Monday, August 24, 2009

3rd Quarter GDP Will Be Positive, Thanks To Big Subsidies

We are going to get +GDP next quarter due to government spending and $3 billion subsidy from government (cash for clunker) and additional $300 million subsidy for energy efficient appliances and $8000 tax subsidy to first-time home buyers. I think it will be a one time event and 4th quarter GDP will be sluggish due to weak job market and lack of strong consumer consumption. My forecast for 3rd quarter GDP is 2.28% .

I start to wandering who could be next? Victoria's Secret or Disney?! Are we going to bailout every body? Are we going to subsidize everything? Are we going to subsidize underwears too? I would love to get government subsidy to buy some for my girlfriend LOL.
This is a phony recovery; we can't keep doing it for ever. Sooner or later it is going to blow up. If they continue to bailout every single "too big to fail" company, dollar won't be the world reserve currency in near future and that day will be a sad day for America.

Our government acts like drunk person. They keeps making wrong choices. As I said many times before we need to spend the precious money on real economy to create industrial jobs who have potential to export because American consumers will be weak for a while.

The thing that worries me the most is the number of foreclosures that is on the rise and increasing number of prime mortgages that are delinquent. To me it shows people with good credits are falling behind their loans.
On Friday the existing home sales was better than forecast that is very positive, but devil is in the details, single-family, town homes, condominiums and co-ops – rose 7.2% to a seasonally adjusted annual rate1 of 5.24 million units in July from a level of 4.89 million in June, and are 5.0% above the 4.99 million-unit pace in July 2008. The last time sales rose for four consecutive months was in June 2004, and the last time sales were higher than a year earlier was November 2005. Note that the seasonally adjusted data was much higher than raw data, non-seasonally adjusted June vs July sales increased 2.1% vs seasonally adjusted of 7.2% increase.

You may ask where is the problem? month to month we have 2.1% increases in existing home sales not decline. I agree but this increase is due to $8000 government subsidy for first time buyers that is going to expire in November, any body who wants to take advantage of this program should buy a house by end of September to be qualify. Obviously spike in home buyers is expected when we getting closer to final days of program. The real problem is shadow inventory, many buyers who bought houses that could not afford and they are waiting for first sign of recovery to flood the market. As long as number of sellers are higher than number of buyers we won't see increase in housing prices. Note that we have 40-50 months worth of inventory. It is normally about 12 months worth of inventory. We need to see the inventory of houses declines.

S&P500 moved above 1015-1020 resistance that I mentioned last week. If it can hold on to 1015 it would be very positive. As you know fundamentals can't justify the rally ,but the technicals look good as long as S&P500 stays above 1015-1020. Watch out for these levels, failure of the bulls to keep the market above 1015 means starting the pull back that I have been looking for.

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S&P500 Possible Moves In August