| Friday Market Wrapup You're receiving Friday Market Wrapup at finan4@finanmart.com because you subscribed to it. Never miss an email. To ensure delivery directly to your inbox, please add postoffice@kci-com.com to your address book today. |
August 29, 2008 GDP is a Mixed BlessingThe US indexes enjoyed a mid-week rally when the news hit that second quarter GDP rallied to show 3.3 percent growth, beating analyst expectations of 2.7 percent. Unfortunately, the momentum couldn’t be maintained through Friday. The Commerce Dept. released personal income data, which showed incomes had fallen 0.7 percent in July, the biggest drop since August 2005. The three major indexes slid to weekly losses but still managed to post monthly gains. The Dow Jones Industrial Average sank 0.7 percent this week; the Nasdaq Composite knocked off 2 percent; and the S&P 500 shed 0.7 percent. The playoff between GDP and personal incomes really demonstrates the precarious situation the US economy is in right now. At first blush, 3.3 percent GDP growth would seem positive, particularly since the advanced estimate showed just 1.9 percent growth, but the jump was predicated on a weak dollar. According to Commerce Dept data, overall imports and exports were estimated to have fallen 6.6 percent and risen 9.2 percent in the advanced data. But in the preliminary numbers, put together after more reports have come in and the department’s had more time with the data, exports were shown to have surged 13.2 percent and imports have fallen 7.6 percent. That didn’t happen because the world suddenly had the dawning realization that American-made goods are inherently better; the simple fact is American-made goods were suddenly cheaper. That fueled the 1.3 percent jump that was reported in durable goods orders for July and has driven orders in prior months, which is good for GDP. That reinforces the Catch-22 in which the Federal Reserve finds itself. And Chairman Ben Bernanke vaguely alluded to it in his statements this week: The Feds’ primary mandate is to encourage growth, and inflation concerns take a back seat to make sure the money keeps flowing in. But if inflation continues to eat up the value of the dollar, you need ever-growing cash flows for the average American to realize the benefit. And inflation was the real problem behind the personal incomes data. Again, according to Commerce Dept data, wages and salary rose 0.3 percent in July, though disposable income fell by 1.1 percent. If you dig deeper into the income table, you’ll find that with food and energy included, personal consumption expenditures (PCE) jumped 4.5 percent in July, as the necessities ate up more and more of Americans incomes, but PCE still rose by 2.4 percent with those items excluded. Incomes just aren’t keeping pace with costs. Get Rich From This International Fund This fund is already up 8.5% so far this year (while the S&P 500 is down 9.3%). Better yet…it’s currently trading at a 6.5% discount. Plus it pays out fat dividends you can enjoy while you wait for your big gains. And don’t worry, it’s a safe bet and you can trade it right here in the USA. Go here and look forward to some quick profits as the price takes back the discount. But anything the Fed does to fight inflation will almost certainly strengthen the dollar, eating into the exports fueling our growth. I certainly wouldn’t want to be sitting in the Chairman’s seat right now, especially with the balancing act he’s facing in the next year or so. His job may become easier though, as the creeping slowdown may do the bulk of his job for him. Weakening growth in Europe and looming problems in Asia should help keep commodity prices in check, which have been the force behind many of our inflationary problems. That, in turn, would continue to negate the need for rate increases, which would help push the dollar higher. So we need to keep the champagne corked since the GDP number isn’t actually as bullish as it looks, but we don’t need to hoard gold in response to inflation, either. If the markets and global economy continue on essentially this path, the inflation could ultimately work itself out without much direct intervention given the symmetry of the situation. A broader worldwide slowdown would cool the demand for exports, but tamed inflation would help restore the buying power of US consumers, which coupled with a stabilization of the real estate market would amount to slower growth but a shallow recession. And there was a raft of mostly positive real estate data this week. Existing home sales jumped 3.1 percent in July over June to an annualized pace of 5 million units, the fastest pace since February. With existing home sales accounting for about 85 percent of real estate transactions, that’s obviously good news, though we’ll need to see at least a few months of improvement before drawing any conclusions. The largest contributing factor to the improved sales figure is likely to be the purchase of foreclosed properties amid falling prices, with the Case-Shiller Home Price Index, which tracks home values in 20 urban areas, reportedly down 15.9 percent in June from the same month last year. In the second quarter, the index lost a total of 15.4 percent. New home sales also enjoyed an uptick, rising 2.4 percent in July from June to a seasonally adjusted annual rate of 515,000 units. Inventories of new homes fell for a second month, with an estimated 10.1 months’ supply on the market. Still, the number of unsold new homes remains at historically high levels despite deep price cuts and other incentives offered by builders to move their inventories. Mortgage applications rose 0.5 percent last week as rates dipped with the exception of adjustable-rate products, with refinancing activity accounting for more than a third of application volume. The average rate for 30-year fixed-rate mortgages fell to 6.44 percent from 6.47 percent last week; 15-year fixed-rates dropped to 5.94 percent from 5.99 percent; one-year adjustable-rate mortgages (ARM) rose to 7.15 percent from 7.07 percent. The Conference Board’s Consumer Confidence Index rose for the third consecutive month, beating analyst estimates as it rose to 56.9 from 51.9. Americans remained worried with the state of the economy, as more than a third of households rated current business conditions as “bad” and 32 percent reported that jobs were hard to get. But the number of respondents expecting conditions to further deteriorate over the next six months fell to 25.8 percent from 32.4 percent in the prior month. And the number expecting the economy to improve rose to 11.9 percent from 9.2 percent. How To Protect Your Portfolio From the Coming Election Initial jobless claims fell for the third straight week, down 10,000 from the prior week’s revised number to 425,000. Continuing claims rose by 64,000 after the previous week’s number was revised downward, with 3.423 million workers continuing to draw benefits. The pace of layoffs appears to be slowing, though hiring remains sluggish at best. Overall, this week’s numbers seem to show an economy still facing headwinds but hardly on the verge of collapse. In the latest issue of Growth Engines, editor Yiannis G. Mostrous--who’s been in Europe for the past few months--revisits the Georgia-Russia confrontation and what it really means for investors. BRUSSELS, Belgium--Following is an excerpt from a recent company press release: Novolipetsk Steel (LSE: NLMK), the leading Russian steel producer, has signed a definitive agreement to acquire U.S. steel pipe and tube manufacturer John Maneely Company (JMC) from a shareholder group including global private equity firm The Carlyle Group and the Zekelman family for US$3.53 billion, acquiring the company on a debt free, cash free basis. The transaction is subject to customary regulatory approvals and is expected to close in the fourth quarter of 2008. It’s business as usual while politicians try to revive old rhetoric that didn’t work then and won’t work now. No one can seriously support the idea--while some of the biggest investors on earth, who also sport great political connections, continue to do business with the “foe”--that the recent political developments in the Caucasus would change things radically. And why should they? There’s no reason why the US would go to great lengths to engage in some kind of military confrontation with Russia on account of a megalomaniacal creation of PR firms. True, the Georgian president has been useful to certain people in the power corridors of Washington and London, but at the end of the day no superpower goes to war over a country the size and importance of Georgia. Just ask the Taiwanese. Secretary of State Rice said as much in a July 10 press conference during a visit to Tbilisi: “The violence needs to stop…And whoever is perpetrating it--and I’ve mentioned this to the president--there should not be violence.” Obviously the president wasn’t listening; maybe he was engaged in one of the numerous interviews/press conferences he held at the time. A month later, as the opening ceremonies of the Beijing Olympics got underway, he launched his attack. But maybe this should have been expected from the man who, in a speech 19 March before the Atlantic Council in Washington, declared that the Russians “are not capable of enforcing the Taiwan model in Georgia. Their army in the Caucasus is not strong enough…to calm down the situation in their own territory. I don’t think they are ready for any kind of an adventure in somebody else’s territory. And hopefully they know it.” No comment is required here. The problem, therefore, isn’t whether Russia or Georgia is right or which country was more aggressive. The problem is that an insignificant leader of an insignificant country--though Georgia has been openly supported by the US--can create such havoc. It seems unconceivable that US leadership would allow such an unintelligent action, unless there’s really a belief in Washington that Russia will never react to any provocation because it needs the West. Commentators on this side of the pond have been saying for some time that the expansion of NATO shouldn’t be the sole focus of US policy in Europe, and that Russian concerns should be taken into consideration. Many still think the same way. During the NATO summit in March, when President Bush brought up the subject of admitting Georgia and Ukraine, America’s real European allies, among them Germany, said clearly that this was “not the right time.” Maybe European advice shouldn’t always be dismissed out of hand. At any rate, the issue has become a media circus, with misinformation the game of the day. Headlines such as “The EU Condemns Russia” have also seen the light. Never mind that leaders of the EU countries will meet in Brussels on Monday in an effort to issue an official statement; the decision will also need to be presented by French President Sarkozy (France now occupies the rotating presidency of the EU) and the minister of foreign affairs to the EU assembly. After talking to a couple friends in fairly high posts in Brussels, it seems that no one is certain yet as to how severe the official response will be. As they put it to me, the numbers are clear: Trade between Europe and Russia amounted to USD284 billion in 2007, making Europe Russia’s biggest trading partner, and Russia supplies 25 percent of Europe’s gas. One has to be careful. But no matter how Monday’s statement reads, the important date is in October, when a new, 10-year agreement between the EU and Russia is to be negotiated here in Brussels. We’ll know then how important today’s headlines are. Russia has been a very profitable investment opportunity the last six years, and I expect it will remain so for the foreseeable future. I’ve discussed my reasoning in greater depth in my premium service, The Silk Road Investor. Russia has the same risks that every other emerging market has, and incidents of the Georgian kind shouldn’t alter the economy’s strong growth prospects. Concentrate on the known risks and look out for any improvements in infrastructure, the legal system, corruption and the like rather than paying attention to insignificant actions of “minute maid” leaders. The risks are real, but Russia will continue to reward long-term investors. That’s the complete article, but if you’d like to comment on it, go here . Speaking Engagements Fall is the perfect time to enjoy Washington, DC’s outdoor treasures and catch a glimpse of nature’s splendor. And this year you can enjoy the immediate aftermath of the Presidential election in the seat if the federal government. Join Neil George, Roger Conrad and Elliott Gue for the DC Money Show, Nov. 6-8, 2008, at The Wardman Park Marriott. Go here or call 800-970-4355 and refer to priority code 011364 to register as our guest. We also have a special invitation for our readers. KCI Communications, Inc., is organizing an exciting 11-day investment cruise Dec. 1-12 through the Caribbean and Panama Canal. Participants will have the opportunity to meet and chat with my colleagues Roger Conrad, Gregg Early, Neil George and Elliott Gue. This will be a unique opportunity to step away from your daily routines, relax in one of the most beautiful parts of the world and share analysts’ knowledge and passion for the markets. During the sail, you’ll not only explore the cerulean splendor of the Caribbean, but you’ll also delve deep into current markets in search of the most profitable opportunities for your portfolios. You’ll also have the rare chance to sail through one of the world’s engineering marvels, the Panama Canal. It’s always a special treat to meet and talk with subscribers in person, and we couldn’t have picked a better setting than aboard the six-star Crystal Serenity. This is sure to be an especially memorable experience. We hope you’ll join us. For more information, please click here or call 877-238-1270. |
| Friday Market Wrapup is a weekly e-zine written by Ben Shepherd and published by KCI Communications, Inc. Mr. Shepherd is research editor for Personal Finance.
|
Friday Market Wrapup - August 29, 2008: GDP is a Mixed Blessing
