A Week In India: WOW!!!
--- by Guy Baker
I just returned from a week in India – Mumbai, Goa and Hyderabad. WOW!!! There was so much going on there. I was asked repeatedly about the US economy and what was going on. Their eyes seemed to be on the U.S. and what it would mean to them: but clearly, India and China have the world stage right now. Rupees anyone? They are only 2 cents apiece.
The Department of Commerce reported a strong gain in GDP for the 3Q, but the stock market did not reflect it. Isn’t that the way recently? It adds further evidence to the fact that markets work and when we get the news, the markets have already discounted it through the prices of the stocks. The advance estimate on GDP for 3Q 2009 was +3.53% a bit above even the most optimistic forecasts. The weakest components of real GDP were international trade and business investment in structures (such as offices and retail space).The BEA (Bureau of Economic Affairs) reported 1.66% was attributed to increased sales of automobiles. This reflects the impact of the Clunker program.
Cash-for-clunkers contributed to a surge in consumer spending in July and August, followed then by a drop in September. The underlying trend shows real (inflation-adjusted) consumer spending is up at a 1.5% annual rate when we compare September this year to December last year.
The Conference Board's index of consumer confidence fell to 47.7 in October from 53.4 in September. Real personal consumption expenditures increased 3.4 percent in the third quarter, contrasted with a decrease of 0.9 percent in the second. Durable goods sales increased 22.3 percent, compared to a decrease of 5.6 percent.
New orders for durable goods increased 1.0% in September, exactly as the consensus expected. Excluding transportation, orders were up 0.9% versus a consensus expected gain of 0.7%. The largest increases in orders were for industrial machinery and defense aircraft/parts. Other categories of orders were mixed, with no significant movement one way or the other.
Nondurable goods increased 2.0 percent vs a decrease of 1.9 percent 2Q. Services increased 1.2 percent as compared to a 0.2% increase in 2Q.
On the inflation front, overall consumer prices are still down versus a year ago. However, prices are up at a 2.1% annual rate so far this year and up at a 3.2% rate in the past four months. Given all the liquidity the Federal Reserve is pouring into the economy, year-ago price comparisons will turn positive late this year and then head higher in 2010.
The Chicago Purchasing Managers Index, a measure of manufacturing in the Midwest region, increased to 54.2 in October from 46.1 in September. That’s the highest level in more than a year. The measures for production and new orders were both above 60, signaling rapid expansion.
New single-family home sales declined 3.6% in September to a 402,000 annual rate, lower than the consensus expected pace of 440,000. Sales were up 22.2% versus the January low. Sales were up in the Midwest, unchanged in the Northeast, but down in the South and West.
At the current sales pace, the supply of unsold new homes was unchanged at 7.5 months in September. A slower pace of sales was offset by a decline in the inventory of unsold new homes. Inventories fell to 251,000 in September, down 56.1% from the peak in mid-2006, and the lowest since late 1982.
The median price of new homes sold was $204,800 in September, down 9.1% versus a year ago while the average price of new homes was $282,600, down 1.6% versus last year.
Most analysts believed there would be an upturn starting in 3Q, but this was stronger than predicted. Besides consumer spending, the gains came from growth in exports, a buildup in inventories, and increased federal government spending. Corporate profits reported September 30 were up considerably as well although the profits have yet to reach the highs of 2007 and the beginning of 2008.
I found this quote at www.economy.com:
"The expansion of real GDP in the third quarter is the clearest indication yet that the deepest recession in the U. S. since the Great Depression is now over."
So, is it really over? The doom and gloomers like Peter Schiff believe this is short lived and only a precursor to a cliff hanger in 2010. I heard him speak at a conference in early October and wanted to go all to gold. Realistically, to believe it is truly over, one has to overlook the problems still remaining in the mortgage markets, the unemployment figures, the lack of credit for small businesses and the looming disaster health care portends if passed. Couple this with the huge national debt that is careening out of control, and I find it hard to think all is well. I fear the hangover from the "double bubble" (tech stocks and housing) will last much longer than we have seen so far. But what do I know?
THE MARKETS
The markets slumped pretty consistently all week. After breaking 10,000, the Dow pulled back 3% during the last week of October. So the GDP report had either already been priced into the market or they didn’t believe it. For the month, The Dow [-2.60%; +10.67%], the S & P 500 [-4.02%; +14.75%] and the NASDAQ Composite [-5.08%; +29.68%] surrendered big chunks of their significant gains this year.
Obviously, watching the markets “chuck and jive” is not for sissies. So I choose to not look. If you study any month to month analysis of markets over long periods you see they go up and they go down. So is there any reason to think this will be different? The ONLY way to be in the market is to widely diversify and own all the market in appropriate allocations. Modern Portfolio Theory has been castigated by those who have been criticized in recent years when passive so out-performed active, but you have to have a philosophy that you stick to through the good and the BAD times.
Yields on U. S. Treasury securities fell last month. The 10-year and 30-year bonds took the biggest hit. The only reasonable explanation is the bonds were reacting to the nominal inflation report that accompanied GDP. The so-called "price deflator" rose just 0.1%, the same rate as the past four months.
It is unlikely the Fed will raise short term rates anytime soon; so, for any who are hoping that safety is a hedge against market turmoil, this is not good news. And despite the second consecutive quarterly improvement in corporate earnings after four straight quarters of decline, the markets were less than impressed. How long before investors will become convinced it is “safe to go into the water” is anyone’s guess, but I have to think the credit markets need to stabilize before it happens.
An unspoken factor is the government intervention in the markets. The fiscal stimulus and "bailout" programs are impacting capital markets. This cannot last forever because China will not continue to prop up our debt. So is the pump primed or not? Time will tell. Fortunately, foreign investors seemed to regard the GDP report more positively. The dollar rose in value against the Euro stopping a fairly steep decline.
The world oil and gasoline prices both increased. Expect this to continue as the U. S. and world economies recover. We could see $100 oil soon. It will be interesting to see if Gold continues to sprint towards $2000.
FINANCIAL WEB SITE
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FINANCIAL FACT OF THE WEEK
According to the Urban-Brookings Tax Policy Center, only about 4,500 estates will be federally taxable in 2011. The average tax rate is expected to 22%. The federal exemption rose to $3.5 million per individual in 2009, up from the previous level of $2.0 million. So a husband and wife can exempt $7 million from taxes.
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