It was another wacky day on Wall St. I wanted to talk about the GDP number tonight. Merrill Lynch's David Rosenberg came out with a great research report today on this bogus number. I can't link his report but I will highlight it below.
Here are some things that Rosenberg pointed out.
- The GDP reported that earnings among the financials grew at a 27% annual rate. Mr. Rosenberg called this an "Alice in Wonderland" number.
- Per unit pricing came in at -3.8% which is the biggest deflationary drop in prices since 1949!
- He can't see how this number can be right when the inflation numbers are running so hot. CPI is running at 5% annual rate and the PPI is running at a 10% annual rate.
- Corporate profits are were down 9.2% in the second quarter.
- GDI(Gross Domestic Income) (This includes personal and corporate incomes) has contracted for four consecutive quarters from 4.6% in Q2 '07 down to 2.3% in Q2 of this year.
- Bottom line: They are non-believers in the GDP number.
My Take:
This Q2 GDP number is a joke. Rosenberg explains in the report that corporate and personal income contractions for 4 consecutive quarters are only seen during recessions.
The deflationary -3.8% on prices was startling to me. This is the biggest quarterly drop in 60 years.
So how can this happen when we have soaring inflation? My best guess is its all about the drop in housing prices and other assets. SUV's are dropping like a rock. I see sales everywhere. Outback is promoting a 10$ steak. I think this 3.8% deflation drop points towards a potential "deflationary collapse".
I understand where Rosenberg is coming from. As an economist, he doesn't understand how there could be such deflation in an environment of soaring inflation.
Some economists believe we can have both at the same time. Less disposable income due to price inflation drops the prices of assets: In other words, the consumer has less money to spend on assets because he is paying more for necessities.
Rosenberg repeatedly emphasized that the GDP numbers don't make any sense and I agree with him.
The headline of this report says it all: "2Q GDP tough to swallow. Needs a Grain of Salt or two"
The Stock Market Dislocation
The price action on certain stocks today was astonishing. The GSE's and financials soared. Equities as a whole rose based on the new mantra from the "bubble boys":
"Merrill Lynch & Co. became the latest major Wall Street bank to cast doubt on speculation the Treasury would directly support the companies, since both have adequate capital to offset losses for "several quarters."
The Merrill note on Tuesday follows similar comments by Goldman Sachs Group Inc. and Citigroup Inc. that threw cold water on bailout concerns.
Fresh calculations by analysts on revenue and losses suggest the companies, while stressed, can survive on their own, avoiding a government takeover."
Kass disagrees(from the same piece)
"NEW YORK (Reuters) - Hedge-fund manager Doug Kass said on Wednesday he is maintaining his short position on the seriously depressed shares of Fannie Mae (FNM.N: Quote, Profile, Research, Stock Buzz) and Freddie Mac (FRE.N: Quote, Profile, Research, Stock Buzz), saying the housing finance companies still face deteriorating fundamental conditions.
The founder and president of Seabreeze Partners Management shrugged off the recent rally in Fannie and Freddie, saying the companies continue to face higher funding costs in the latter half of the year as well as falling home prices.
"These two companies face not only a margin squeeze because their cost of funds is rising against Treasuries, but a deterioration in their primary earning asset -- which is the left side of their balance sheet, and that is the value of homes," Kass told Reuters in an interview."
My Take:
I agree with Doug Kass here(shocker right?). The pigmen know these companies will end up flaming out. They throw this news out there and then trade on it. They are willing to say anything to keep the game going.
This will all end in tears folks. The fundamentals are all very bearish as I have explained before. Dell had a huge miss in earnings afterhours tonight. Dell saw weakness in markets all over the world including Asia and Europe.
Bear market rallies are common folks! Rumors swirl and the markets react. Stocks trade on emotions versus fundamentals when the markets are under severe pressure.
This is why trading this market should only be done by the pros. This market can swallow a trading account whole in a few weeks because of the volatility. Invest with athesis and stick with it!
Bottom Line:
The market is only up slightly for the week so far. This three day move up on low volume is just another bear market bounce. Gustav will make his appearance over the holiday and could really throw the market into a tailspin if he takes out some oil rigs.
I am hearing this could be a strong category 3 or higher!
The big players are back to work on Tueday and it will be interesting to see what they do.
8 comments:
Any idea what GDP would be w/o impact of $timulus checks?
oppor
Good question. That sure helped a lot but I don't know to what degree. There are so many variables that go into that number.
Rosenberg just shredded the report. I wish I could have posted it up here for everyone to see. If you can get your hands on take a look.
These government numbers are such a joke. I can't wait to see the revision of this number later down the road.
FYI
I posted an important article in the forum.
It looks like Jefferson County AL. is going bankrupt. This county includes the city of Birmingham.
Expect to see a lot of this. These counties and cities spend spend spend thinking the money well never runs dry.
Well it did in Jefferson County. The same thing is going to happen to Wall St. One day the well will simply run dry.
There isn't enough money to bail out everyone. It seems like the many are trading the banks financials like they can't go BK.
Thats a pretty dumb bet. Jefferson county should be a reminder that entities can fail!
Jefferson is probably on the leading edge of something BIG. Assuming municipalities are spending all their tax revenue and more, the impact of decreased property, sales, tourist, etc. taxes has to come into play at some point. Then the inevitable cuts or more borrowing. I'd sure rather get it over with. The next decade(s) is going to blow.
oppor
My thoughts exactly. The whole thing feeds on itself. Housing hurts tax revenues, which hurts munincipalities, which then hurts wages and jobs, which puts further pressure on housing. Round and round we will go right down the drain.
The spend spend mentality of the US has got to stop.
Shut down the darn discount window at the FED and lets get back to the days where we had responsible banking institutions.
Banks are taking greater and greater risks because they think the Fed's got their back.
In the end, the bond market will force the government to stop the spending. When this happens towns, banks, and companies will have to either shape up or they will go under.
Wow
Fannie/Freddie trade is falling apart. Each are down about 15%.
Bank of China annouced that they reduced their Fannie/Freddie debt exposure by 25%.
Yikes!
The Jefferson County story has been perculating in some news outlets for about 2 months. The County was caught up in a Wall Street scandal as no doubt you've read by now. Ive monitored it on-n-off for awhile and am impressed that they've staved off the filing for 2 months & counting.
Sometimes the slow-turning wheels of bureaucratic justice are a good thing, i guess.
So what exactly does it mean when a county is bankrupt? Orange County filed years ago right? Obviously they didnt evaporate into atmospheric-bourne carbon molecules...and their credit rating took a blow...but im not sure what else it means. We'll find out, I guess.
I think they reign in spending avl
This will put further pressure on the economy. Less infrastructure spending. Less hiring etc.
The after shocks of this are whats bad for the economy IMO
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