Friday, January 27, 2023

Morning Note: Under the GDP Surface

My response to my good friend Sam's comment on yesterday's blog post (he mentioned the Q4 2022 economy and the impressive resilience of the equity market of late):

"You bet Sam... And, definitely, the near-term equity market is in the hands of the fed...

With regard to Q4 GDP, under the surface revealed a less than rosy picture, stripping out what are maybe the less telling data (govt spending, inventory and exports), we end up with essentially flat results (0.6%)... It was very telling, when you focus on housing, durable goods and business equipment spending -- according to researcher Erik Basmajian, we actual contracted -3.2% in Q4... Narrow it down to just housing and durable goods, and we're looking at a serious recession (-5.5%).

Peter Boockvar also does a good job breaking down the data:
"Digging into GDP ex government spending and gross investment saw final sales to private domestic purchases grow just .2% in Q4, the slowest since it went negative in the first half of 2020 and December 2009 before that. Negative prints likely follow from here. Real final sales which takes out the influence of inventories grew by 1.4%.
Bottom line, Q4 GDP 2022 rose 1% (rounded from .96) from Q4 GDP 2021 on a real basis. I expect negative GDP prints from here in Q1 and Q2."
All of this is consistent with the signal from our own general conditions index... I.e., recession risk is high in 2023...

But, you're right, the market action suggests soft landing...

Lastly, the intraday action is quite interesting... Apparently there has been a massive amount of speculation using 0DTE (zero day to expiration) call buying at daily bottoms leading to these huge intraday ramps -- day-trading the dips (en masse) so to speak... Let's call that a shaky setup that could open the market to some not-small downside if/when it dries up...

Bottom line, it's just a messy setup right here... Could indeed continue to melt higher, but I'd be very careful..."

Asian stocks were mostly green overnight, with China shuttered this week for the lunar holiday... 10 of the 13 open markets we track closed higher.

Europe's mostly green as well so far this morning, with 14 of the 19 bourses we follow trading up as I type.

While the major US equity averages are up to start the session, sector breadth, like yesterday's early action, is a bit suspect (healthcare, energy, and staples are trading lower): Dow up 129 points (0.36%), SP500 up 0.42%, SP500 Equal Weight up 0.29%, Nasdaq 100 up 0.52%, Nasdaq Comp up 0.64%, Russell 2000 up 0.60%.

The VIX sits at 18.18, down 2.94%.

Oil futures are up 1.26%, gold's down 0.09%, silver's down 1.27%, copper futures are down 0.49% and the ag complex (DBA) is down 0.05%.

The 10-year treasury is down (yield up) and the dollar is up 0.07%.

Among our 36 core positions (excluding options hedges, cash and short-term bond ETF), 20 -- led by Dutch Bros, Amazon, uranium miners, Albemarle and MP Materials -- are in the green so far this morning. The losers being led lower by Brazil equities, silver, Nokia, base metals futures and long-term treasuries.

"Our difficulty is we listen to a lot of things."

--J. Krishnamurti 

Have a great day!

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