Thursday, August 28, 2008

Here come the Bulls...

The markets continue to feed of suspect data and spiral higher. I've been saying for some time that you need to be especially wary of the government data and in particular watch how the big money reacts to the data.

The two most recent data releases - durable goods and GDP - have been interpreted as good news and the markets are up about 350 points in the last couple of sessions. The headlines and the summary reports run by the news wires clearly seem to be good news for the economy. Again, I don't recommend fighting the news but be aware that most of the big money uses head fakes like these establish short positions.

1) Durable goods - Consider as Goldman Sachs noted that "Durable goods orders beat expectations with a 1.3% month-on-month increase in July. But the apparent strength is due to higher prices, not stronger activity. In fact, deflating orders by the producer price index for durable manufactured goods shows a 9.4% year-on-year drop in real orders, the worst since early 2002." In effect we report durable goods orders in dollar terms and since we are seeing fairly profound producer inflation we are selling fewer goods for more money and that gives the illusion of a strong economy when in fact the exact opposite is occurring . For example, assume that last year a producer of paper equipment might have sold 10 units for $1,000,000. If today they sell 9 units for $1,100,000, the durable goods number shows a 10% increase, when the reality is they've sold fewer goods and the associated inflation that they are experiencing (steel, energy, raw materials) offset any price gains they've realized.

However, most small money traders and people running the desks while the big boys vacation in the Hamptons this week will see Durable Goods Beat Expectations and they'll start buying stocks with two fists.

2) GDP - Again the headline here screamed Q2 GDP Revised UPWARD to 3.3%!! and away they went. However, the devil is in the details - Inventories rose, stimulus spending drove some of the growth, exports were surprisingly strong as a result of the weak $ and Federal Government continues to spend like a drunken crab fisherman on leave in Dutch Harbor (shout out to my fellow Deadliest Catch viewers). Q3 will not likely see a repeat of these events as the US $ has strengthened and the stimulus checks are almost all spent.

As expected this should present an opportunity to build a short position in the first weeks of September.


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