100 Days With Obama, Still Bad GDP

Obama 100 daysJust as I had anticipated, indeed another devastating economic indicator which was given to the market was once again somehow manipulated into portraying a positive sign for the economy. The ignorance that is being shown from traders is amazing to me and, in my opinion, will come back to haunt many investors as more and more continue to believe in this new “bull market.” The economic data continues to try and warn us of real, fundamental problems that still exist in this economy and are probably only getting worse. However, many are choosing to turn their heads and just hit the buy button.

GDP came in worse than expected at -6.1%. Last quarter’s number was -6.3%, showing that indeed we are not making any quick turnaround. In fact, being that the first quarter is usually a stronger quarter, having a contracting report still remain so close to that devastating fourth quarter of 2008 is discouraging news to me. However, I obviously was the minority feeling this way as stocks came out of the gates running right from the get go. Volume still shows that indeed this is not the "everybody get back into the market" bull rally that many on CNBC are claiming this to be. I believe it was a short covering, end of the month, mixed with some PPT day of rallying.

News that was perceived as a positive indicator was the 2.2% increase in consumer spending. As I have said time and time again, consumer spending makes up 70% of GDP and that if we plan on turning this ship around, we need to get money into consumer’s pockets to get them spending again. So, this 2.2% increase is a positive sign, right? Once again, you are required to look at the full data.

Is it just me, or has anybody else found themselves eating at Subway a lot more recently? If you have, most likely it is because you want to take advantage of their $5 foot long deal. I never thought to go to Subway before that, as I never felt the price of their sandwiches justified it. However, this new price (which they are no longer offering on my sandwich) caused me to make several repeat visits recently. This seems great for Subway, but remember they use to sell a foot long sandwich for $8. This is a 37.5% decrease in revenues per sandwich. Imagine how many more sandwiches Subway needs to sell in order to make that profit up. Usually, offers like these are unsustainable and are given as a promotion, but during the past few months everything is being promoted.

This scenario, multiplied by hundreds of thousands of businesses around the country explains the reason for the slight uptick in consumer spending. How do I know this? Because of the inventories number. There was a 3.4% decrease in inventories showing that businesses are increasing their Cost of Goods sold and selling more of their inventory. Thus, people are taking advantage of massive discounts and spending a little. Big deal. I wish we could see of what percent of the spending was done on credit cards, but that's a whole different story. I heard many analyze this decrease in inventories as a positive indicator giving praise and saying this could be a sign to start re-amping production. For me, as long as housing prices stay down and unemployment goes up, people will continue to spend less and less.

Another discouraging sign in the GDP report is the huge contraction in exports. Exports being down 30% is the lowest we’ve seen since 1968. This just confirms that indeed this is a global crisis and that nobody is buying our goods just as we are not buying other’s goods. Having this be a global recession/depression can make things much more complicated than they were during the great depression. If indeed data shows that we have continued in a recession into May, it will mark an 18 consecutive month recession. This hasn’t been seen since the Great Depression. I discuss more GDP influences and consequences on today's premium podcast (subscribe here).

What can I say? The real data remains discouraging. You can nick pick and manipulate them to be anything you want, and many will believe it. However, there still remains too much evidence that indeed we very much remain in a bear market. We saw bear market rallies of this magnitude during the Great Depression. Another support to us being at the tail end of this rally, is the retreat we saw from recent highs during mid-day trading. Obviously, there is still technical pressure signaling that we are due for some selling.

Banks received love today, as they tend to do on strong buying days. I don’t see the reasoning, especially as you see the Bank of America CEO fired by shareholders. I find this move very convenient and coincidental that it happened only a week after allegations from the CEO surfaced about the Fed forbidding them to discuss their acquisition of Merrill Lynch to the public. I am sure that is the last time a CEO will publicly discuss their concerns with The Fed or government. Anytime companies have their CEO fired, it is usually not good news.

The signs and models are still on track for capitulation. Like I have always said, I am still waiting with the small positions I have until the signs are stronger and there is less risk. At any rate, I do believe May will be a red month. This rally has had its fun and I don’t see much of a future for it. The good news is that I continue to make my 10.5% return on my investment with Lending Club. Whether you are looking to invest or get a loan to pay off some credit card debt, it's worth looking in to. No late payments thus far and it is proving to be a great investment for me. Have a great evening and Happy Trading.

7 comments:

  1. McBalls Says:

    A mathematical correction to your post: $8 to $5 is a decrease of 37.5% in revenue for each subway sandwich and not 60%. The denominator used should be $8. Details details.

  2. Finance Fanatic Says:

    Good catch mcballs, I fell asleep at the wheel

  3. Boyd Says:

    Good call on shorting MAR. I immediately bought after your recommendation. Thanks FF.

  4. Finance Fanatic Says:

    Futures are up right now, but it will be interesting to see what we open at... volume creeping back in.

  5. Anonymous Says:

    Hi FF, so volume creeping in means that the market is really going up strong? I bought 3K shares of FAZ at 13. Wondering what should I do now? PLease advice:(

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