Updated US GDP Analysis -- Mind the Shrinkage

On May 5, I posted about US GDP. Back then, everyone was concerned about potential GDP shrinkage of 0.1%.  Turns out it was just revised today to a drop of 1%.

In fact, this was lower than the consensus estimate of a 0.5% decline.

We are hearing many excuses for the shrinkage. Many economists are blaming the weather.  In addition there was there was a drop in private inventories. And that certainly subtracted 1.62 percentage points from growth, way up from the 0.57 percentage points in the first estimate.

At the same time, personal consumption expenditures growth was revised slightly higher to 3.1% from 3.0%; however, that only bumped up the contribution to GDP to 2.09 percentage points from 2.05 percentage points.

Real final sales of domestic product, which excludes the change in inventories, rose just 0.6%.

Bottom line: First quarter economic activity was a disappointment that can't be explained away simply by the weather.

More importantly, how is the market taking the news? Quite well, actually, with stocks rallying and bond yields dropping like hot turds out of the wrong end of a horse.

Why is the market rallying? Because the shrinkage in GDP makes it less likely that the US Fed will stop the easy money party anytime soon. This is a theme I have been exploring with Gold & Resource Trader subscribers for the past two weeks, and we are investing accordingly.

Friday's Must-Reads

I'm entering some more trades today, and I'll have the charts up after the close. Why enter more trades when the S&P 500 just hit a new high?

Let's look at an updated version of this chart of the S&P 500 again, the one I posted on September 18 under the heading, "Your Next Best Buying Opportunity"

(Updated chart)

You can see that despite all the wailing and gnashing of teeth in Washington, the market shrugged off the crisis associated with breaching the debt ceiling.

It's not just that it's an artificial crisis, as I pointed out in my original post. I believe it's that the market saw three previous artificial crises on this side of the Atlantic alone in the past three years. Now, the market barely pulls back in a "crisis."

So, sure, we'll have another debt crisis in February. But it sure looks like the market is becoming immunized against these shenanigans.

Now, let's add in the following bullish facts ...

• So far, 85 S&P 500 companies have reported quarterly results, with earnings topping expectations by an average of 4.2%, according to the latest data from Thomson Reuters.
• S&P's bottom up operating earnings estimate for the SPX is currently $107.58, leaving the SPX's PE ratio at almost 16. Next year's estimate is $121.66. If the SPX continues to trade at that PE multiple, it renders a price target of 1946. 
• The US is now the top "oil" producer, if you measure by all liquids, and not just the black gooey stuff. That continues to help our balance of trade enormously.
• Overseas, in the other big economy that matters, China's economy grew at its quickest pace this year between July and September, at 7.8%.  Sure, experts are calling for a slowdown into the end of the year.  It wouldn't be the first time they've been wrong.
• Finally, the generational low is in the rear-view mirror. And we're breaking out higher. Holding 1575-1530 keeps this breakout intact.
  

Source


Those are the good things. Bearish headwinds include: 

• Consumer confidence that has been battered by all the political shenanigans. 

• The government shut-down sucked $24 billion out of the economy. This caused S&P to lower its forecast for annualized US growth to 2% from 3%. For more details on what the government shut-down cost, see this.
• Wall Street will start anticipating another, even worse budget battle in February. That will slow down corporate spending and money could flow to the sidelines again.

You can add your own ideas to this list.  Bu they say the market climbs a wall of worry, and that's just what I think it will do into the close of the year. 

Now, for those must-read stories ...

Chinese Scientists Invent Lightbulbs That Emit Wi-Fi 

Britain's gold exports to Switzerland are surging. And from there, it goes to Asia.

The Average 401k Balance Has Nearly Doubled Since the 2008 Crisis 

The "Baffling" Moves in Gold. Somebody's fat finger is showing.

Goldman: Now is Not the Time to Short Gold. Hey, wait a minute. You just said .... aw, shoot!

President Obama Bashes Bloggers Then Shills For Monsanto. Yeah, I saw that, too.
The Truth About the Deficit

Look for my charts later today. And if you slide early into the weekend, have a great one. Chill out and relax. Here, this will get you started ...