Thursday, August 26, 2010


Just wanted to make a quick post reminding everyone that tomorrow morning we'll have a release by the government stating the second quarter's revised GDP report. As you can tell by how the market has been trading, there are now lowered expectations for growth. In the last month expectations have dropped from 2.5% to now somewhere around 1.4%. So needless to say, the market has a lot of emphasis put on this one information release.

A print of greater than expectations would probably goose the market higher right at the open while a print in the low 1.0% area will all but deliver a final body blow to those that have been suggesting that we are not going to double dip. Don't you recall back in April when you were hearing people say that there was no chance of a double dip? I sure do, I got a few emails stating that I was always emphasizing negative data and we weren't going to have another peek at recession.

As I mentioned to them, they were probably correct, but only because it was evident that we didn't ever come out of one.

Anyway, since the expectations in the market have been so managed and the tone in the market is pretty negative it may pay to at least think through the contrarian view. I almost expect to see any large gap down met with buying if the number is nasty (1% ish..).  If the number comes in above the managed expectations, we may see a jump, but I think we'll sell off after the fact as people will realize that the market is bouncing because it is happy about a less bad horrible scenario.  The only thing that holds me back here from getting long if we have some upward momentum is that we did close under 10,000 again, we still have really negative technicals, we are entering the September and October period which is usually more horrible than other months. In addition, we closed very poorly as folks crowed out to get out of the way of the GDP report. This clearly wasn't an end today with positive conviction.

Finally, if GDP announcements weren't enough, the Fed's round table meeting in Jackon Hole, Wyoming will wrap up and if the GDP number is very negative, expect our Fed Chairman to come out with unusual and extraordinary doses of financial shock and awe! I'm guessing that he'll admit things are slowing and suggest that the Fed has lots of ammunition to deal with the decline in growth. Of course all the measures won't really be effective and will not really produce any meaningful improvement long term. The issues are still cemented in place and we won't see any REAL improvement until they are attacked. Just so we have a handy list, here they are;
1) People don't have jobs
2) Because people don't have jobs and they've been without one for a long period, they are losing their homes to foreclosure...
3) Because people don't have jobs, they can't buy these foreclosure homes left by their neighbors.
4) If people have a job and still have a decent credit score, they might be able to refinance, but if they do refinance, they are using that to pay down debt, not spend more. (The Fed has wanted more spending not paying down debt).
5) Having said that, most people with jobs don't have a decent credit score, and therefore cannot refinance their mortgage.
6) Many others not buy houses either because they don't have 10% or 20% to put toward a down payment.
7) Without buyers, housing won't be fixed and banks have begun actually enforcing and processing foreclosures which will add more inventory to the huge backlog of unsold homes.
8) Against this backdrop, Mom and Pop have stopped spending and are now believers in paying down debt and bragging about how little they paid for clothes at Target and Wal-Mart.
9) Businesses cannot sell products to people that don't have jobs, don't have large houses they never really couldn't afford in the first place, and sell fewer products to people that are bragging about how little they spend now.
10) Businesses now face a working environment where they do not have certainty about their future sales, tax, and regulatory environments. In other words, they are pretty sure that their sales are stagnating, taxes are going higher, and they will be forced to pay more for health benefits for their staff and any new people that might be added. Since they have convinced themselves that this is highly likely they are not attempting to add staff (expenses) when their sales are flat to declining.
11) Because business profits are declining, tax revenues for cities, states, and the federal government are horrible.
12) Because cities, states, and the federal government have become accustom to ever increasing taxes they have been devastated for their long term mismanagement of our dollars. They have overspent on useless projects, promised free benefits to everyone, and richly compensated themselves with healthcare and pension plans that are without match in the private sector. These shortfalls of revenues for the second year will add to layoffs of government workers and reductions in benefits (if we tax payers are lucky).

And to fix all of these problems our Administrations, Congress, Treasury Department, and the Federal Reserve have attempted to rescue us by issuing more debt and even gone so far as to buy more of our debt with our own money.

My guess is that Ben Bernanke will tell us tomorrow that he's got it all covered. He'll stimulate the economy, get jobs growing, get banks lending, and do it all through the power of financial engineering and monetary policy. Call it QE (Quantitative Easing), call it debasing the dollar, call it outright purchases of stocks and bonds, no matter what he calls it, it will be an attempt to cover up the core problems and its real impact will be to destroy the value of our currency and further drive us into an oblivion of unpayable debt.

Cross your fingers, tomorrow will be interesting.