My Own Analyst

Did GDP Fall or Did it Rise?

Real GDP was reported to have declined 0.1% in Q4, which is really unchanged in the scheme of things.  The way the GDP is reported is really messed-up.  They annualize the change in the quarterly growth rate.  For all of 2012, Real GDP grew 2.2%.   The following are the numbers:

• Nominal:  Q4-11: 15321, Q4-12:  15829 (3.3% growth)
• Real:  13441 --> 13647.6  (1.5% growth)

Bottom-line:  Even on the surface, there is no reason for concern.  The real economy is 1.5% better than a year ago despite a tough quarter, with nominal at 3.3% (this is what guides company sales and earnings).  Looking below the line, weak government spending is the real issue, with the rest of the economy muddling along.  Q4 was tough, with it being post-election, pending sequestration and fiscal cliff fears.

Fiscal Cliff Doesn't Scare Economy

Profit-taking on options expiration as the "deal" fades.  Guess what?  It was never happening anyway.  

In any event, after a huge run, the markets are using the excuse to sell off.  We didn't lose any trades.  Med Device companies very weak - haven't heard, but the proposals to kill the device tax may be fading, as these stocks were slammed out of the gate.  The 2% tax is very harmful to smaller companies like MASI and MAKO - I think priced in to a great degree.

The big story - all of the early economic data today was strong, though consumer confidence was weaker than expected.  The big point is that unlike earlier this year or especially in 2011, the fiscal austerity issues aren't leading to economic weakness despite what we hear in the media.  Personal Income is the lifeblood, and the stronger (not strong - maybe "less weak") payroll data is translating into better income (and spending).  Durable goods up nicely and revised up prior.  

Bottom-line:  Forget the drama of the fiscal cliff and focus on what's really going on.  Hint:  Check out European stock markets...

Smoking Hot Payroll Numbers

Well, it's amazing what qualifies as hot, but these were excellent numbers.  Private payrolls of 184K were well above the consensus, plus there were positive revisions to previous months.  The only fly in the ointment was flat wages from last month.

The bigger picture is that the economy may be lifting despite all fo the concerns over the fiscal cliff.  Keep in mind, consumer spending is 2/3 of the economy, and confidence has been lifting along with spending.

Stocks are NOT priced for a pick-up in economic growth...

The Gift in the GDP Numbers

The market was down and is coming back.  While I am sure that 2.0 instead of 1.9 for Real GDP was better than a stick-in-the-eye, the real gift was in the deflator.  It came in at 2.8 instead of 2.0.  This means that NOMINAL GDP grew almost 5%.  Holy Smokes!  While that's a normal kind of number, we haven't had a number like that in a very long time.  NOMINAL GDP drives stock earnings ultimately...

This week has been frustrating.  Fortunately, all of the models are doing better than the market as smaller stocks have outperformed.  I don't see any real damage, though I have to admit that a lot of the earnings reports really blow.  I guess that's not too surprising.

Obama: The Deal is Sealed

Today's payroll report pretty much cements it for the President.  Right or wrong, 7.8 is lower than 8 - period.  The report was actually much better than last month's scary report, which was revised up by the way.  There were also previously reported "benchmark" revisions that paint a prettier picture.

In this report, which was not exciting by any stretch with the number of new jobs, we did learn that people worked longer and for more money.  This back and forth has been typical for the past few years - rarely do we see a trifecta of more jobs, more pay and more hours.  Last month had been the opposite.

While many think that Obama's potential reelection is "bad" for stocks, I don't buy that at all.  It's one of those misconceptions.  Romney's aggressive spending cuts (well, potential aggressive spending cuts - we'll see, as Big Bird reductions won't do a lot) would lead to a recession most likely.  I am not trying to be political - just economic.  The country might be better off taking bitter medicine - not my point.  History shows Democratic Party presidents are great for stocks.  

All of this ties in with my near-term forecast of piercing 1500 and sustaining momentum into November...

No Stops Violated

I am a bit encouraged that none of the short-term trades have been stopped out (yet).  The sell-off is not surprising - horrible payroll numbers by every stretch.  The upside is that there is likely going to be more fiscal and monetary policy response, though both of those forces are somewhat constrained.  Best scenario:  Weakening jobs creation leads to government addressing the fiscal cliff sooner rather than later.  Gold is up strongly, signalling coordinated easing policy -we'll see.

Not-So-Good Friday

The employment report surprised to the downside - 120K was well below the 200K new jobs expected.  The revisions to prior months were minimal.  While the unemployment rate fell to 8.2%, this was due to a contraction of labor participation.  The weak areas were in retail and in construction, which is odd because the weather was seemingly favorable.  Other components were in line with the prior consensus.  Stocks sold off (futures) by about 1%, leaving them a little below the lows of this past week.  Bonds rallied as the FED is likely to stay easy.

Gold, Commodities and Bonds Bend on Bernanke's Testimony

Bernanke testified before Congress today, and I think that investors may be inferring a potential change in the the interest rate outlook.  I don't think that he said anything specific, but I didn't hear the entire Q&A.  Gold is down sharply, and bonds are falling today slightly. The worst sectors in the market today are Materials and Energy.  

I continue to think that the FED is at risk of staying too easy too long - hence I haven't had a problem upping exposures to Energy and Gold in my ETF model and even in Top 20 to some degree.  This just looks like a trade for now, but it merits attention.  At the first sign that Bernanke is open to earlier rate hikes than three years from now, we don't want to be exposed to pro-inflation investments, at least in the near-term.   

Way Off Wall Street GDP Take

Everyone focuses on Real GDP, which is adjusted for inflation.  I have always focused on Nominal, which is the actual number.  Companies report earnings in nominal dollars and pay nominal interest payments on their debt and nominal dividends.

While there will be some talk today about the Real GDP, which grew 2.5%, being a little stronger than it expected (2.3%), I think that the real focus should be on the 5% Nominal GDP growth.  This is the first time it has been this high since Q1 and Q2 of 2010 and Q4 of 2009.  Before that, you have to go back to 2007. 

Why is this important?  A little inflation will go a long way to helping us grow out of this debt overhang.  We have been seeing shifts between real GDP and inflation such that high real GDP prints have been accompanies by low inflation and, more recently, both have been low.  We need nominal growth to pay back all of the nominal debt at the government and individual levels.

The "Goldilocks" scenario is that we can have just enough inflation on an economy that grows in real terms modestly, and today's GDP report smells like Goldilocks.  Markets LOVE Goldilocks...

This kind of report screams to sell bonds.  The 10-year Treasury over long periods of time tracks nominal GDP.  One quarter isn't a trend, but there is tremendous risk in my view to holding long Treasuries if we find Q4 ends up being like Q3.

Offshore Cash

There is a lot of speculation about Obama's speech on Thursday.  Some things seem obvious and are getting a lot of talk, like extending the payroll tax partial holiday.  One that isn't, but that could be a huge spark for certain stocks, is a holiday for offshore tax (think CSCO).  Many companies have tons of cash that could be used to pay dividends, repurchase stock, fund acquisitions or pay for capital investments domestically, but there is a tax penalty to bring it home.