TMFDeej (99.47)

Q2 GDP was a bunch of baloney / PM Smokes Big MO

August 29, 2008 – Comments (1) | RELATED TICKERS: MO

Everyone sing it with me, the Fed is not going to raise rates, do da, do da.  I have been saying for months and I will continue to say that the Federal Reserve will not raise interest rates before the end of the year and likely not until mid-2009 at the earliest.  Much of the dollar strength that we have seen lately is based on the premise that the Federal Reserve is more likely to raise interest rates before the ECB.  I say hogwash.

Wait you say, the second quarter GDP was amazing, right?  Uhhhhh, no.  Yes, the revised Q2 GDP came in at an astonishingly high 3.3%...by they way, why do they even publish a first look when it's off by 50%?  If I published an estimate at my job that was off by 50% there would be heck to pay.  I digress. 

Yes, Q2 GDP was much stronger than expected.  However, two things gave it a significant boost

1) exports accounted for something like 3% of the 3.3% rise

and

2) the government stimulus checks made domestic demand look much stronger than it really is. 

If the economies of our trading partners weaken as may expect them to continue to and the U.S. dollar continues to strengthen U.S. exports will slow.  Add more realistic domestic consumption to this and I expect the Q3 and Q4 GDP numbers to be significantly weaker than the Q2 number. 

If unemployment remains elevated and the GDP weakens like I expect it to, the Fed will not raise interest rates.

As I mentioned earlier, without the stim checks consumer spending would have been much, much worse.  The personal income and spending numbers that were published today support this premise:

"Personal income in largest drop in 3 years

Consumers are spending more even though they have less cash in their pockets as the stimulus wave passes, according to a government report. " (link)

Here are a few highlights:

- The Commerce Department said Friday that individual income decreased by 0.7% in July.

- While personal income fell, disposable personal income sank even further in July. Disposable personal income - which is what consumers have after they pay taxes - fell by 1.1% in July, after a 1.9% tumble in June. In May, however, disposable income jumped by 5.7%, largely due to the initial wave of stimulus checks.

- personal spending in July increased by just 0.2%...The uptick in consumer spending was primarily driven by higher prices, however. Individual spending, when adjusted for inflation, actually fell by 0.4%

The bottom line here is that the Q2 GDP was a bunch of baloney.  It is a backward-looking statistic that was pumped up by the government handing out money that it doesn't have to consumers.  Do I believe that we're all doomed and that this is the end of the world as we know it like many of the annoying perma-bear bloggers who constantly post links to negative articles from their canned-food-filled bunkers without ever offering any constructive suggestions about what companies to short, or even a single long play (this is an investing web site right)?  No.  But I have little doubt that the economy is a whole lot weaker than the numbers are showing at this point.  This is why I believe that the recent dollar strength that we have been seeing has been overdone and that the dollar will at best remain flat and eventually begin to lose ground versus other currencies in 2009.  This is good news for commodities, but bad news for consumers.

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Philip Morris Intl boosts dividend 17 percent: Hooray, PM outdoes its old parent company, raising its dividend by 17% versus Big Mo's 10%.  I am long PM in real life and I expect it to significantly outperform the S&P 500 over the next decade.

Deej