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A look at just how overstated Q3 GDP was / CIT was easy points

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November 02, 2009 – Comments (9) | RELATED TICKERS: CIT

MacroMavens recently published an excellent analysis of the +3.5% Q3 U.S. GDP number that Mr. Market was so pleasantly surprised by.  After taking a closer look at the details, it things aren't quite as rosy as the number indicates.

-  Inventories continue to be liquidated at a rapid pace.  The $130 decline was the second most rapid inventory contraction on record, however since it was $30 billion better than the $160 billion in the previous quarter it added 1% to the Q3 GDP.

-  Cash for Clunkers and tax credits for home buyers added another estimated 1.5% to the GDP.

-  Government stimulus spending added another 0.5%.

That leaves the "real" Q3 GDP at +0.5%.  That's a whole lot better than the massive contraction that we had been experiencing and what the Chicken Littles off the world are squawking about, but also much worse than what the V-people were expecting.  As I have been saying, the truth is in the middle...we're not all doomed, but we're in for a long, slow recovery.

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As a former bondholder of the company who had done fairly extensive research on it and just how terrible its portfolio of loans is, shorting CIT when it peeked its head over the $1.50 CAPS minimum price in mid-August was a slam dunk.  Hello 100 free CAPS points.

CIT files for Chapter 11 bankruptcy protection

Deej

9 Comments – Post Your Own

#1) On November 02, 2009 at 6:33 AM, TMFDeej (99.28) wrote:

Oh, by the way, that $2.3 billion that the U.S. government recently loaned CIT probably just went up in smoke while bondholders are receiving $0.70 on the dollar.  How does that make sense? 

If I was Uncle Sam, I wouldn't loan any company a thin dime unless I was at the very top of the capital structure.  Any company or bondholder who didn't agree to those termsis always welcome to take their chances in bankruptcy.

Deej

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#2) On November 02, 2009 at 8:25 AM, alstry (35.86) wrote:

When Shipping is DOWN 20%........When Income Taxes are DOWN OVER 20% and Corporate Taxes are DOWN OVER 50%......the GDP is not growing.

But if you keep clicking your ruby slippers.....you still may believe the GDP is growing.

 

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#3) On November 02, 2009 at 8:44 AM, russiangambit (29.30) wrote:

> If I was Uncle Sam, I wouldn't loan any company a thin dime unless I was at the very top of the capital structure.

TARP money wasn't in the top tier - un-be-lievable. They need to let IRS manage TARP, somehow IRS always manages to get its dues  from what I heard and with hefty % too, and if you don't pay you go to jail. What kind of dialetantes manage TARP ?

>Inventories continue to be liquidated at a rapid pace.  The $130 decline was the second most rapid inventory contraction on record, however since it was $30 billion better than the $160 billion in the previous quarter it added 1% to the Q3 GDP.

In this upside -down market analysts proclaimed it to be the best news in the whole report. To them it means that inventory restocking is still coming, and will add to future GDP. Keep on waiting, guys.

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#4) On November 02, 2009 at 9:52 AM, checklist34 (99.73) wrote:

that inventories are still drawing down is very bullish for future economic activity. 

It can't go on forever, and ... so much as it still goes on this is good for the future.  Drawdown on inventory means companies are still selling more than they are buying (in the fullness of time these two amounts must be equal of course) which portends a bit of a production boom in some sectors once goods in comes to equal goods out or, even better, inventories get re-stocked to more traditional levels.

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#5) On November 02, 2009 at 11:18 AM, leohaas (32.93) wrote:

OK, so you are basically arguing that the stimulus is working!

Congrats to the Obama administration...

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#6) On November 02, 2009 at 11:23 AM, cbwang888 (25.41) wrote:

USD effect on the GDP? If USD didn't go down 10+% since March, the GDP will still be contracting ...

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#7) On November 02, 2009 at 11:34 AM, davejh23 (< 20) wrote:

The money loaned to CIT was part of the stimulus.  That was a big failure.  Nothing in the stimulus has provided real lasting stimulus...just a temporary illusion of growth.  If the intent of the stimulus is to fool the American public into thinking things are better than they really are, then it may be working.  However, it's not strengthening our economy, and it's not putting people to work.  

As for CIT, are they really as important to the retail sector as everyone claims?  Their new lending was already down by more than 60%.  Was this the result of their own reluctance to lend,  their customer's reluctance to borrow, or have their customers already found new sources of funding?  Some still fear that this could disrupt retailers operations at a very bad time, but they're continuing operations, and I don't think the bankruptcy is going to cause any real disruption.

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#8) On November 02, 2009 at 12:43 PM, leohaas (32.93) wrote:

"The money loaned to CIT was part of the stimulus.  That was a big failure."

You win some, you lose some. Not all endeavours in life result in success.

"Nothing in the stimulus has provided real lasting stimulus...just a temporary illusion of growth."

That statement shows a basic lack of understanding of how a stimulus works. By definition, a stimulus is temporary. It cannot be lasting. And the growth we had is NOT an illusion, it is real. It is real because it is a representation of additonal economic activity. That additional activity means that fewer people have lost their job, fewer have lost their house, people have spent more, tax receipts are down less, etc. All in comparison with a situation in which there would not have been a stimulus. So it has strengthened our economy!

 

 

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#9) On November 09, 2009 at 6:01 PM, memoandstitch (< 20) wrote:

Just a friendly reminder.  Economic activity does not equal economic prosperity.  Only sustainable GDP creates wealth over time.  Would you be happy with the 2.7% GDP of 2006 if you knew it contains a ton of subprime mortgages?  Would you be happy with 3.5% GDP of 2009 if you know it contains a ton of clunkers?

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