Thursday, August 28, 2008

When MORE seems like LESS

GDP surprises then amazes...
GDP was up strongly by 3.3% but most of that was trade- stronger exports and dropping imports. Without trade GDP was up by a skinny 0.2% (saar). So amazingly stocks rose sharply. It's no wonder that stocks improved on these sorts of fundamentals. And some key bank stocks that had been troubled were up by 5% on the day. Fannie and Freddie saw their shares up by 17% and 9% respectively. Why? Beats me. Strong GDP for a fluky reason?

Optimism is beginning to spread. But maybe it's only bull optimism in a still-bear market - or barren market.

It's Dell and it's not swell
At the close of Biz on Thursday Dell reported earnings numbers that were somewhat mixed; better revenues but it missed on its earnings-per-share. The real dirt was in Dell's comments as it saw a cutback in tech spending spreading in Europe and in parts of Asia. Even the bullet proof economies are taking it on the chin or at least beginning to cut back.

Still bullish?

There is a school of thought out there that sees the economy strengthening. I don't get it.

An uphill road for the consumer
The tax rebates are done and consumers have been pulling back even before the job losses got to be very large in this cycle. The rebates themselves did not spur all that much spending as it turns out. Sure oil is off-peak and at-the-pump gas prices are some 11% off their recent highs, but gas is still expensive. Consumer confidence reports are still bottom feeders even if they up off their most recent lows. A downdraft in gas prices will do that for you... but not much more. There is little to cheer prospects for improved consumption.

Dell as bellwether?
If the Dell report is a harbinger it is saying what I have believed all along, that the slowdown is global and that it will include even the formerly fast-growing developing nations. If the overseas economies slow and oil prices remain high where does the stimulus come from to boost consumers again? House prices are still falling, and while housing may be trying to get some traction we are looking a prices that remain weak, continue to drop, and at banks that have continued to tighten up lending standards.

What'cha gonna do when the well runs dry?
Where are consumers going to get any extra to spend? Incomes are limited by continued temperance on wages. Businesses are not expanding payrolls. Lower house prices do not encourage equity tapping - some consumers have no equity to tap in any event.

Hope...a four-letter word
The good news is that inventories seem to be in good stead. Durable goods orders, backlogs and shipments have been firming. MFG reports seem to have stopped eroding. They are not strong but they are not unraveling.

There is a case to be made for some stability and a drawn out recovery, but nothing fast. I still don't believe it or buy into it, but there is enough there to get some...traction on the TV circuit.

I fear this is a best case that still is poor and still is too good to be true.

Best case scenario is not for the best case
There is far more reason to look for more slippage. While stocks are falling in line with their historic performance in recession they are bracing for an upside that might be delayed further - history be damned! What I am concerned about is that this consumer-led recession is different. I have said in the past, the worst forecasts I have seen have come from forecasters under estimating the consumer. The American consumer is resilient. But this time the consumer is really in a bind. The debt economy has caught up to American consumers, businesses and banks. Consumers simply do not have the options they have had in the past. Banks are seeing to that. Consumers are no longer in the driver's seat. You can't score if the coach won't let you off the bench and into the game. Consumer resilience may not even be a factor this time.