Investment Strategy, Equity Market Trouble, “Positive” GDP, Norway Increases Rates

Stock Market Investing: The equity averages are down another 2.5+% today capping off an awful week during which time the uptrends from March and the 50day moving averages have been violated. The price action should not come as a shock but instead as a reminder of the tightrope the Fed must walk in order to keep this economic house of cards from collapsing.

The Fed’s quagmire: Use quantitative easing and other liquidity producing programs to save the U.S. economy from a depression while at the same time avoid turning the US$ into the North American equivalent of the Argentine Peso. (This method of saving the economy is a pet project of Ben Bernanke and the culmination of his years in academia, G-d help us. Never in history has the debasement of a currency led to a true and sustainable economic recovery. But I digress.)

So, in order to continue the debasement shell game, the Fed must occasionally make it look as if US$ strength is important. What better time to feign support than at the completion of a $300 billion Q.E. program and in the midst of positive GDP excitement. I have been writing for weeks that when we begin to read about “good” economic numbers we must take action to protect the portfolio. Well, this week was replete with “positive” numbers, so the US$ rallies and asset prices suffer.

Investment Strategy: Remain long a core position of precious metal investments and use inverse ETFs to benefit from market weakness. We expect precious metal investments to outperform on a relative basis and would view any weakness as opportunity. I will note: today the spot price for Gold is down only .15% as I write this; the epitome of relative out performance.

You may wish to know why I place quotes around words like, good and positive, when discussing the recent spat of economic numbers. Well, the answer is simple: when we and our respected colleagues parse the numbers warning signs are uncovered. Please review the following two accounts of the “exciting” GDP data so you can better understand our concerns…

Briefing: Q3 GDP Goes Positive!

As expected, GDP growth in Q3 went positive for the first time in four quarters. GDP performed better than expected as output grew by 3.5% quarter-over-quarter annualized compared with the consensus expectation of 3.2%. Demand was strong across all sectors of the economy as consumption increased 3.4%, gross private domestic investment increased 11.5%, exports increased 14.7%, imports increased 16.4%, and government expenditures rose 2.3%. With all sectors seemingly humming along in Q3, final sales of domestic product jumped 2.5% compared with an increase of only 0.7% in Q2…

Unfortunately, a more detailed look at where economic growth occurred makes it difficult to pronounce a full sustainable recovery is on its way. Government assistance played an extremely large role in producing the positive GDP result. For example, the Cash for Clunkers stimulus package boosted motor vehicle sales and contributed 1.47 percentage points out of the 2.36 percentage points that personal consumption added to GDP. Further, the first-time homebuyers tax break has benefited not only the construction firms, who have ended their decline in manufacturing new homes, but also realtors through increased income/fees. The jump in realtor expenses accounted for a full third of the increase in the residential investment component…

Inventories provided positive growth to GDP for the first time since Q3 2008. However, the data is a little misleading. GDP is measured as a rate of change between quarters. Inventories actually declined by $46.3 billion in Q3. However, the drop in Q2 was so severe that the rate of change was actually positive $29.4 billion. We expect inventories to continue to improve over the next year and provide a strong bonus to GDP.

GDP is…Better Than Expected: The Market Ticker

You cannot have an economic recovery when on a q/o/q basis real disposable income is contracting at a 7.4% annual rate and worse, the spread between nominal and real income is widening, indicating that mandatory purchases such a food, energy and health care – are increasing. MORE…

Meanwhile, Norway becomes the second country behind Australia to increase interest rates. The heat is being turned up on the carry trade and the Fed. This development out of Europe places further pressure on the Fed to ease up on Q.E….

Norway’s central bank hiked rates by a quarter-point to 1.5%, the first interest rate increase in Europe since the global financial crisis bit a year ago. It signaled more tightening to come as the economy recovers. Higher crude prices have helped oil-rich Norway. Commodity-rich Australia hiked rates earlier in Oct. The U.S., U.K. and euro zone are unlikely to hike rates soon.

Next week I will discuss the possible duration of this US$ rally as well as the Fed’s ability to remain hawkish. Until then chew on this…

A government big enough to give you everything you want, is strong enough to take everything you have. –Gerald Ford

About Bret Rosenthal

Interpreting the news that moves markets. Principal of RCM, LLC, and founding partner of the Fortune's Favor Family of Funds
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