I suppose just about every columnist writing on financial matters will start their column with these (or very similar) words this week: "Market does a swan dive first day of 2008!" It is just too good a shot to miss, as they say.
However, the more important news is not the selling on Jan. 2, but the trend of news from the past three months that will bring us the gross domestic product (GDP) numbers for the fourth quarter 2007 soon. You see, one day of selling does not a year make, not even a minor trend! The pie is never finished until the oven cooks it, as they say.
Just so you know, yesterday started out rather quiet in the stock market. But, at 10 a.m. the Institute of Supply Management (ISM) — formerly the Purchasing Manager's Institute (PMI) — reported manufacturing activity was at 47.7, a good amount below the expected 50. The Dow fell over 100 points in about 10 minutes after the report and finished the day over 220 points down.
Yes, I guess that does qualify as a swan dive, doesn't it?
But, let me get back to my opening statement. The real news is not ever any single news report (unless, of course, it is a totally unexpected event outside the markets like the 9/11 disaster, for example). No, the real news is always a compilation of many different news reports that eventually go into making our final and truly important GDP report.
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To see what the GDP pie that was baked in the fourth quarter might look like, here are some of the recent reports that I believe will have a great influence in making our fourth quarter GDP a figure over 3 percent, well above even the most optimistic estimates made in September and October (most initially below 1.7 percent). These reports released over the October and November period have even the most pessimistic economists busy reworking their fourth quarter GDP estimate, many say.
Worker productivity rates for the third quarter, at a heady 6.3 percent rate, appear to have maintained their solid gains into the fourth quarter. This is one of the major inputs into the growth figures that help make up the GDP. Remarkably, this third quarter growth rate was the fastest growth rate reported in nearly two years!
Private commercial building has not softened or slowed even in face of the subprime mess. Why? Mostly because these are longer range investments and projects, meaning it usually takes substantial time to slow this sector, even if the residential markets were to fall much more than they have to this point (something I do not expect).
Already, and even more telling, a number of economists are beginning to hint at the possibility that the residential market slowdown is beginning to show signs that it may bottom and reverse itself early in 2008, and that especially in the last two quarters of 2008 there may be a markedly positive move (and can I add that "The Donald" himself even said at a TV appearance last week that he felt this is a strong possibility).
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The unemployment rate remains quite low in spite of the fear that this would possibly change due to the subprime mess. The reasoning went that consumers would slow their purchases to compensate for higher unemployment (lower incomes) and inflation in the last quarter of 2007. But, this does not seem to have materialized.
And as the reported service producing employment levels continued to move up in November (and I also expect likely in December — won't have those numbers until tomorrow) the support for overall consumer spending is holding up quite well in October and November, in spite of a mild down trend in manufacturing. Further, weekly hours worked remains very stable, another sign that consumers are not being put to the strain economists expected.
Retail sales seem to be defying all the economists' predictions and it seems likely that the truly unexpected hike in November may extend into December. Those final December numbers will be issued in 10 days or so. If the prediction of a match of or even a number exceeding November bears fruit, it will truly add major impetus to the first quarter 2008 GDP, as well. It is a testimony to its resilience that real domestic purchases as reported by the Bureau of Economic Analysis (an arm of the Fed) show no negative quarter since 2001! Remarkable!
And lest we forget, there was a one-half trillion (that's a T!) dollar defense spending bill just passed by Congress and much of it is earmarked as "Made in America" after Congressional members finally heard folks like you and me that think we better maintain a solid manufacturing base of our own. Depending on China for military jet parts would maybe not be so good after all. Hmmm.
So, there you are. My five slices of pie that I think portend some surprises in the last quarter GDP. I think you get the picture. As I see it, this country is hardly about to fall into the abyss!
But, I want to be fair here. Without a doubt, the ISM report was troubling. But, we will need to see how much of its decline is linked to year-end inventory reduction and other seasonal factors before we give this number weight enough to expect a major sell-off to develop in the stock market. Again, one report does not the year make.
A second troubling number is the oil import number. The rise here in actual quantity and the increase in price is an area to be alert to, obviously. However, were you aware that an Air Force C-5 flew coast to coast last week, the second such flight, on a fuel that can be adapted to auto use? The fuel is 50 percent aviation fuel and 50 percent a natural gas and coal derivative combination. The Air Force reported the flight went quite well.
Why might this be important? Well, the Air Force estimated the 50 percent made of coal and natural gas cost in the $45-70 per barrel range, dependening on manufacturing volume economies it appeared from the report.
Might enterprising industry find a way to get this mixture to market for auto use in the next few years? Hope so, for it would scare the "begebbies" out of foreign suppliers of oil. They are well aware of our huge coal and gas deposits.
How well might they weather a drop of say 50 percent in their exports of oil to the U.S.? Maybe, they might say, just maybe $100 per barrel oil is a bit much after all. Hmmm.
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A final area to keep alert to is car sales numbers. While the numbers seem to be holding onto small gains, if oil prices don't moderate at least some, auto purchases will likely decline. While that won't in and of itself be an economy buster, it will, like the housing market, lend a bit of slowing to the growth of GDP. Just a place to watch.
So, that's the way I see the pie being sliced this week. And yes, I have left out some of the secondary indicators that would add some fluff to this GDP analysis, some pro and some con, but even as an aggregate they would have only a single slice of pie influence on what the fourth quarter GDP should end up being.
All in all, I repeat, I believe the numbers for the fourth quarter are going to be an upside surprise. You see, I have one tool the market doesn't – unless it reads this column each week. What is it? My Super Chart!
At the end of every day when the final gong sounds at the NYSE, according to the Super Chart, we remain a long way from any signal of a Major Market Turnaround — a long way! The current numbers required to reverse this huge bull market started in June 2006 are S&P 500 cash index at 1410 and Dow Jones Industrials at 12,460. This, to me, continues to be the final proof of the pudding.
I see clearly in this action that there is no conviction by investors of a coming recession or worse, a deflation. Until I see the Super Chart keylines broken to the downside on these charts, I stand on the 45-year history of the Super Chart and look for the current churning to resolve to the upside.
I also saw that David Frazier, my colleague at Newsmax, in his latest column was looking for a slow start to 2008, but his indicators are now showing a good possibility of the second half of 2008 being a bias to the upside. I have much respect for his work. His is a much more fundamental approach to market calls than mine, but he has been exceptionally good in his ETF picks. I would strongly urge you to give his ETF Strategist service a close look — good profit numbers. Click Here.
To have him also looking for a coming up move is gladly welcomed.
Well, that is about all for this shortened week. I will likely include my Super Chart in next week's column, as it will show nearly a full week of 2008 trading with all the big cats back. It should be of more interest then. Do hope your coming investing week is a good one. In the meantime, you keep in touch. I do! See you next week.
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