Look at the Numbers

2006-07-28
Today's Thought of the Day comes from John Succo at Minyanville.

The CEO of DOW was on financial TV last month telling the world how great things were and how positive he was on the company. Yesterday the stock blew up.

We never listen to what people say. We don't listen to Ben Bernanke. No one can tell you anything about the future. You can have an understanding of the state of things, but not how people will react to that state. Trends are uncertain and even CEOs can't tell you much about them. Trends in products that have wide profit margins (insurance) can change overnight; trends on products with small profit margins (toothpaste) are more stable, but the companies are more levered.

We only listen to numbers. The sooner people understand this the sooner they will stop losing money trading stocks. Everyone has an agenda. Numbers do not: people can make the presentation of numbers false, but they cannot make the numbers themselves lie.

So the next time any media says something, take it with a grain of salt. Before you invest your hard earned money, look at the numbers.

John Succo / Minyanville

Mish:

Thanks to Professor Succo and Minyanville for that thought of the day.

Today's number to look at is the GDP.
Here it is in all its glory:

==========================================================
!Gross Domestic Product 2nd    1st   4th   Consensus:     !
!   Overall GDP Growth  2.5%   5.6%  1.8%r          +3.2% !
!   PCE Price Index     4.1%   2.0%  2.9%   Actual:       !
!                                                   +2.5% !
==========================================================

Well the market "seemed" to like the fact that the GDP is slowing but no one can "really" say much of anything othere than the market rallied because it wanted to. Perhaps a better way of looking at it is "risk takers are willing (once again) to plunge back in on any bad news". Bad news has been bought for three straight years so why not buy bad news today?

Rest assured GDP at 2.5% with housing collapsing and 2.5 trillion dollars worth of ARMS resetting over the next two years is not good news. Those too are important numbers but today those numbers do not matter. Perhaps those numbers matter tomorrow.

Supposedly the spin of the day is the market is looking forward to a pause. Of course the pundits have been saying the market has been looking forward to a pause for 5 months now. If and when the Fed pauses, slow growth will be one of the reasons.

The odds of a seeing a sustained rally on a Fed pause has been a losing bet. Not only did it take a pause but several surprise cuts by the Fed in 2000 and 2001 to get a rally. The first couple of rally attempts were eventually sold very hard. In fact, the market did not make a sustained rally until the Fed has slashed rates all the away to 1%.

Historically the time to buy is after the second cut. That would not have worked in 2001 and it may not work next time either given the extreme gross imbalances in our economy.

In spite of the fact that it took rates at 1% to get the economy humming last time, people are still speculating on a pause, a pause that has not yet happened. One wonders what all these "riskloves" are thinking.

I suspect that people are finally starting to believe the Fed can cure anything by throwing money at it. I have heard many comments on message boards over the last year or so "The Fed will NOT let this market fall". My answer has been and still is "The Fed is not in control. They are irrelevant." The Fed is clearly not in control and if they have any sense left at all (debatable of course) they should be scared half to death about increased speculation in the face of a slowing economy.

This market depends on the ability of consumers to consume, and "riskloves" to keep taking more and more risk at decreasing volatilities.

If the Fed could control things, there would not be recessions, there would not be market plunges, and there would not be asset crashes. How quickly we forget the lessons of 2000-2001 just six short years ago. We are about to re-learn that lesson. This time housing will be the driver.

It is clear the economy is weakening, substantially weakening in fact.

In Econ 101 Applied to Existing Homes, Paul Kasriel at the Northern Trust claims housing is in an outright recession. From Kasriel:

In the months ahead, Econ 101 predicts that the prices of existing dwellings will continue to soften.

This will serve to reduce the excess supply as some not-so-serious sellers take their homes off the market and as those sellers who have to sell acquiesce to the reality of lower prices.

The knock-on effects of all this will be subdued consumer discretionary spending as those �home ATMs� are not refilling as rapidly as before. Another factor that will curtail consumer discretionary spending is slower income growth in housing-related industries as employment and sales commissions moderate further. I said it last week and I will say it again � the residential real estate sector has entered a recession. Whether the economy as a whole enters a recession early next year depends on how severe the housing recession gets. Further Fed interest rate increases can only increase the depth of the current housing recession and geometrically increase the odds of an economy-wide recession.

Mish:

The numbers are what they are, but it is also important to understand what they represent. If we calculated GDP the way Europe did, we probably would be showing something like .5% growth (if that) rather than the 2.5% that was reported. I talked about this in Grossly Distorted Procedures.

Also note that if we calculated unemployment numbers the way they did in Europe (or for that matter the way we did here about 20 years ago), unemployment would be at 8%-9% vs. the 4.6% we report. So while "numbers may be numbers" and "numbers don't lie" please be aware that what those numbers represent can and does change over time. I am quite positive that I am not explaining anything in that regard to either Succo or Kasriel.

Yes, I am looking hard at those numbers. So is Kasriel, and so is Succo. "Sammy the Snake" is concerned about those numbers as well (even if it seems like he only has one eye on them).

On behalf of Professor Succo and "Sammy the Snake" please keep at least one eye on the numbers, preferably two. Any further sustained weakening of those GDP numbers and will be in a recession (even though no one will admit it).

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/