Fiscal Cliff Fools Should Mind the Q3 GDP Report & Q4 Forecast

An upward revision in the third estimate of Q3 GDP should serve as a guide to U.S. legislators, not a comfort. This morning’s data showing real economic expansion of 3.3% represented a significant increase over the second reporting of 2.7% growth for the same quarter. It was also importantly higher than the 1.3% growth seen in Q2, and it exceeded the consensus economists’ view for plus 2.8%. The report offers Congress an important message and at just the right time for it, so hopefully legislators are paying attention. Because the fiscal cliff conflict, with global economic deterioration, has expectations for Q4 2012 significantly short of the result for Q3. It would seem in the interest of all that economic growth gain traction rather than being undermined just as it does.

The market, as measured by relative indexes, has seen a muted reaction to the positive news because of concerns about the future. We can see through the table below that stocks of all sorts reflect contained enthusiasm today on what would have otherwise driven shares much higher. Furthermore, our esteemed representatives in Washington D.C. should be interested in seeing investment capital flows that favor economic growth and so fuel it. Thus, the non-reaction of stocks to this news today is quite concerning to me, as it should be to you.

Index Tracking Security	Thursday Change Through 11:30 AM ET
SPDR S&P 500 (NYSE: SPY)	-0.05%
SPDR Dow Jones Industrials (NYSE: DIA)	-0.14%
PowerShares QQQ (Nasdaq: QQQ)	-0.42%
iShares Russell 2000 (NYSE: IWM)	+0.12%
Wilshire 5000 ETF (NYSE: WFVK)	Price Not Updated

The final reporting of Q3 GDP is based on more complete data, and so is more reliable than earlier versions of the estimate. The Bureau of Economic Analysis (BEA), which is responsible for reporting GDP, indicated that the general picture of the economy had not changed much since the prior reporting of Q3. However, two important aspects had been altered some.

The Real Personal Consumption Expenditures (PCE) data-point was hiked to show an improved growth rate of 1.6% in Q3, versus 1.5% in Q2. Considering the “real” aspect of this data, and that the price index was unchanged, we can enjoy the gain without concern about noise. American demand for goods drove the increase, though those were continued at discounters like Wal-Mart (NYSE: WMT) and Amazon.com (Nasdaq: AMZN). At the same time, real imports of goods and services declined 0.6% in Q3, contrasting with the 2.8% increase in Q2.

If U.S. legislators want to best support the economic expansion seen in the Q3 data, it would be wise to keep in place supports to consumer and business spending. That means income tax rates are best left as is, in my view, with perhaps some flexibility at the very top of the earner ladder. Still, with increased healthcare costs for many who fall in between the various measures of “the rich”, those at the lower end of the wealth perspective ($250K earners) are facing the prospect of a burdensome tax hike. We need to keep the load off them, and raise that tax increase threshold significantly higher. We can support revenue enhancement in a less than smothering manner.

The latest housing data, including today’s reported Existing Home Sales annual pace increase to 5.04 million, a 5.9% improvement over October’s pace, argues for continued support of real estate market incentives. So, taking those off the negotiating table completely would be wise in my view, since housing activity is still at relatively low levels. Homebuilder sentiment, just reported this week, is finally climbing to less than pathetic levels, but can be undermined easily because it is mostly built on hope and less on real buyer traffic. We need to keep incentives in place for the historically critical real estate market.

This article is not intended to discuss the entire fiscal cliff or budgetary issues, or to find places to cut costs or to raise revenues, but to reinforce the still relative need for fiscal policy programs geared to provide incentive and fuel for economic growth. Economists see fourth quarter GDP growth slipping to 1.4%, according to a Bloomberg survey conducted in December. As we know, several economists’ groups have warned that a complete failure to at least control the rate of descent from the fiscal cliff could drive the U.S. economy into recession. Further, I’ve warned that the delay in addressing the cliff has effectively stymied business investment and hampered the economy in Q4, and that is reflected in the consensus view for economic growth in Q4.

Legislators would do well to compare today’s reported GDP data with economists’ expectations in order to preserve this still vulnerable economy and to fuel capital investment in it. Congressmen should be noting today’s non-move in stocks, and gaining some understanding of what that says about business and investor confidence in their ability to correctly steer fiscal policy. Action is in order and overdue.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

Builders' Tail Wags the Dog

By "The Greek"

The National Association of Homebuilders (NAHB) published its Housing Market Index (HMI) Tuesday, and the shares of homebuilders climbed higher on the news. The SPDR S&P Homebuilders (NYSE: XHB) was up 2.1% on the day. However, I’m of the opinion that the tail is wagging the dog here.

First, let me reassure real estate enthusiasts that I agree that the housing market has bottomed and is recovering. I was one of the first to make that call, just see my July 2011 article saying as much, but I have been warning (painfully so) that economic conditions should deteriorate and affect the market for new homes and the shares of cyclical homebuilders. Still, I’ve also advised stock investors that the well-capitalized publicly traded homebuilders like PulteGroup (NYSE: PHM) and Toll Brothers (NYSE: TOL) would continue to gain market share from beaten down smaller builders, and advantage from that.

I’ve also recently suggested that now is probably the best time to buy a home and real estate generally, but I believe that this is a special situation that may not last for long with real estate prices likely to spike along with mortgage rates. I expand on this view in an article I’ve begun working on for Seeking Alpha that I expect to publish shortly. Still, I also believe that for most builders, the HMI better reflects what they are hearing and reading than what they are seeing in terms of traffic through model homes and phone calls for custom builds.

The NAHB surveys builders of all sorts and sizes, and I believe this has been the reason why the index has remained under the break-even mark of 50 for so long. Most builders are still behind the eight ball when you take an all-inclusive look. I bet if you asked the ten largest builders in isolation, you would get a number much higher than 50 on the HMI, but if you asked the 100 smallest, you would find a number far short of the current index. Or, you would find a similar figure, but one built on little tangible reason, because builders like the rest of us, keep reading and hearing about how the real estate market is improving.

Anyway, the December read of the HMI produced the eighth consecutive month of increase. The index edged up to 47, from a revised lower reading of 45 (46 initially) for November. Surveyed economists were in agreement in their forecasts at the consensus, and so the shares of builders rallied Tuesday on the good news.

Homebuilder	Tuesday’s Change	YTD Change
SPDR S&P Homebuilders (XHB)	+2.1%	+59%
PulteGroup (PHM)	+3.2%	+195%
Toll Brothers (TOL)	+0.9%	+59%
K.B. Home (NYSE: KBH)	+3.3%	+156%
D.R. Horton (NYSE: DHI)	+2.0%	+62%
Beazer Home (NYSE: BZH)	+5.3%	+32%

 * Performance adjusted for dividends and splits

My thesis is reinforced by the NAHB data. While two of the HMI components improved in December to above 50.0, the component measuring the actual traffic of prospective buyers was still just 36, 14 points below the level that would signify a neutral industry observation.

HMI Component Index	Current Mark	Monthly Change
Current Sales Expectations	51	+2
Forward 6 Month Expectations	51	-1
Buyer Traffic	36	+1

Considering that 50 marks where an equal number of builders find the situation good as find it poor, we would temper enthusiasm about the new home market. And given the gains in the XHB and most homebuilders’ shares this year, there’s all the more reason to expect pushed forward capital gains selling in January. So, if the shares rally some more on a fiscal cliff solution that is inclusive of ongoing real estate incentives, I would take profits in these shares sooner rather than later.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

German GDP Outlook Cut

The German Bundesbank admitted to a decelerating economy, and reported real GDP growth would slow in 2013. The admission of weakness in Europe’s key economy lends to concern of the contagious nature of the euro region’s financial and economic crisis. As a result, stocks across the euro region were lower, as the news also weighed on U.S. futures in the early morning. The SPDR S&P 500 (NYSE: SPY), SPDR Dow Jones Industrials (NYSE: DIA) and Powershares QQQ (Nasdaq: QQQ) are pressured by the report, though the day’s jobs report will ultimately dictate direction.

Our founder earned clients a 23% average annual return over five years as a stock analyst on Wall Street. "The Greek" has written for institutional newsletters, Businessweek, Real Money, Seeking Alpha and others, while also appearing across TV and radio. While writing for Wall Street Greek, Mr. Kaminis presciently warned of the financial crisis.

German GDP

The German DAX Index was down 0.2% just after 7:00 AM ET, and the EURO STOXX 50 Price Index was off 0.3%. Key German securities like the iShares MSCI Germany Index (NYSE: EWG) were likely to open lower as well. Deutsche Bank (NYSE: DB) shares were trading lower in Germany to start the day, and my expectations are low for a short list of important German shares.

German Based Stock	Premarket Trading (7:30)
Volkswagen AG (OTC: VLKAY)	NA
Deutsche Bank (NYSE: DB)	-1.3%
SAP AG (NYSE: SAP)	-0.1%
Siemens AG (NYSE: SI)	NA
BASF (OTC: BASFY)	NA
Bayer (OTC: BAYRY)	NA

The German central bank said that soft euro region economies combined with global economic slowdown are weighing on Germany’s economic production. The Bundesbank reported real GDP would likely slow to a growth pace of 0.4% in 2013, down from its June forecast for 1.6% growth. The bank also reduced its 2012 expectations to 0.7% GDP growth, which was down from its previous estimate for 1.0% growth. The bank colored its gray forecast with a note that: if all should go well with the euro region bank and sovereign debt crisis, then growth could revive to a pace of 1.9% in 2014.

Investors will and should have little faith in hopeful long-term forecasts during a period of declining current estimates, as in my experience, cuts to forecasts in such periods are more likely than the realization of them. The same goes for stocks in periods of declining EPS estimates, based on my personal experience and study as an analyst.

Thus, investors might reconsider early bets on recovery. Ahead of the ECB In early September, I noted European stocks likely marked near-term bottom, and I said they should experience a short-term recovery. If you think that was something, see my June article discussing a super relief rally for Greek and European shares, and look at the charts.

Chart by Yahoo Finance

At this point, I see that recovery tested and would lighten or exit positions even as European central banks discuss adding more support. The shares of relative securities are much higher since our articles authored in September and June. However, if recovery is pushed forward now, then investors could reconsider the securities, especially if estimates and operating results are hampered near-term. Depending on the importance of tax considerations, sales of such securities could begin today or in earnest in January.

European ETF	Change Since August
iShares Europe (NYSE: IEV)	+8.4%
iShares Germany (NYSE: EWG)	+12.4%
iShares France (NYSE: EWQ)	+10.2%
iShares U.K. (NYSE: EWU)	+5.1%
iShares Spain (NYSE: EWP)	+11.4%
iShares Italy (NYSE: EWI)	+8.7%
Global X FTSE Greece (NYSE: GREK)	+32.6%

I conclude and reiterate that pressure remains on American shares as well, due to the apparent deterioration in the important German economy. However, the U.S. market will be completely dependent today on the data from the Labor Department. The news regarding employment is not expected to be healthy, but pundits have Hurricane Sandy to place the blame upon for now. On net, at this hour, I would take risk off.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

Layoffs Up 20% in November

Money minders and economy watchers got bad news Thursday when Challenger Gray & Christmas reported Job Cuts climbed by 20% in November. It’s a bad sign for an economy on the brink of a fiscal cliff freefall. Furthermore, the situation seems to be deteriorating in December, with a high profile mass purge plan just admitted by Citigroup (NYSE: C).

Layoffs

Regarding November, immediate blame wants to find Hurricane Sandy, but the responsibility falls upon the bankruptcy of Hostess Brands and its mass impact to the labor count, with 18,500 jobs lost on the bankruptcy alone. If not for the Hostess failure, announced layoffs would have fallen in November from October’s tally of 47,724. Instead, we saw the layoff count rise to 57,081.

Still, big layoffs are commonplace, however unpredictable. After all, the month marked the third consecutive increase. That reflects poorly on the fourth quarter, so that the year-to-year improvement marked thus far in 2012 might narrow before year’s end. Through November, year-to-date, total layoffs have measured 13% less than in 2011, at 490,806. The pressure is not easing either with Citigroup’s (C) just announced reduction of 11,000 jobs; those will impact December’s data.

Big impact layoffs have dictated doom in 2012, with Hewlett-Packard’s (NYSE: HPQ) high profile headcount cut of 27,000 workers in May. In October, Ford (NYSE: F) workforce reductions made up almost a quarter of the total layoffs for the month. Citigroup’s cuts may be followed by more massacres on Wall Street in December. According to Challenger's data, New York is already third in job cuts this year, behind California and Texas. A New York Post article published in late September which referred to the comments of a banking analyst at Nomura, indicated that banks would need to cut workforce to safe-keep return to shareholders.

Some say the workforces of Wall Street will be 10% to 15% slimmer in 2013. European banks have been more active for obvious reasons, with Deutsche Bank (NYSE: DB) announcing a cut of 1900 people in July. UBS (NYSE: UBS), Credit Suisse (NYSE: CS) and Goldman Sachs (NYSE: GS) announced cuts around the turn of last year. Bank of America (NYSE: BAC) has continuously chipped away at the 30,000 jobs it said it would shed last year in September. Morgan Stanley (NYSE: MS) is likewise working on previously declared firings. J.P. Morgan Chase (NYSE: JPM) has actually added jobs over the last three years. Still, with margins tight due to record low interest rates, and with global economies at issue and markets complicated as a result, the banks have increasingly turned to expense reduction to save return to shareholders. Still, layoffs can go too deep and significantly impair revenue generation, so a fine dividing line must be carefully approached on Wall Street. Financials led layoffs in years past, but this year’s biggest job cutters by industry have come from computers (on HP), transportation (Ford), food (Hostess), Healthcare/Products & Retail.

The end of the year can be hotter for the hook, as companies look to meet their new (and likely slimmer) budgets. Likewise, a tight and limited bonus pool can influence thinking about inefficient producers. A quick cut can mean a fatter bonus for survivors, ignoring the costs of litigation etc. Some companies also benefit from a write-off around the close of the year, to help fog the red reality they might otherwise have to show shareholders. Finally, I believe the fiscal cliff issue has frozen the hands of small businessmen, and that the cliff and also the re-election of the health conscious President has large and small firms contemplating rising healthcare costs and workforce counts. Whatever the case, I think we can all agree the current period is not one inspiring of new hiring. As I continue to cover economic reports and the economy, readers may want to follow the column.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

A Harsh Economic Reality

On Monday morning, as I watched the popular media pumping up the market on the prospect of a Greek debt buyback and economic data from China, I thought, gee that sounds fantastic. I almost bought into it, though it was before I had my first coffee of the day, a time when I’m relatively useless to the world. A few minutes later, with a sip of Joe and a glance at the latest ISM Manufacturing Index, and then while recalling the more recent stream of unemployment reports and the durable goods orders data of last week, I think I said out loud, “What are they smoking!?” Even putting fiscal cliff concern aside, the economic reality of today does not reflect something supportive of any sort of celebration.

Our founder earned clients a 23% average annual return over five years as a stock analyst on Wall Street. "The Greek" has written for institutional newsletters, Businessweek, Real Money, Seeking Alpha and others, while also appearing across TV and radio. While writing for Wall Street Greek, Mr. Kaminis presciently warned of the financial crisis.

Economic Reality

Back in mid-November, I warned readers of my column that the fiscal cliff posed more than just a threat post January 1st. I said that with each and every passing day, small businesses were withholding capital investment and were not hiring new employees. I suggested that businesses large and small were also more likely to consider labor force reductions given the new healthcare costs they were about to commit to with the President’s reelection. Whether right or wrong, and while I assure you I am in favor of health care for all, the cost issue is a new economic reality we’re going to need to adjust to. So I did my best to raise alarm about the current economic costs of fiscal cliff fear, versus the tendency of most to focus on the result of certain end of year actions or inactions. With a vulnerable economy continuing to lack support from international demand (mostly Europe), and with unemployment still elevated, I said recession was again threatening. I think any reasonable investor with a sense of the realities of Main Street today can concur with that view.

A few voices yesterday did direct attention to the importance of the ISM Manufacturing Survey result, but the information was mostly drowned out by noise at television media. Though, you should take note, because the stock market took notice yesterday. After a gap open higher on the hype of the day, the SPDR S&P 500 (NYSE: SPY) reflected economic reality as trading progressed, ending the day down a half of a percentage point. The Powershares QQQ (Nasdaq: QQQ) was down by a lesser fraction, but the SPDR Dow Jones Industrial Average (NYSE: DIA) was off 0.4% (after benefiting from a closing spike) due to its sensitivity to the industrial sector measured by ISM. In that regard, a closer inspection of stocks shows the Industrial Select Sector SPDR (NYSE: XLI) fell by a more significant 1.1%, and the iShares Dow Jones Basic Materials (NYSE: IYM) showed the sensitivity of basic material names to the data with its 1.6% decline on the day.

Chart by Yahoo Finance

Last week’s Durable Goods Goose-Egg concerned me, because of the details of the data, which we discussed in the linked to article here. So, ISM’s Manufacturing Survey for November, showing an index under 50.0 at 49.5 and therefore reflecting contraction, compounded on concerns. November marked a sharp drop from October’s read of 51.7, and it was off the economists’ consensus for a similar reading (51.7). November marked the fourth month in the last six showing contraction, though it followed two months of growth. Furthermore, the reading marked the lowest level in the index since July 2009, which you’ll recall was a really tough economic time. Add to this information the fact that the last several weeks of Initial Jobless Claims have measured near or above 400K (though certainly affected by Hurricane Sandy), and you have more than enough cause for concern.

Thus, I remind investors that the economic reality of today remains less than perfectly represented by media commentary and even by the rise of stocks in 2012. The earnings season just passed served as a wake-up call to that economic reality, but investors remain hopeful that a fiscal cliff compromise will serve as adequate support for stocks. Unfortunately for profit seekers in equities, hopeful valuations are regularly checked by economic realities in times like these. A meaningful fiscal cliff compromise might offer the market a holiday gift (I doubt it), but these realities will nonetheless persist and continue to weigh in 2013. Economic report coverage remains a key topic area for my column here, so econo-watchers may want to follow along.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

POWERBALL Stocks

A multi-part series on speculative investment and where the big payoffs come from in the stock market

Part I: Stock Market Myth

Investors covet 10-baggers, or stocks that make ten times their money, so the windfall of a Powerball jackpot, which returns millions of times the invested dollar or two, is truly incomparable mathematically. It’s also off the charts in terms of the time it takes to get there. However, the impact to the quality of one’s life can be similarly substantial for holders of the shares of the really big stock gainers.

Historically speaking, we recall the millions made by early investors in Berkshire Hathaway (NYSE: BRK-A, NYSE: BRK-B), Wal-Mart (NYSE: WMT), Home Depot (NYSE: HD), Microsoft (Nasdaq: MSFT) and Apple (Nasdaq: AAPL). In more recent times, names like Priceline.com (Nasdaq: PCLN), Whole Foods (NYSE: WFM), AutoNation (NYSE: AN) and Chipotle Mexican Grill (NYSE: CMG) have won the attention of stock market thrill seekers. Still, none of the gains made in these lottery stocks came overnight, and while the winners based their rise on solid footing, many windfall gains often prove fleeting on Wall Street in the end.

Chart by Yahoo Finance

In recent times, we’ve seen huge profits made and lost in trendy names like Crocs (Nasdaq: CROX), Heely’s (Nasdaq: HLYS), Jones Soda (Nasdaq: JSDA) and the like. Today speculation opens about the future fates of former high risers like Netflix (Nasdaq: NFLX), Research in Motion (Nasdaq: RIMM) and Under Armour (NYSE: UA). Biotechs rise and fall on speculation about FDA approvals and novel treatments for societal spanning ailments.

Chart by Yahoo Finance

Take note of the similarities of the lasting winners mentioned atop the article. They all compete in relatively well understood businesses, but each produced disruption to their individual industries and reinvented the way things were done and from the perspective of the consumer or customer. The kinds of names winning investors are enriched by are usually produced by these types of companies providing viable goods or services in lasting markets.

Obviously, the profits have been huge in some stocks, though they have taken some time to accumulate. Still, legendary investors like Warren Buffett would never opt to chase speculative stocks with big near-term gain hype and momentum if they could do it all over again. Instead they continually choose to climb higher with small and measured steps, and yet they have reached great heights. That said, for the average investor, it is human nature (read greed) that drives a coveting of the big life changing win, and all of us are drawn to the prospects that might provide it. But it is mostly myth that a million can be made in one stock and in short time.

Part II in this series will focus on stalwart speculative sectors.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.