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Tuesday, November 5, 2024

GDPhursday – No Jobs for US!

Do 18M unemployed people care what our GDP is?

That's the question the market will try to answer today as we get a measure of another 500,000 pink slips handed out last week.  Hopefully, by the end of the month, a net 450,000 of those people will find new jobs but what is the cumulative effect?  The bottom line is that, in the past 52 weeks, 25M people have lost their jobs and 20M of those people have gotten a job back or quit the workforce (which is just as "good" as measured by government statistics), which still leaves just under 6M people "officially" unemployed.  With 10% unemployment and the average person knowing 144 people, that means we have a population where each person knows about 14 unemployed people and, obviously, that is not good for consumer confidence.

Things that are not good for consumer confidence are not good for retail sales BUT today we will be looking at a very positive slice of the year in Q3, when we had Cash for Clunkers and we had housing stimulus and the stock market rose 20% while the dollar fell 7% and the Fed gave free money to the banks and IBanks, which drove many of them to record profits.  Our corporations are reporting a Q3 that is much improved over Q2 because global stimulus is pumping money in and, thanks to the plunging dollar, they are paying the American workers they have left 15% less than they did last fall.  That's right suckers – you accept pay in dollars and you are not even smart enough to do what Europeans learned to do long ago – ask for currency-adjusted wages! 

The farce in this earnings quarter is you have S&P 500 companies who collect 50% of their revenues overseas paying their American laborers in crappy US dollars.  PRESTO – instant 15% "efficiency" savings on real labor costs.  Companies have cut back on most capital sprending so when you see companies telling you how well their cost-cutting program is going, keep in mind that they laid off 10% of their workers and are paying the remaining 90% just 85% of what they were getting last year when measured in any major currency on the planet except the Dollar and the Yuan. 

What will happen when/if dollar get expensive again?  Most companies have already stripped fixed costs to the bone.  If they are forced to come up with 15% more net currency to pay their workforce, the only solution is to lay 15% of that workforce off.  That's why the Fed is in a weak-dollar trap.  They probably sit at the table each day and try to come up with more dumb things to say to make sure no one accidentally wakes up one morning and decides to buy dollars.  We don't have a strong dollar policy – we have a weak dollar prison! 

So happy GDP Day to you!  Whether the GDP beats 2.5% or not will be important to the markets for today but it won't change the long-term prospects.  We have gone neutral into the report, with a spread bet on the Dow moving 200 points one way or the other.  Whether it does it today or not is not a big deal, we have until November 20th to collect that bet so it seemed fairly safe…  Meanwhile, what is GDP really?  Here's a nice chart from Briefing.com listing the contributing factors:

Category Q2 Q1 Q4 Q3 Q2
GDP -0.7% -6.4% -5.4% -2.7% 1.5%
  Inventories (change) -$160.2 -$113.9B -$37.4B -$29.7B -$37.1B
  Final Sales 0.6% -4.1% -4.7% -2.9% 2.7%
   PCE -0.9% 0.6% -3.1% -3.5% 0.1%
   Nonresidential Inv. -9.6% -39.2% -19.5% -6.1% 1.4%
     Structures -17.3% -43.6% -7.2% -0.1% 14.5%
     Equipment & Software -4.9% -36.4% -25.9% -9.4% -5.0%
   Residential Inv. -23.3% -38.2% -23.2% -15.9% -15.8%
   Net Exports -$330.4B -$378.5B -$590.5B -$757.5B -$738.7B
     Export -4.1% -29.9% -19.5% -3.6% 12.1%
     Imports -14.7% -36.4% -16.7% -2.2% -5.0%
   Government 6.7% -2.6% 1.2% 4.8% 3.6%
GDP Price Index 0.0% 1.9% 0.0% 4.1% 2.0%

Notice that we have a MASSIVE change in Net Exports since last year.  Our GDP is about $3Tn per quarter and, since Q2 last year Net Exports have improved by $427Bn – that's 14% of our quarterly GDP!  Wow, that sounds great doesn't it?  Did we export more stuff?  Er, no, we actually exported 16% less stuff…  The secret to our success is we IMPORTED 9.7% less stuff, which makes sense since 9.7% of us have no jobs and probably aren't waiting at the docks for their new knick-nacks to be delivered.  

Nonresidential Investment was down 11% from Q2-Q2 and Residential Investment was down 6.5%.  So no Residential spending, no Nonresidential spending – who is spending?  Oh yes, government spending was up 3.1%.  We also burned off $123Bn in inventories, which is considered a positive based on the assumption that inventories MUST be rebuilt but what if we are "right-sizing" inventories for the new reality? 

Certainly this chart of Personal Consumption doesn't indicate to a savvy retail operator that they should be running out to stock up the shelves does it?  Along with the GDP this morning we need to take a close look at September Personal Income (down 0.2% expected) and Personal Spending (down 0.7% expected) tomorrow, as it seems to me we eneded Q3 with a whimper, not a bang, and the October data we've seen so far (Retail Sales, Consumer Confidence) has given the GDP bounce a very dead cat feel.

I mentioned in yesterday's post that we need to keep in mind that the GDP, even if it improves this quarter, is only an improvement since the last quarter.  We have had 4 consecutive negative quarters and, if we started in Q2 at a GDP of 100 then we lost 2.7% in Q3 (GDP = 97.3) then 5.4% in Q4 (GDP = 92.1) then 6.4% in Q1 '09 (GDP = 86.15) and 0.7% in Q2, giving us a net GDP of 85.6, down 14.4% from Q2 of 2008.  IF we go up 2.5% this quarter, that brings us back to 87.7. still 12.3% lower than we were in Q2 '08.

As we know, you can't just look at a stock and deduct 12.3% from it's Q2 '08 price to determine it's value.  That price assumed we'd be growing GDP at 3.5% a year, not contracting 12.3%.  So we have to factor in what our outlook is for the next few years AND, more importantly, we have to consider that the last 12.3% of sales in many, many companies may contain most of the real profits.  Cost cutting will only get you so far and, unless the dollar is going to drop another 20% over the next year, companies are going to have to start making some actual sales in order to make a profit.

OK, that's enough of that.  It's 8:30 now and the GDP (advanced estimate) report came in at +3.5%, so GS low-balled us by a mile yesterday when they dropped estimates from 3.3% to 2.7%.  Were they trying to force a bottom yesterday or trying to lower expectations or were they just clueless?  Unfortunately, as expected, we lost another 530,000 jobs (520K expected) but the most interesting thing happening at 8:30 is the dollar immediately dropped 0.5% on the release of the GDP report?  Do currency traders think a good GDP is inflationary?  The PCE is up 2.8%, that's a little hot but core PCE is up a tame 1.8%.   

So GDP is up 3.5%, that means that we are now back to 88.6% of where we were at the beginning of Q3 '08.  Only 4 more quarters of 3.5% growth to go and we are back to positive!  There was a huge increase in consumer spending this quarter as it rose 3.4% and contributed 2.36% to GDP.  Like the GDP itself, consumer spending was down 18% since Q2 '08 so we're talking about a 3.4% bounce off 82 to take overall consumer spending up to 84.8% of where it was a year ago.  BUT, on a quarter to quarter basis – what an improvement!  

In my last post to members yesterday I strongly warned the bears that it was a good idea to take profits off the table.  I had pointed out in the morning that we were very oversold and it would take a very small beat of the very low GDP expectations (thanks to Goldman) to boost the market but, looking over the data, I think we'll be taking the money and running on our long plays and going back to bearish as soon as we test our levels (assuming we fail).  Don't forget we were very bearish for the past 3 weeks and were just taking a cautious stance into this GDP report but th-th-that's all folks for likely econoic boosters this week as we get Personal Income and Spending tomorrow along with a deflationary PCE report, an iffy Chicago PMI, declining Michigan Consumer Sentiment and a shrinking Employment Cost Index, which may be good for some companies but does not bode well for a continuing consumer recovery.

Consumer spending (2/3 of the GDP) was boosted by Cash for Clunkers and we all know how quickly that reversed itself.  Also, as we expected, Business Inventories added 0.94% to the GDP because they declined by $130.8Bn.  Residential
 Fixed Investment was up 23.4% for the quarter as the other big stimulus program kicked in but we saw New Home Sales fall off a cliff in yesterday's report so not too sure that we'll have follow-through there in Q4.  The government also made a huge contribution to the GDP kitty with a 7.9% increase in spending on top of the 11.4% increase in speding in Q2.  State Governments, on the other hand, seem to be out of money and spending there fell off 1.1%. 

On the dark side, Business Spending cost us 0.24 GDP points as that fell by 2.5% due to Q3 cost cutting that gave us all those great earnings reports.  Aside from the 2.8% QUARTERLY inflation rate in Personal Consumption, we had a 1.6% QUARTERLY increase in Gross Domestic Expenditures so yay, I guess….

Over in Asia, they didn't have all this great GDP news and the Hang Seng gapped down about 400 points and stayed there for the day (down 1.8% AGAIN).  That puts the Hang Seng below the 22,000 mark at 21,264 but it's the Nikkei that's really concerning us as they blew right through 10,000 in a 1.8% gap down, finishing their day at 9,891. 

"Global equity markets are selling off as that dirty four letter word — R-I-S-K — reasserts itself after a monstrous rally that has far exceeded macro fundamentals," said Gluskin Sheff Chief Economist David A. Rosenberg.  DBS Vickers strategist Yeo Kee Yan said concerns about a rising U.S. dollar as a safe-haven play were also a factor. "We have seen the hot money flowing into Asia and commodity plays recently, but if the U.S. dollar rises, these dollar carry trades will unwind."

IMF raises its 2009-2010 growth forecast for Asia's economy, but warns that a fragile recovery in advanced economies and lingering problems in the global financial system pose risks. IMF sees Asia growth of 2.8% and 5.8% this year and next, up from 1.2% and 4.3% – far higher than the 1.25% growth expected from G-7 economies, but well short of the region's 6.66% average.

Europe pulled a tremendous U-turn after seeing our GDP number and those markets are now up 1.5% after opening about half a point lower.  I suppose we can keep things going as long as we keep pumping in more stimulus but I am very skeptical and not seeing a very pretty end game if that's the policy we're going to pursue (go deeply into debt for 30 years in order to have a couple of good quarters).   It would be a great plan if we were pumping up the country's books in order to sell it to some rival nation who does an LBO on America.   Wait a minutes – maybe that is Goldman's plan!  

We will remain watchful of our levels and let them guide us for the day.  We hit most of our numbers on the nose so no sense in abandoning them now.  As usual, the Dow is the least meaningful of our indicators and we'll focus on the Russell and NYSE as getting back over 6,900 is going to be pretty hard just a day after failing it. 

Be careful out there! 

 

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