Friday, August 27, 2010

GDP & Negativity

The 2nd guesstimate for 2nd quarter GDP is expected this morning at 8:30am. The market has been awaiting this report for what it seems like a months. Ever since the trade figure's came out a few weeks ago, many have grave worries to the revision. The original 1st guesstimate was the economy grew 2.4% in the 2nd quarter, after the disastrous trade figures this was a fallacy. The market expects this figure to come in around 1.4%, a full 1% below the original guess. The market fears that this figure will come in at around 1%. My feeling is that its all about nothing. Who cares what the figure is. I personally think that the figure will come in between 1.4% and 1.7%, but that means nothing today in the bigger picture. Its all about stimulus and how the Fed is going to find another way to try and get this economy going. Bernanke speaks today from Jackson Hole, Wyoming, and I personally believe he will announce the official start of QE2. We will have to figure out how QE2 will help the two biggest economic headwinds which happen to be jobs and housing. QE1 didn't help but slowed down the progression. QE1 was a massive extend and pretend scheme, no doubt QE2 will be the same. The market gets its petrol from liquidity and this is mainly supplied by Bernanke. As I have stated, any notion of additional stimulus will have the USD move lower freeing up liquidity. The Aussie Dollar crosses which have been the primary carry trade that has propelled global equities will almost assuredly rally if Chopper Ben does what his name suggests. Bernanke is running out of bullets and is desperate. Desperate people do desperate things. Another interesting topic has been the Yen. The Yen is at 15 year lows and eyes are also focused on the BOJ. Will they intervene to stop the appreciation? They tried and failed badly earlier this decade so they are gun shy. My feeling is that the BOJ will intervene but not before the Yen moves to 80 or so vs the USD. The BOJ before they officially start any forex intervention will most assuredly start their own massive stimulus program. This is because last night Japan released these figures regarding the islands economy.

Japan's jobless rate falls, but deflation persists

The Nikkei dropped over 1% to its lowest level in 14 months immediately on its open, but was able to claw all the back up 1%. This is was good news for the bulls. Maybe that's a short term bottom for the Nikkei? Maybe the Nikkei trys to rally back to 10K on the backs of further stimulus and Yen intervention? Maybe JGB yields move higher just a tad? They moved up above 1% last night. This is needed for risk assets to get a bid.

The angst that the market has at the moment is quite negative. Its not absurdly negative but still negative. If we do get a GDP print above the consensus of 1.4%, this market most probably gets a bid. The risk off trades then need to be unwound. I am also thinking that the Euro which has gotten smoked from 1.34 down to 1.26 should rally back to 1.30 or so if risk assets get a bid.

Let me be clear. I still think this market represented by the SPX will hit 900 by late November and test the March 2009 lows of 666 by the 1st quarter of 2011, but the market never goes down in a straight line and rallies in bear markets tend to be sharp. We have seen this the past few months.

The economy has huge headwinds in the name of jobs and housing. Despite yesterdays surprise decrease in initial claims to 473K, jobs are in structural decline and a new jobs model must be created by the Obama Administration. Housing looks to be further correcting at the moment. All of this leads me to believe as the real economy slumps the Obama Administration will pump in more money. Where is the question. So far every stimulus plan has been announced to directly prop up the financial sector. This stupid and misdirected strategy has bought the knives on both sides of the political spectrum. The problem with stimulus was not the size but where it was directed to. Trillions of tax payer dollars directed at unproductive areas of the economy is not going to solve the underlying issues. My feeling is that the next batch of stimulus will again be directed at the banking sector, and gain that will fail. The stock market may find some footing here and get a bid in the meantime. Of course until the real economy rears its head and takes stocks down again. When the Obama Administration finally wakes up in the 1st quarter of 2011 after they have lost the House of Representatives, they will announce another round of stimulus, this time it will be directed at the root problems which are jobs and housing. The banks have to take losses on their mortgage portfolios. The bad debt needs to be expunged from the system. Only after we have a clear sense of what the bad loans look like and the plan to deal with them will the economy finally make some real headway towards growth. It won't happen overnight but it is at least a plan. Again, any stimulus needs to be directed at the real economy. This is where the multiplier effect is the greatest. The stimulus that was directed at the credit markets also worked in that it brought down rates and narrowed spreads. This made billions on Wall Street benefiting the financial fiefdoms while accomplishing nothing for the broader economy.

Ireland is currently undergoing serious issues, but they have a plan to deal with their bad loans. They created NAMA, a vehicle that takes the bad loans out of the Irish banking system. Ireland smartly went this route fully knowing that immense pain will be inflicted on their citizens and government. It was the right thing to do going out into the future. In 5 years time we will look back on Ireland and say "These guys did the right thing."

Back To Negativity.

I will leave you with this:

Investor sentiment has taken a turn for the worse. Its at an extreme bearish reading. This is a contra indicator.

The Investor’s Intelligence Survey showed a drop in bullish sentiment to just 33.3% while the AAII Survey showed a decline to 20.7%. Both surveys have now decline to historically low levels. The bearish sentiment is at 50%, which is not as bad as it was in March 2009 when 70% were bearish.

The AAII states:

"Bullish sentiment fell 9.4 percentage points to 20.7% in the latest AAII Sentiment Survey. This is the lowest that expectations for stock prices to rise over the next six months have been since March 5, 2009. The historical average is 39%."

"Neutral sentiment, expectations that stock prices will stay essentially flat over the next six months, rose 2.4 percentage points to 29.8%. The historical average is 31%."

"Bearish sentiment, expectations that stock prices will fall over the next six months, rose 7.0 percentage points to 49.5%. This is a seven-week high for pessimism. The historical average is 30%."

"As stated above, bullish sentiment is at its lowest level since March 5, 2009, the approximate bottom of the last bear market. Short-term market bottoms also occurred when bullish sentiment fell to 22.2% on November 5, 2009, and 20.9% on July 8, 2010. However, bearish sentiment was above 55% on all three of those dates, versus its current reading of 49.5%."

My feeling is that if we get a GDP print above the consensus, this market will rally nicely. If Bernanke gives the market any indication of QE2, we will see a big rally.

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