the EU into a tailspin – this is something the individual citizens of the EU don't quite get about Union membership. The reason the US seems relatively stable is that we make centralized decisions for the whole economy. California doesn't get asked whether they want to bail out Michigan – it just happens and Americans do tend to think as if we are one big country, which allows our leaders to do what is necessary – even if it is a little unpopular. The biggest danger for the EU is that the Union will disintegrate as nationalism begins to take hold now that the economic pie is shrinking.
We'll see how well the GDP is taken this morning, my assumption yesterday is we would flat-line into the Fed at around 8,040 but I warned members that flat didn't mean we wouldn't go up 100 (to 8,130) then down 200 (to 7,900) and back up 100 (around 8,040 again) so we're looking for a wild ride today but we'll be impressed by anything that does finally take out our breakout levels (see yesterday's post).
