Investment Contrarians

GDP Growth

GDP growth is a measure of all the goods and services produced within a country (gross domestic product) and its level of growth from the previous time period. GDP growth is usually calculated and stated in real terms, which means that it is adjusted for inflation. This number for GDP growth gives an accurate picture of the true strength of an economy. The goal for policy makers and politicians is to create an environment for GDP growth to reach maximum potential without increasing inflation.

Chart Shows Investor Sentiment Out of Touch with Reality

By for Investment Contrarians | Nov 13, 2013

Investor Sentiment Out of TouchTo some people in the mainstream media, last week’s advance estimate on U.S. gross domestic product (GDP) growth was seen as a positive surprise.

According to the U.S. Department of Commerce, the advance estimate on U.S. GDP growth for the third quarter of 2013 was an annual rate of 2.8%. In the second quarter, real GDP growth was 2.5%. (Source: U.S. Department of Commerce, November 7, 2013.)

Reading just the headline, it would be easy to assume that GDP growth was accelerating on a solid footing. However, had they looked just a bit deeper, they’d find that the truth is the GDP growth estimate that was reported was actually much worse than the headline number.

The fundamental strength underpinning this increase in GDP growth was temporary, and it could lead to a much weaker fourth quarter. If investor sentiment were propelled higher due to this blip in GDP growth, it would be a mistake.

The big increase in GDP growth was due to a build-up of inventory, a reduction of imports, and an increase in spending by state and local governments.

What happened to consumer spending, which makes up three-quarters of our economy? Personal consumption increased by 1.5% in the third quarter versus an increase of 1.8% in the second quarter. People began to reduce their spending versus the first half of the year.

Inventory increased by $86.0 billion in the third quarter, versus a $56.6 billion increase in the second quarter and a $42.2 billion increase in the first quarter.

Just the increase in inventory alone added 0.83% to the GDP growth figure. If investor sentiment is increasing based … Read More

Why a Closer Look at October Jobs Numbers Paints Anything but a Rosy Picture

By for Investment Contrarians | Nov 12, 2013

2013 October Jobs NumbersIn my previous commentary, I discussed the third-quarter gross domestic product (GDP) growth and how it was really weaker than it appeared. The Federal Reserve should realize the underlying weakness in personal spending, business investment, and export sales.

The nonfarm payrolls reading released on Friday was also suspect. On the surface, the creation of 204,000 new jobs in the jobs market in October seemed spectacular, given the U.S. government shutdown during that period. Apparently, the impasse didn’t impact the October jobs market, according to the U.S. Bureau of Labor Statistics. (Source: “Employment Situation Summary,” Bureau of Labor Statistics, November 8, 2013.)

But then there are other numbers that shed some light on October’s count. Given the estimate of 120,000 new jobs, the October jobs market reading appears to be spectacular. An average of 190,000 new jobs have been created each month over the past 12 months. The stock market appears to be scared by the numbers (fearing a drop in quantitative easing), but the reality is the economy needs to see about 400,000 to 500,000 new jobs created each year to maintain a healthy jobs market. The average jobs growth is supported by the weak revenue growth by corporate America. It’s clearly time to take some money off the table on stocks now.

There also continues to be 11.3 million unemployed in the jobs market, and that figure is likely much higher if you count the workers who have dropped out from the workforce and those who are employed full-time but working at jobs that are well below their experience level and skill set. About 8.1 million were working … Read More

Advance 3Q GDP Growth Reading Doesn’t Tell the Whole Story

By for Investment Contrarians | Nov 11, 2013

3Q GDP Growth ReadingThe market was impressed with the advance reading for the third-quarter gross domestic product (GDP) growth last Thursday. The fact is that with the Q3 GDP growth at 2.8%, the news was a relief, as it was much better than the consensus estimates of 1.9% and the 2.5% final reading for the second-quarter GDP growth.

The U.S. Department of Commerce said it was the fastest rate of growth since the third quarter in 2012. But while the market appears to be applauding the result, I’m not.

Yes, the GDP growth was better than if we had a soft reading, which many were expecting.

The Federal Reserve, at first glance, may look at the number and decide it’s time to rein in its quantitative easing at its December meeting.

But hold on… A closer look at the components of the GDP growth report would show some fragility that makes me concerned about the country’s economic renewal.

Spending by the businesses stalled in the third quarter, based on early indications. This is a red flag, as companies will generally spend more if they are growing and the economy is healthy and in an upturn. This lack of spending by businesses may indicate continued weak revenue growth.

Another warning in the report is that real personal consumption, which accounts for about two-thirds of America’s GDP growth, rose 1.5% in the third quarter—that’s not that good. Actually, it’s a decline from the 1.8% GDP growth in the second quarter. Given this, the retail sector could continue to struggle, so I would be careful when buying. I would continue to stick with the discounters, such … Read More

Tune Out Wall Street Bulls: Nothing Left for S&P 500 to Rally On

By for Investment Contrarians | Oct 17, 2013

Tune Out Wall Street BullsThe S&P 500 moved to within 18 points of another record on Monday, and there was chatter on Wall Street of a breakout being in the works that could reward bulls. And in spite of Tuesday’s pullback, the bulls continue to believe the index will soon rally above its record high set in mid-September.

Well, the idea of a sustained upward move in the fourth quarter doesn’t resonate with me. The S&P 500 is up nearly 20% this year, and my view is that there’s not much fuel left in the tank to take the index higher, except for maybe a few percentage points. I see more downside risk ahead, based on what will likely be a sluggish fourth quarter driven by continued bickering in Washington (the government may have agreed on extending the debt ceiling deadline, but there’s still the budget to debate), a soft jobs market, and fragile consumer confidence.

Gross domestic product (GDP) growth will clearly be affected. Confidence is eroding. Consumers will likely be hesitant to spend, especially on big ticket items, and this will impact GDP.

Wal-Mart Stores, Inc. (NYSE/WMT) is already predicting tepid growth in its key same store sales. Other retailers are also beginning to feel the hurt of an economy that is too in flux. The retail sector could likely see heavy discounting throughout the holiday shopping season to attract consumers.

The key to buying stocks in this environment is to look at areas that can benefit from the continued sluggishness in the economy and the move of consumers to look for deals and control their spending. The middle class continues to … Read More

Why a Debt Default May Not Be as Bad as It Seems for Investors

By for Investment Contrarians | Oct 9, 2013

Debt Default May Not Be as BadToday is day nine and counting of the U.S. government shutdown. At this point, of course, the bickering in Congress could magically stop and the politicians could hug and make up, ending the stalemate. However, I think the idea of the government coming to a resolution this soon is more fiction than reality.

My feeling continues to be that the government may finally solve the budget issue soon, but with the debt ceiling deadline on October 17, it’s likely to be a last-minute thing. In fact, there’s even a possibility no budget or debt ceiling deal will be agreed upon by October 17, based on the lack of progress we’re seeing right now. And while the White House may be considering a short-term increase on the debt ceiling limit, this isn’t an actual resolution—it’s just a temporary bypass.

However, if this short-term increase doesn’t occur (which is a possibility, given the government’s inability to agree), I really would not be that surprised to see the debt ceiling deadline come and pass. America would then run out of money and would default on its debt, bringing down the financial markets and the U.S. economy. The global economy would also be at risk.

Now, this may seem like just more fiction, but it could also happen: just like it was in 2011, the country’s debt could be downgraded due to the inability of the two parties to compromise on the debt ceiling,

And depending on how long the shutdown lasts, the impact on the country’s fourth-quarter gross domestic product (GDP) could be minimal or it could be larger. Bank of America Corporation … Read More