Stop don't go
Over the past 2 days we were stopped out of the following:
CSH
DIGE
INFY
NUAN
PCP
WHAT HAPPENED AND WHAT DOES IT MEAN?
The blame is being placed at the doorstep of China, whose stock market fell 9%. But that's ridiculous: China's stock market fell twice in January, also after the Chinese government took action to cool the Chinese economy.
It does matter what the trigger was for this because it determines whether this was a one-off or a trend. That's why I think that this is a trend - there is market nervousness as it becomes evident that things are changing in the global economy.
The media is spinning today as a re-bound, but a 50 point rise after a 400 point drop is not a rebound. So I don't think this is over - I expect more volatility.
The goldilocks slowdown is now under threat. I am taken aback that the 4th quarter GDP was revised down so strongly: from 3.5% to 2.2%. Make no mistake - that matters a lot. The reason for the drop was business investment in inventories were slower than expected. (What is interesting is that economists at major institutions expected the downward revision, so there was no panic selling today- but could it have been leaked yesterday?)
2005 GDP 3.2%
Q4 2005 was 3.2%
2006 GDP 3.3%
Q1 5.6%
Q2 2.6%
Q3 2%
Q4 2.2%
Q1 2006 was an anomaly. Remove it and we see that the economy is trending to stable growth of 2%. Which is pretty good. Except that inflation is running at 2% as well. We are currently seeing no real growth.
Meanwhile, the economy will get slower. Business investment is not picking up the slack of a slower residential spending. That makes for a combined slowdown in commercial and residential spending. Consumer spending is the strongest player in our economy and it remains strong, but not for much longer. The real estate shakeout is still on the way. Foreclosures, massive employment layoffs in the real estate industry, and tighter credit will hit over the next 6 months. The recession is now closer.
WHAT NEXT?
Interest rates are now in the spotlight. On the one hand, a slowing economy tends to move rates down as inflationary presures drop and the Fed seeks to boost the economy. On the other hand, inflationary pressures remain in the form of worker pay. The minimum wage hikes and other salary increases were not viewed as inflationary as long as productivity was strong (i.e. Q4 3.5% GDP). Now, however, it is inflationary. Bernanke's inflationary concerns now make more sense: he knew this was happening.
What will reduce the inflation pressures is the impending jump in unemployment. I think that 500,000 people will hit the rolls by the end of the Summer. All of these people will be real estate related: agents, lenders, and associated businesses.
End of the boom or beginning of a bust, call it what you will - the market will be in turmoil until the interest rates drop. The question is timing. The government acts pre-emptively and the data is lagging. If they rely on the data, then the move will be in the summertime.
I think the portfolio going forward needs to be one that looks like we are in a recession. Biotechs are safest.
CSH
DIGE
INFY
NUAN
PCP
WHAT HAPPENED AND WHAT DOES IT MEAN?
The blame is being placed at the doorstep of China, whose stock market fell 9%. But that's ridiculous: China's stock market fell twice in January, also after the Chinese government took action to cool the Chinese economy.
It does matter what the trigger was for this because it determines whether this was a one-off or a trend. That's why I think that this is a trend - there is market nervousness as it becomes evident that things are changing in the global economy.
The media is spinning today as a re-bound, but a 50 point rise after a 400 point drop is not a rebound. So I don't think this is over - I expect more volatility.
The goldilocks slowdown is now under threat. I am taken aback that the 4th quarter GDP was revised down so strongly: from 3.5% to 2.2%. Make no mistake - that matters a lot. The reason for the drop was business investment in inventories were slower than expected. (What is interesting is that economists at major institutions expected the downward revision, so there was no panic selling today- but could it have been leaked yesterday?)
2005 GDP 3.2%
Q4 2005 was 3.2%
2006 GDP 3.3%
Q1 5.6%
Q2 2.6%
Q3 2%
Q4 2.2%
Q1 2006 was an anomaly. Remove it and we see that the economy is trending to stable growth of 2%. Which is pretty good. Except that inflation is running at 2% as well. We are currently seeing no real growth.
Meanwhile, the economy will get slower. Business investment is not picking up the slack of a slower residential spending. That makes for a combined slowdown in commercial and residential spending. Consumer spending is the strongest player in our economy and it remains strong, but not for much longer. The real estate shakeout is still on the way. Foreclosures, massive employment layoffs in the real estate industry, and tighter credit will hit over the next 6 months. The recession is now closer.
WHAT NEXT?
Interest rates are now in the spotlight. On the one hand, a slowing economy tends to move rates down as inflationary presures drop and the Fed seeks to boost the economy. On the other hand, inflationary pressures remain in the form of worker pay. The minimum wage hikes and other salary increases were not viewed as inflationary as long as productivity was strong (i.e. Q4 3.5% GDP). Now, however, it is inflationary. Bernanke's inflationary concerns now make more sense: he knew this was happening.
What will reduce the inflation pressures is the impending jump in unemployment. I think that 500,000 people will hit the rolls by the end of the Summer. All of these people will be real estate related: agents, lenders, and associated businesses.
End of the boom or beginning of a bust, call it what you will - the market will be in turmoil until the interest rates drop. The question is timing. The government acts pre-emptively and the data is lagging. If they rely on the data, then the move will be in the summertime.
I think the portfolio going forward needs to be one that looks like we are in a recession. Biotechs are safest.
posted by Andrew at
8:56 PM
2 Comments:
Andrew - FYI those GDP numbers ARE real, not nominal. The nominal GDP numbers are rarely referred to in press releases...
I think there is a difference when we draw parallel …Real estate companies are not like Dot Com companies that they go bust all of a sudden. They have a product (land & home) that everyone wants …but the question is at price? If they start dropping prices by say 30% it will generate lot of sales and they need people to manage it. It’s for the builders to decide either to lay off or drop the prices. I think Fed wants them to drop the prices ! .
I don’t think home sales will shoot if Fed drops the interest rate by .50 or more. In Bay area for example even condos are priced at $ 500,000 with HOA of $300 not affordable to a common man on one decent salary. If the interests are up today you can always re-finance when it’s low...but it is the base home prices that has to come down for any recovery.
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