Slowing US Economy
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01/30/12

Friday morning the Bureau of Economic Analysis released their preliminary number for fourth quarter U.S. GDP.  They reported the GDP grew at 2.8%, much better than the 1.8% reported in December.  The market expected 3.0% growth but again, the reading was the best reading we have had since last March (3.1%).

This number may not be as encouraging as it appears at first.  Fourth quarter numbers are almost always better than other quarters.  Last January’s reports showed fourth quarter 2010 GDP growth at 3.2%...by August the second quarter had fallen to 1.0%

Digging into the GDP number, 1.9% of the growth is due to businesses building inventories.  If we remove inventory growth from the number, then GDP grew at 0.8%.  Who wants to turn back-flips over that?

Standard accounting practices credit increasing inventories to GDP.  The reverse is also true, when businesses sell down their inventories it subtracts from GDP.  We don’t know why businesses built inventories in the fourth quarter.  Did they fill their sales pipeline and move production to the warehouse?  Did sales actually slow down?

GDP was less than expected, and was less than it appeared.

Retail sales were released two weeks ago, and disappointed the market with 0.1% growth.  Reuters reported a 0.3% growth in business inventories at that time.  The retail sales number included auto sales, which were up 1.5%.  Without auto sales, retail sales actually fell 0.2%  This was the first decline since May 2010.

European Union leaders are meeting today in Brussels.  It has been a busy weekend.  Greece continues wrangling debt holders to write down their debt and take a 70% loss.  Rumors floated that Germany’s Angela Merkel was ready to propose that a special budget commission take over Greek budget authority.  The Greek government would have to give up budget and tax responsibility in order to receive any more money from the EFSF, European Commission or ECB.  France changed GDP growth forecasts for 2012 to 0.5%

Portugal’s borrowing costs hit new all time highs this morning.  Ten-year bond yields rose to 16.1% with five-year yields topping out at 21.8%. Credit Default Swaps (CDS) on a $10 million Portuguese 5-year bond are quoted at $3.95 million initial payment, then $500,000 per year.

Last night, Nicolas Sarkozy went French television to announce the country would institute a 0.1% financial tax in August.  Bloomberg reports the tax would apply on stock and bond transactions.  He also wants to increase sales taxes and a financial income tax.  Sarkozy is up for re-election, with voting in April and May.  He expects the tax to increase revenue $1.3 billion dollars.

His opponent, Francois Hollande, is a socialist and supports the financial tax.  Hollande is ahead in presidential election polls by six percent.

Ernst & Young reported the transaction tax proposed by the EU for all 27 countries would reduce economic activity and reduce taxes from other taxes.  The net cost could be a reduction of up to three times the money raised from the financial transaction tax.

The agenda today in Brussels includes signing documents to create the permanent European Stability Mechanism (ESM).  The ESM is to be a $650 billion dollar bailout fund.  It will start operation in July, and was intended to replace the European Financial Stability Facility (EFSF) that was begun last year after Greece ran into trouble and needed concerted help.

The International Monetary Fund (IMF) and others are pressuring eurozone countries to increase the size or continue the EFSF side-by-side to provide a larger backstop for eurozone countries.

The market looks soft this morning.  Should we be concerned about what happens in euroland?  We have been on a heck of a run higher since Christmas, does anyone really believe this will continue?  It will be interesting to see if the bulls try to reverse today’s market and take it higher.

“Greed” has been on display for the last few weeks.  We will stay with its cousin “fear.”  The worm will turn.

Quote:
Do not spoil what you have by desiring what you have not; but remember that what you now have was once among the things you only hoped for.---Epicurus

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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