Wednesday, January 30, 2013

GDP Post Surprising Contraction in Q4

The markets are slightly lower in early trading, but it looks more like slight profit taking as opposed to a negative reaction to this morning's GDP report.

Q4 GDP came in at -0.1%, a surprising contraction in the face of consensus expectations for a 1.0% gain.  But the headline figure looks weaker than what may be actually happening in the economy.  Huge drops in govt spending and inventories lopped a large amount of growth from the calculations.  But consumer spending, business investment, and housing remain on the upswing.  So it's likely that the former two components will become less of a drag in Q1 and going forward.

Today we will hear from the FOMC and while no one is looking for a change in interest rate policy, many continue to look for hints as to when the Fed may alter its current asset purchase program.  Given today's weak GDP print I think it is unlikely that the Fed will mention any altering of its game plan.  Bernanke may discuss the path to exiting QE during his Q&A session if asked.

Elsewhere in economic news, today's ADP employment report showed private payrolls rose by 192,000 in January, above expectations for 175k increase.  But this datapoint hasn't always correlated that well to Friday's official govt payrolls report.

Earnings reports continue to roll in.  In a flip from yesterday, we are seeing more positive stock reactions than negative ones so far.

Stocks rising on earnings:  AMZN, CVLT, BA, PJC, PSX, MAN, LLL, ADT, SLGN

Stocks falling on earnings:  ROK, BXP

Asian markets were higher across the board overnight, led again by Japan.  Europe is seeing declines this morning after Spain posted a Q4 GDP contraction of -0.7%.

The dollar index is lower today, mostly helping precious metals.  Gold prices rallied to $1680 and silver prices are higher as well.  Oil prices are roughly flat near $97.50.

The 10-year yield is getting another boost as Treasury bonds selloff.  This is somewhat a surprising reaction to a weak GDP report, but could be indicative of further fund flows out of bonds.  The 10-year is at 2.02% so far.

The VIX is also bouncing from last week's low levels in the 12s.  So far it is up +5.7% back to the 14.0 level.

Trading comment: Buyers continue to funnel money into equities despite the market having one of its biggest runs since 2004 and reaching overbought levels.  Bullish stampedes like the current one do run their course eventually.  Raymond James like to say that they last on average 17-25 sessions with few pullbacks along the way. By their count we are at about day 20 today.  Food for thought.  Beyond what's going on in the major indexes, we want to focus on individual stocks and how they are faring in terms of price/volume action.  On that front, fewer stocks have been making new highs in recent days which means the leadership in the market has been narrowing, another sign that the market is tiring.

KAM Advisors has long positions in PSX


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