Double-Dip Watch: GDP Report Was Mixed UPDATED

I have been running a double-dip countdown but Friday's GDP report was ambiguous as to the imminence of the double dip even as it was generally greeted as confirming a second-half slowdown and bringing the double-dip in closer. Hence rather than tick the countdown down I will put it on hold and see what the mixed signals mean. 

UPDATE: JP Morgan says that the Friday GDP number of 2.4% annualized will be revised down to 1.7% after new data on non-durable goods that came out Monday. [Other updates in italics below]

The Street's view was of slower-than-anticipated growth with smaller-then-forecasted increase in personal consumption. Goldman predicted even lower growth, so it came above their expectations, but below the median. Still, put this in perspective:

• Early this year predictions were for 4% growth in Q2
• A month or so ago predictions were lowered to 3%
• Last week the consensus became 2.5%

So we already have a second half slowdown, even before the second half starts - a slowdown in expectations. And doubtless the Q3 predictions will be lowered as well, since the key takeaways are discouraging:

• Inventories are slowing: Inventory rebalancing was increased in Q1, but more than final sales, and was lower in Q2, indicating inventories are about to go from a positive to a negative in GDP
• Personal consumption is slowing
• Residential investment will drop: it was boosted by the homebuyers credit

Still, almost all components were positive:

Another mixed message from the report: the Great Recession has been worse even greater than thought. GDP going back to 2006 was lowered, and the dip in 2008 was deeper than previously reported. In effect, we were already treading water back in 2006, before the recession officially began, and have now had 3 1/2 years of slow to negative growth. On top of that, the cumulative drop in GDP was deeper even as the recovery out of the dip is slower. 

 

Personal consumption was also lowered in prior years, and as The Big Picture summarizes, the key contributors to Q2 GDP growth were government largesse, while personal spending was below expectations. A toxic cocktail for Q3 and beyond, as the Stimulus ebbs, the States face huge budget disasters, and the consumers are saving again.  

 

All was not bad, however, which is why the report is best characterized as mixed. Bright spots:

• 21.9% rise in spending on equipment and software. 
• 4.1% rise in real final sales, up from 1.3% in Q1.

Unfortunately, these categories are not enough to make up for the shortfall in inventories and residential investment. Pending home sales fell to a record low in June. Much of the rise in real final sales was due too a surge in imports, up to 29% from 11% in Q1, while exports were up only 14%. As a consequence, real final sales of domestic production only expanded at 1.3%, barely up from 1.1% in Q1. Also, the great increase in business spending, which we would want to bolster production, probably is not for those purposes. We have too much capacity, and companies are sitting on cash rather than expanding. I suspect that the increase in software mirrors what we saw in the Great Depression: companies hoarding cash since they lacked good places to invest for growth, and spending it instead on productivity tools such as IBM punchcards (then) and new PCs (now). Hiring machines instead of people. 

Other mixed news comes from outside the report, and could support a GDP growth of 3-4%:

• GM just reported a 25% increase in auto sales*, while Ford and Toyota rose only around 3% .. overall auto sales were up 9%, a good sign
• Global chip sales up 45%
• ECRI's growth index fell further, to -10.7% from -10.5%, but their index rose a bit 
• The National PMI index fell, but less than expected, from 56.2% to 55.5%. A reading above 50% indicates expansion, so no recession indicated, but the trend is down. (See chart below.)
• The Chicago PMI came out higher than expected, at 63%; up but still below April's number

* GM sales increase is artificial since it was in bankruptcy the first part of July a year ago.

 

Optimism aside, other indicators beyond ECRI also point down, including the latest from the Consumer Metric Institute, which is definitely pointing down:

My take: the mixed report has some glimmers of hope, and we might see more inventory building than expected due to anticipation of a good holiday sales season. This is apparently what drove the surge in imports. The impact would be a positive Q3, although maybe in the 1.5-2% range, and a positive Q4, seasonally at a higher annualized rate. The double-dip may emerge in Q2 next year at the earliest. 

Comments

[Hockthefarm]

Yelnick:

More great reading, thanks.

Have you got a feel for what the punditry is expecting in terms of the size of the crash that is expected in the A/S/O time frame?

Dent is expecting a minimum of a 4000 point drop in the Dow by December. A real crash. Prechter seems to be in a similar boat.

I have a hard time getting there. If I get short at all, I'd probably exit after a 10% decline.

Thoughts appreciated,
Hock

[yelnick]

Hock, EWI would say at least to Sp860/Dow8K with more downside possible. He says either the deepest point is reached early (as in 1933) or is reached at the end, in 2016. Hence if we bounce off 850 or so expect a deeper fall in 2014-16.

Neely expects his triangle to have a final wave down (e) and then we have a C wave to around the April highs before the next drop. No guidance on that expect he does not expect the Mar 2009 lows to be breached.

My count is different than either of these guys but of course I am not the pundit. I like the constant-dollar count above the nominal one, and hence have the 1929 correction extending to 1949, and the 1982-00 move as wave 3. We would then be in wave 4, and it should run around 16 years. I count the 2000-2009 as a flat and the Hope Rally as an X. The next wave would be another corrective period, and it is too early to determine what it is other than to say it is likely to be more complex than the X wave. The X is a zigzag of sorts so the 2d corrective wave is likely to be another flat or a triangle.

A triangle would be interesting, and might look like this:
- leg A is what we are in and it ends around 850 (more on this below)
- leg B goes back up and would look like the typical Presidential cycle bull run into 2012
- leg C would be the drop after, regardless of who wins, say into 2014 (four year bottom)
- leg D would be a fake out into 2015
- leg E would finish this off around 2016-7

Hard to say its shape other than that triangles tend to be sideways, so leg A may be the deepest. This troubles me since manias tend to retrace to the start, which I would peg as 1994 or around Dow4K/Sp400. Possibly leg A goes much lower; or maybe this will break as a flat as follows:
- wave A to 850 in 2011
- wave B a triangle that goes sideways thru the election in 2012 with an apex around halfway back up (Sp1000)
- wave C a deeper dive that goes to below Sp500 by 2014 based on A=1150-850 or 300 pts, and C = 1.6x A or 500 pts

[trendlines]

Last post called for upside towards 1130 on a break above downtrendline. Price has risen in a wedge, and currently facing resistance at the "right shoulder" around 1126. Looking for some consolidation here at the very least.

http://trendlines618.blogspot.com/2010/08/s-very-short-term-consolidation-ahead.html

[Hockthefarm]

Thanks Yelnick, I like your count.

I think Dent is a smart guy, I like his approach. That is why I have had so much trouble with his extremely bearish views right now and keep asking "what's he missing".

Then I read a respected article like this that doesn't fit the puzzle at all and figure maybe he's really got it nailed:

http://www.marketwatch.com/story/the-biggest-lie-about-us-companies-2010-08-03

Seems to me it's the old Nostradamus / not so fab four proletariate pablum on a much grander scale.

If you buy into the notion that the vast, vast majority of money entering or leaving the markets on a given day is propelled by fairly simple people (along the lines of a realtor or house flipper), then it is not so much of a stretch.

It begs the question of how we got into this mess in the first place. Sure there were a few puppeteers at the top. But even those folks could not have pulled it off without a massive hoard of goofballs to take the hook. Maybe that explains today's markets. Let's not forget the financial genius that couldn't read or write who bought the 500k$ house and was able to put the pool in 6 months later because of appreciation. We forget that he now raises his kids in a sublet basement over at the inlaws.

Hock

[Ted]

Arch Crawford says watch August 1, 2010

GIVE OR TAKE A WEEK

http://seekingalpha.com/instablog/234091-hewitt-heiserman/61457-rare-cardinal-climax-planetary-alignment-this-summer-puts-stocks-at-risk-says-veteran-sky-watcher

[Account Deleted]

Dow Jones futures before opening bell
http://niftychartsandpatterns.blogspot.com/2010/08/dow-futures-before-opening-bell.html

[MHD]

Yelnick.... if this is a "Wave 2", then it should not go much past 1140 as that is the 61.8% retrace from 1220-1010. As you have posted Fib history on Wave 2's there is only a 7% chance that this is a wave 2 and will top between 1140 and 1220. Not good odds to say the least if your bets are to the downside!

[MHD]

That is....if S&P surpasses 1040.

[MHD]

Correction 1140

[cribrange]

In 2004, Harry Dent said this :

Dow 40,000, Nasdaq 20,000 by 2009; Harry Dent predicts a 'New Millionaire Economy'
CBS MarketWatch.com ^ | 11/03/2004 | Paul B. Farrell

Nice.

Cribrange.

[yelnick]

Hock, nice article. US corps sit on record cash - but hold record debt. Needs to be written down. Hence the real reckoning lies ahead.

[yelnick]

MHD, if we use May25 as the end of wave 1, the 62% retrace is 1220-1040 (rounded) implying 1152 or thereabouts.

[Roger D.]

MCD

http://www.screencast.com/users/parisgnome/folders/Default/media/21c20c75-ca36-4b6d-aa91-3555e517941d

Roger D.

[Michael]

"Hock, nice article. US corps sit on record cash - but hold record debt. Needs to be written down. Hence the real reckoning lies ahead." - Yelnick

Yelnick,

When IBM can sell $1.5 BILLION of 3-year notes yielding 1.14% in the market this week, I somehow doubt that the corporate debt levels that you speak of are that big of an issue.

[Hockthefarm]

Cribrange:

Yes, no arguement. But he provide a fairly reasonable explanation for that call in his latest book, why it was wrong and how he has corrected for it.

I'm really interested in where things will be at 3 to 5 years from now. How that shakes out really does matter imo. While dent incorporates a lot of TA in his work, his focus is cycles. Some strech out 30 to 50 years.

Hock

[Whitebear]

EWI is bullish on Asia and Shanghai. I am not sure how it will stand against its bearish stance on the Dow Jones.

[Red Langley]

Roger D, that is a beautiful chart. I am no Elliott expert, but those quadrilaterals you have uncovered look ominous. This is no time to be picking up pennies in front of the steamroller. Do you offer subscriptions or services for real-time updates? I am looking to trade more actively and I realize that paying people for their insights is a necessary part of being a good trader.

Cribrange, Dent is probably not the best guru to follow because he doesn't have much credibility. If you are looking for someone with integrity, you can try EWI. Also check out some of the charts and commentary by Roger D. And Yelnick's commentary is always nuanced and out-of-the-box. The stock market is the classic game, elegant in its discipline, and it requires integrity, integrity, integrity. Good luck.

[vipul garg]

Red langley, good that you self admit you are no EW expert when praising Roger D.
Thank god for small mercies.

i am quite sure 'yelnick' would know who 'red langley' is: one who is full of praise for Roger D's technical prowess.

[Hockthefarm]

Nobody is quoting good old Tony Caldaro any more it seems.

Well, he is sure wearing the bull suit:

"After yesterday's rally and ending the day overbought and at the highs, it was not too surprising to see the market pullback some today. From monday's SPX 1127 high to today's low at SPX 1117 is only 10 points, and within the range of the typical 10-15 point pullbacks during good rallys. All short term OEW charts remain in positive territory. Yesterday the NYAD, (market breadth), made an all time new high. This certainly suggests higher prices in the weeks and months to come. Best to your trading!

MEDIUM TERM: uptrend
LONG TERM: bull market

H

[Bird]

I'm sorry. Roger may end up being right but those quadrilaterals could be drawn around a moose's ass and have more predictive value.

[Michael]

Vipul,

Better get back into EXAS before their Validation Study results are presented Oct. 29th in Philadelphia at the American Association of Clinical Research Conference!

[Michael]

"I am looking to trade more actively and I realize that paying people for their insights is a necessary part of being a good trader."

You couldn't be more wrong.
A successful trader develops his OWN trading methodology. He does not risk his capital based on the opinions of others, or their so-called "expertise".

Your quote above is the quickest way to the poor house, and it is once again reflective of the laziness that I see in the younger generation of traders these days, that simply seek to follow others.

That hasn't worked out very well for all of those "expert" EWave bloggers like Kenny, Daneric, Binve, Shanky, Evil Speculator, etc. - - - now has it?

They've been DEAD WRONG for 12 months straight and if you followed them you would have wound-up in Bankruptcy Court.

That's a fact.

[vipul garg]

Michael,
saw exas that you mentioned it.
it appears that it will consolidate between 4.25 and 3.5 for some time before it can make a fresh upmove any time soon.
if it consolidates for some extended time, it can be interesting play with a stop loss under 3.

[hUiNeX]

EVERY TIME YELNICK POSTS A NEGATIVE BEARISH POST THE MARKET RALLIES!

[Michael]

Vipul,

You continue to miss the BIG PICTURE in regards to this Company. You cannot look at it as merely a trade! The results from their Validation Results on 1650 samples will be presented at the AACR conference on October 29th in Philadelphia.

Last week, they presented data on how well their DNA markers worked detecting colorectal cancer in CRC tissue. On 91 samples ( 37 contained CRC, 25 had adenomas, pre-cancers, and 29 were normal) they reported 100% sensitivity and 100% specificity ( no false positives ).

This stock will easily double from here, given this catalyst in late October. It is then, that the big institutions will recognize this stock and start piling into it... thus driving it up into the teens.

[CyberNUT]

Hey Red!

Do yourself a favor and read the posts that follow yours! Do not PAY OTHERS for advice if you want to be a trader. Do not RELY ON OTHERS for ideas.

You sound like you have a brain why not put it to work? Do you think Precther and Roger and Yelnick got to be good by copying others? They are INDEPENDENT THINKERS.

If you can survive in this game for a few years you'll be generating cool charts like Roger D's and you might even get SOMEONE ELSE TO pay YOU for them.

In the meantime, study hard, work hard, and keep your bets small.

[JT]

More new highs today in the cumulative NYSE Advance/Decline line. The PERMA-BEARS continue to conveniently ignore this significant indicator of market internals, and have been doing so all year long.... getting CRUSHED in the process!

[Ian]

Yes, and sentiment ridiculously low for a big bearish move. But the charts say otherwise. Look at a 30 min chart of SPX. Or check out Roger D's MCD chart. There are good reasons to be very, very bearish here. Some bears have been hurt here but they will probably have the last laugh.

[Hockthefarm]

More planetary alignment around the moose's quadralateral:

Meredith Whitney Even More Bearish On Housing And Financials
Submitted by Tyler Durden on 08/03/2010 16:07 -0500

Housing Market LIBOR Meredith Whitney Sovereign Debt Sovereign Risk

Meredith Whitney appeared on CNBC earlier and was about as bearish as ever, not only on financials, but on housing as well. In addition to saying that she expects the housing market to get worse in Q3 and Q4, the maven again reiterated the blatantly obvious, namely that all the recent earnings beats by financials have been an accounting sham driven by:

Provisioning for less future losses, by reducing NPLs in the current quarter, thus generating profits out of manipulated air (particularly relevant for HSBC's results yesterday, which were the main factor in pushing the market 25 points higher)
Increasingly more difficult for consumers to get loans. Not much of an issue - Obama will simply blame this on the previous regime.
And the glaringly obvious, i.e., that all European banks sit on bloated amounts of largely overvalued sovereign debt. Should another sovereign risk flaring appear (and it is Zero Hedge's belief that this will occur promptly, as soon as the European vacation season is over), it will be time to dig up the old skeletons of financial insolvency once again, only this time with EUR LIBOR and Euribor about 100% higher than where they were in May.

Regardless of where we head this fall, it is always fun to watch "full of chit" meet the highway.

Hock

[Starbuster]

More planetary BS from Arch Crawford. Looks like Arch fizzled again, or did Pluto line up with Uranus afterall?

LOL!

[OracleLurker]

Red is obviously jesting... (right Red?)

[Red]

Good catch, Oracle. 10 gold stars.

[JT]

Hock,

I strongly suggest that you STOP reading ZeroHedge. Those people are a bunch of kids playing on the Internet that have no idea how the markets work. Absolutely no clue at all. Almost as bad as David Rosenberg, the former Merrill economist who now resides at Gluskin-Sheff in Canada and who has been about as wrong as Prechter forecasting the US equity market.

One of these days, the "rookies" that fantasize about becoming big time traders in the stock market instead of posters on internet blogs will learn that the macro-economic backdrop isn't always as bleak as people love to paint it, nor does it have a very high correlation with the stock market, especially given where interest rates currently are.

Once you are able to realize this lack of correlation between the economy and the equity markets, you'll do very well, but not until.