Monday, July 22, 2013

Choose your data wisely

There has been a great deal of hand-wringing about the economy getting ready for takeoff and what that means for the Fed, the stock market and your retirement account in recent months.

The problem is that this story line has hit a bit of an air pocket over the past 2 weeks. If you are in the "things are getting better camp" you point to earnings for the S&P 500 still showing close to 10% growth vs. last year.  A deeper reading of that data though shows that almost all of that growth has come from financial firms (the banks - hmm, where have I seen this story before - 2007?).  Equally troubling is the lack of revenue growth.  Company after company is showing earnings growth through cost controls.  So far only 50% of companies have matched their revenue expectations.  This gives the "US growth is slowing" camp lots of ammunition.

Also, when my budding 10 yr old oil analyst notices that regular unleaded prices have nearly reached $4 again locally you know that gas prices are going to start impacting retail spending.  I've read article after speculating on what has caused this latest spike - summer driving, Egypt (btw: did that story fall off the map or what?**), and refinery outages but the reality is no one knows.  The price got a little juice from Egypt and a refinery that lost power and then the traders started bidding up the price and without any reason the price went higher because there were more buyers than sellers.  I wish there was a better explanation but there isn't.

So with higher gas prices and lower consumer spending, the current forecast is for US economic growth to be just under 1% in the second quarter.  That sounds a lot more like stall speed than it does a point of lift off for the US economy.  So, that begs the question can the Fed really start to "taper" their buying?  Probably not, which means stocks actually will have a bid underneath them despite weakening fundamentals.  The stock market has become the new home of the no money down mortgage - no perceived risk as long as things keep going up.

That's great until things change :)

** I should note that the story of Egypt remains on the front page of most major global news outlets.  In the US we are apparently obsessed with some British woman having a baby and where the President is vacationing.

No comments: