2010Aug29 Week In Review
GDP for the second quarter, expected to be 2.4%, was 1.6%. In the next two months, revisions will likely lower the 1.6% closer to 1.2%. Without government stimulus, it would have been 0.74% and subject to lower revisions! However, the stimulus had more impact in Q2 than it had in 2009. With $4 Trillion in programs ending and extensions facing loud public objection, third quarter GDP could easily be less than 1%. Goldman Sachs’ estimated GDP forecast without stimulus funds is quite negative.
All government spending occurs by taking money out of the private sector. We have not found any analysis estimating GDP if the $4 Trillion had not been filtered through the administrative expenses of federal bureaucracy.
Consumer spending on durable goods continues to decline. Government’s GDP is calculated using 1937 manufacturing data and is slow to reflect the impact of consumer activity. Without job creation, consumer spending and GDP will not grow. The Manufacturing Alliance has reduced its forecasts for GDP and lowered its estimates of job growth by 350,000. The magnet for job growth will be in technology rather than highly unionized industries. The combination of taxes, regulation and higher cost of labor has moved manufacturing off shore for a half century. Until this trend changes, the jobs that created our middle class will continue leaving the U.S.
Neither the federal government, the stock market nor the economy reflect the serious shortage we are facing in continuing our Social Security Ponzi Scheme. Bernie Madoff is in prison for doing what Congress has been authorizing since SS was created. Even the SS Trustees admit to a $16.1 Trillion unfunded liability after allowing for future payroll taxes. Laurence Kotlikoff has been studying the issue for years. His estimates indicate a need for reducing benefits or raising taxes by 26%.
The next indicator of economic health will be the employment report on Friday, September 3rd. Adjusting for more terminated census workers, private new employment is expected to be tepid, at best. While the private sector has been hiring, it has not been sufficient to absorb +/- 100,000 new entrants weekly to the job market.
It is not news that real estate remains a drag on our economy and will be so for several more years. Nationwide, there were no reported sales in June or July of new construction above $750,000. There were limited sales above $500,000. Demographically, the buyers in the market are there for starter homes evidenced by sales below $300,000. Even the idea of home ownership is being questioned as a growth asset for one’s future.
Foreclosures continue to dominate revaluation. Lenders are not in the ownership business and, like it or not, will continue taking losses as properties are sold at auction. Just having a foreclosure in your neighborhood has a negative affect on surrounding properties. The government’s mortgage modification program included in TARP is failing. The majority of modified loans still end up in foreclosure due to either a decline in, or loss of, income.
The Buyer’s Home Tax Credit created a distortion in the timing of sales activity rather than creating buyers where none existed. The credit provided more benefit for existing home sales where sellers could more easily discount prices. Prices will fall further before reaching parity with new construction.
Since the end of WWII, bear markets in housing have been regional due to local events such as the closing of nearby military bases. Markets recovered due to demographic demand and community efforts to rebuild local economies. Never having dealt with a national bear market in housing, Congress and Keynesian economist assume a little “fix” will turn this situation around. They need to remove their rose colored glasses.
Hot on the tail of home foreclosures are commercial defaults where lender recourse is limited to taking title to the property. Businesses with mortgages much larger than current property value are playing hard ball by purposefully stopping payments to force lenders to write down balances due. If unwilling to negotiate, lenders are given the keys to the door. Whether they were banks or pensions, lenders “invested” in mortgages for a stream of payments to include interest and a return of their money. Either way, any loss is transferred to stock holders in the banks or real estate funds or pensioners. Borrower or Lender, one of them has to bear the downside risk.
Friday’s market rallied on bad news because it could have been worse. Individual sentiment from AAII is as bearish as it was in March 2009. Generally, that is a short term positive for the market. Maybe the job news will be considered to not be “that bad, all things considered.” The Summer of Recovery is rapidly coming to an end without supporting evidence.
During the week, the S&P500 (SPX) fell below its long term trend that began in April 2009. In concert over a few days, the bullishness of the NYSE, the NASDAQ, the Optionable Stock Universe and the All US Equity Universe reversed to negative trends suggesting a more defensive posture with respect to the equity market at this time.
With that change in risk in the market, now is as good a time as any to conduct a portfolio review in order to ensure the presence of technically sound names in your portfolio and weed the laggards out.
This year has seen its fair share of fits and starts with no real ability for emerging leadership areas to develop a sustainable trend. It is times like this that it is more important than ever to remain diligent, keeping your finger on the pulse of the underlying imbalances between supply and demand in the market place.
There are any number of examples of stocks that have recently broken down on point and figure charts and had their technical attributes drop below an acceptable level moving them into the “weak” attribute territory. Many of the big bank stocks would fit here as well as big names within the Technology sector.
“When the facts change, I change my mind. What do you do, sir?” - John Maynard Keynes
Our plan is “the plan will change.” What is your plan?
If you would like a free relative strength analysis of your portfolio’s sectors and positions, call us at 800-317-9119 begin_of_the_skype_highlighting 800-317-9119 end_of_the_skype_highlighting.