Great GDP Report At Face Value
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September 26, 2014

9-26-2014 7-02-15 PM Empire

Friday produces an outsized comeback rally presumably due to the GDP report. But, it came in as expected, 4.6% vs 4.6% expected & prior 4.2%. Traders and algos react and trade headlines without looking under the hood. But our friends at Consumer Metrics Institute always study these reports in detail and conclude the report as “seriously misleading”. The full report is here but the summary is below:

Summary and Commentary

This report once again strengthens the Fed's hand for completing the QE taper, which should finish before the next GDP report. An economy that is reported to be growing at 4.6% might be argued to be tipping gently towards overheating, especially when the quarter to quarter change of +6.7% is taken into consideration. This report can also be conveniently spun by political hacks into a "happy days are here again" message while heading into the final month before midterm elections.

We repeat that at purely "face value" this report also purports to show a strongly rebounding US economy driven by commercial fixed investments, growing inventories, surging exports and a modestly healthy consumer. The +6.7% quarter to quarter change is truly remarkable: if we view the 2Q-2000 report as somewhat noisy and spurious (since the purported gain was more than fully reversed during the next quarter), we have to go back over 30 years into the early 1980's to find such a dynamic quarterly turn-around (provided, of course, that the current +6.7% turn-around is less spurious than the one reported in 2Q-2000).

We caution that a "face value" reading could be seriously misleading. Let's quickly review the reasons for our concern:

-- Consumer spending provided 38% of the headline growth while representing nearly 70% of the spending. Real per-capita disposable income has grown only 2% (in aggregate!) since 2008, at a minuscule 0.37% annualized rate. Household spending remains constrained, and a healthy (and increasing) savings rate indicates that the majority of consumers remain skeptical about the veracity and sustainability of this purported "recovery."

-- Inventories tend to revert to their means. This quarter's inventory growth is essentially the flip side of last quarter's contraction in what is (over the long haul) a largely zero-sum series.

-- Surging exports fly in the face of both softening economic growth among our major trading partners and a strengthening dollar. When trade fully re-acclimates to the new exchange realities it will be the export numbers that will suffer the most.

It is here that we would normally caution that a plausibly noisy "final" 2nd quarter growth could get reversed in the next quarter's first report, just as it did in 2000. But we also need to remind you that the next report will be issued just 5 days before the mid-term elections. In 2000, the next report after the flaky "final" 2Q-2000 numbers was also just days before a major election, and the bombshell reversal of economic fortunes did not treat the incumbents quite so well.

The next report should be interesting.

The day also featured flat Consumer Sentiment 84.6 vs 84.6 expected & prior 84.6; now that’s flat!

Stocks rallied sharply on this news as the dollar rallied given thoughts interest rates would increase while other central banks are in an easing mode.

(Its borderline embarrassing going through the list of sectors leading higher or lower given it’s been three days of reversals up, down, up.)

Leading market sectors higher included: S&P 500 (SPY), Tech (QQQ), Dow (DIA), Small Caps (IWM), Financials (XLF), Energy (XLE), REITs (IYR), Materials (XLB), Industrials (XLI), Transports (IYT), Semiconductors (SMH), Biotech (IBB), Consumer Discretionary (XLY), Value (VTV), China (FXI), Brazil (EWZ), Emerging Markets (EEM), EAFE (EFA), Japan (EWJ), Hedged Japan (DXJ), India (EPI), Singapore (EWS), Italy (EWI), France (EWQ), Crude Oil (USO), Agriculture (DBA) and Sugar (SGG).

Leading market sectors lower included: Gold Miners (GDX), Metals & Mining (XME), Silver Miners (SIL), Indonesia (IDX), Austria (EWO), Coal (KOL) and Gold (GLD).

The top 20 market movers by percentage change in volume whether rising or falling is available daily.

Volume was 30% lower than Thursday’s massive sell-off and breadth per the WSJ was positive.

9-26-2014 7-16-27 PM Diary

Charts of the Day
  • SPY 5 MINUTE

    SPY 5 MINUTE

  • SPY DAILY

    SPY DAILY

  • SPX WEEKLY

    SPX WEEKLY

  • INDU WEEKLY

    INDU WEEKLY

  • RUT WEEKLY

    RUT WEEKLY

  • NDX WEEKLY

    NDX WEEKLY

  • XLF

    XLF

  • KBE WEEKLY

    KBE WEEKLY

  • XLB WEEKLY

    XLB WEEKLY

  • XLE WEEKLY

    XLE WEEKLY

  • XLI WEEKLY

    XLI WEEKLY

  • XLY WEEKLY

    XLY WEEKLY

  • IBB WEEKLY

    IBB WEEKLY

  • XME WEEKLY

    XME WEEKLY

  • ITB WEEKLY

    ITB WEEKLY

  • IYT WEEKLY

    IYT WEEKLY

  • IYR WEEKLY

    IYR WEEKLY

  • IYZ WEEKLY

    IYZ  WEEKLY

  • BOND WEEKLY

    BOND WEEKLY

  • TLT WEEKLY

    TLT WEEKLY

  • UUP WEEKLY

    UUP WEEKLY

  • FXE WEEKLY

    FXE WEEKLY

  • FXY WEEKLY

    FXY WEEKLY

  • FXC WEEKLY

    FXC WEEKLY

  • FXA WEEKLY

    FXA WEEKLY

  • GLD WEEKLY

    GLD WEEKLY

  • GDX WEEKLY

    GDX WEEKLY

  • SLV WEEKLY

    SLV WEEKLY

  • DBB WEEKLY

    DBB WEEKLY

  • USO WEEKLY

    USO WEEKLY

  • SGG WEEKLY

    SGG WEEKLY

  • DBC WEEKLY

    DBC WEEKLY

  • EFA WEEKLY

    EFA WEEKLY

  • EEM WEEKLY

    EEM WEEKLY

  • EWU WEEKLY

    EWU WEEKLY

  • EWG WEEKLY

    EWG WEEKLY

  • EWA WEEKLY

    EWA WEEKLY

  • EWC WEEKLY

    EWC WEEKLY

  • DXJ WEEKLY

    DXJ WEEKLY

  • EWZ WEEKLY

    EWZ WEEKLY

  • RSX WEEKLY

    RSX WEEKLY

  • EPI WEEKLY

    EPI WEEKLY

  • SCIF WEEKLY

    SCIF WEEKLY

  • IDX WEEKLY

    IDX WEEKLY

  • GXC WEEKLY

    GXC WEEKLY

  • NYMO DAILY

    NYMO DAILY

    The NYMO is a market breadth indicator that is based on the difference between the number of advancing and declining issues on the NYSE. When readings are +60/-60 markets are extended short-term.

  • NYSI DAILY

    NYSI DAILY

    The McClellan Summation Index is a long-term version of the McClellan Oscillator. It is a market breadth indicator, and interpretation is similar to that of the McClellan Oscillator, except that it is more suited to major trends. I believe readings of +1000/-1000 reveal markets as much extended.


     

  • VIX WEEKLY

    VIX WEEKLY

    The VIX is a widely used measure of market risk and is often referred to as the "investor fear gauge". Our own interpretation is highlighted in the chart above. The VIX measures the level of put option activity over a 30-day period. Greater buying of put options (protection) causes the index to rise.


     

 

 

Closing Summary

This was a tough week to measure. The strong dollar is causing havoc among oversea and especially emerging markets. Given how much damage its causing perhaps there will be some intervention to stabilize markets even though other countries want a weaker currency. However, soon they won’t be alone as U.S. exporters grow unhappy over prices.

Next week we end September and move on to feisty October. We’ll have more earnings reports to digest as well as employment data.

For all you conspiracy buffs out there an excellent article from always interesting Zero Hedge describing the intimate relationship between Goldman Sachs and the New York Fed.

Let’s see what happens.

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...

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Dave Fry is founder and publisher of ETF Digest and has been covering U.S. and global ETFs since 2001.

He is the author of "Create Your own ETF Hedge Fund: A Do-It-Yourself Strategy for Private Wealth Management" published by Wiley Finance and "The Best ETFs: U.S. Equities, A Companion Guide to Building Your ETF Portfolio".



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Market Summary
NYSE Composite Index S&P 500 Index Nasdaq Composite Index Russell 2000 Small Cap Index NYSE Composite Index S&P 500 Index Nasdaq Composite Index Russell 2000 Small Cap Index 10 Year Treasury Note Yield Gold Bugs Index Morgan Stanley High Tech 35 Index Market Chart
Commodity Quote Change Change % NY
Gold1,209.70-6.30-0.52 %09/30
WTI Crude Futr91.39-3.18-3.36 %17:08
Index Quotes Change Change % Local
CRB278.55-4.59-1.62 %17:27
US Dollar86.03-0.01-0.01 %17:00
Index Quotes Change Change % Local
VIX16.310.332.07 % 16:14
MSCI Value Daily MTD YTD
Brazil2192.087-5.21 %-18.58 %-1.17 %
Russia609.569-2.46 %-6.05 %-22.53 %
India501.821-0.24 %-1.26 %23.20 %
China62.454-1.38 %-5.56 %-1.03 %