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Equity Investment Capital

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Friday, July 30, 2010

The bulls on the economic recovery have a huge hurdle to spin this morning; the advance Q2 GDP report at 8:30 showed the US economy grew at 2.4%, not much lower than 2.5% consensus. The devil however lurked in Q1; in the data released this morning Q1 was revised from +2.7% to +3.7%, the revision took markets by surprise and made the economic decline in Q2 that much worse. In 2009 GDP was revised from -2.4% to -2.6%; 2008 revised from +0.4% to unchanged and 2007 revised from +2.1% to +1.9%. Will the lowered GDP revisions finally wake up markets and media that unless consumers spend the economy will not grow? Or will this data be swept under again in favor of corporate earnings as the economic driver? How many times do markets need to be reminded that until consumers open up and spend the economy is not going to improve, and eventually those better than expected corporate earnings built on massive cost cutting will wane?

Most talking heads on CNBC after the data were already spinning the data better; it doesn't look as bad as the data reflects if one looks at the details according to a couple of analysts. Well, how bad does it need to be to drive home that until the housing sector bottoms and employment begins to improve consumers won't spend much and the economy will muddle along with little growth? The revisions today revised lower the growth in 2007, 2008, and 2009; 2010 won't be any different. Wealth has been peeled away like the skin on an onion, businesses are confused about all the crap coming from Washington on taxes, health care and FinRegs and not likely to hire. US wealth, to the surprise of Washington and Wall Street was in the home, that has eroded and will take more than a few years to recover. Even Bernanke in comments recently has been saying five to six years for full recovery.

On the initial reaction to the GDP data the rate markets rallied, taking the 10 yr note to 2.90%, 2 bp from its 2.88% low that has been tested twice in the last month. The key stock indexes dropped with DJIA running down 100 points; mortgage prices at 9:00 up 8/32 (.25 bp) on the day. At 9:30 the DJIA opened -85, the 10 yr +17/32 2.92% -7 bp and mortgage prices +9/32 (.28 bp).

More data at 9:45; the July Chicago purchasing managers index, expected at 56.0, was stronger at 62.3. New orders component at 64.6 frm 59.1, employment at 56.6 frm 54.2 and prices pd at 58.1 frm 61.9. A much better report from the mid-west manufacturing sector put a little initial support in the weak stock market but didn't have much impact on the interest rate sectors. Prior to the data the DJIA was off 100 points, it rebounded to -75 on the reaction.

One more data point at 9:55; the U. of Michigan consumer sentiment index. It dropped hard on the last outing, the forecasts this morning were for the index to firm a little to 67.0 frm 66.5; as reported the index increased to 67.8; the 12 month out expectation index increased to 66.0 frm 65.0. The slightly better indexes gave the equity market a bounce and stopped the bond market rally on the initial reaction.

The bellwether 10 yr note is working at its recent low yield at 2.88%, touched twice in the past month and failed to fall further. These low rates are likely going to be tough to crack; even the weak GDP data has not busted equities and unless that occurs the rate markets will have difficulty at these low rates. Be alert today for a potential reversal. Still bullish on rates and bearish on economic outlook but markets are resisting that view.

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