1/30/2013 5:44 PM ET|
Is the recovery over?
The first negative GDP print since 2009 has confounded the bulls. And there is more pain coming.
For the first time since the recession ended in the middle of 2009, the U.S. economy contracted at the end of last year. Fourth-quarter GDP growth fell to -0.1% from a 3.1% rise in the third quarters, surprising the optimists so focused on Dow 14,000. As I've been saying for weeks, the fundamentals didn't justify the market melt up. And eventually, fundamentals matter.
The optimists are already trying to dismiss the report as a fluke since a large part of the drop was connected to a 22% fall in defense spending. It's no fluke: In a month, the Pentagon will likely be hit with another budget cut worth 9.4% of its discretionary spending, or more than $50 billion a year.
And it's about to get worse.
People forget that it was government spending -- in the guise of bailouts, unemployment benefits, and stimulus -- that bolstered the economy in the early stages of the recovery when business and consumer spending was in the doldrums. Now, with businesses nervous and consumers suffering from tax hikes, higher health care costs, and still stagnant wages, the government's fiscal mess is forcing it to pull back.
The bulk of the fiscal cliff -- the tax hikes and spending cuts worth 5% of GDP -- was merely postponed. The fact remains that the government has no choice but to tighten the budget, or else it faces the threat of additional credit rating downgrades.
So people should get used to weak government spending contributions to GDP.
What about consumers, who contributed +1.5% to the Q4 GDP number? Not only is confidence down hard on the payroll tax hike, but they are about to be hit with higher gasoline prices and higher rental costs as well. Moreover, the chart below shows how government budget cuts will impact consumer spending -- which the bulls and political operatives are grabbing onto as the bright spot in the report -- since government transfer benefits (unemployment, etc.) have been a more important factor than work wages.
All of this will drag on consumption expenditures later this year and reverse the one bright spot in the report.
And businesses started pulling back on inventories in Q4 in response to uncertain demand from consumers. This should continue as well.
A second negative GDP print in Q1, amidst budget battles and tax hikes, would technically throw the U.S. economy back into recession -- joining most of Europe, Japan, and soon, the United Kingdom.
If you average out the last two GDP prints, you get an economy stumbling along at a 1.5% annual growth rate. An economy that isn't ready for the fiscal cuts and political turmoil that awaits in 2013. Already, the regional Fed manufacturing surveys have been terrible. Home sales are down. It's not looking pretty.
In response, I'm adding new short exposure to my Edge Letter Sample Portfolio via Alpha Natural Resources (ANR) and U.S. Steel (X). I'm also doubling up on the VelocityShares Daily 2x VIX (TVIX) with the CBOE Volatility Index ($VIX) deeply oversold and rounding higher.
Disclosure: Anthony has recommended X short, ANR short, and TVIX long to his clients.
Meet MSN Money at the World MoneyShow
Is it time to give your portfolio its annual checkup? Then join thousands of investors like yourself at the World MoneyShow Orlando, which runs from Jan. 30 to Feb. 2 at the Gaylord Palms Resort in Orlando, Fla. At the world's largest investor and trader gathering, you have chances to hear from Top Stocks writers Jim Jubak, Anthony Mirhaydari and Gene Marcial, and Managing Editor Amey Stone, and dozens of other top investment experts. Registration is free for MSN Money users; sign up on the World MoneyShow website.
Be sure to check out Anthony's new investment newsletter, the Edge, and his money management service, Mirhaydari Capital Management. A two-week free trial has been extended to MSN Money readers. Click the link above to sign up. Mirhaydari can be contacted at firstname.lastname@example.org and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.
Any reasonable person should be able to see that the fiscal cliff and the sequester scare was at least part of the problem. I consider it highly responsible but you cannot not consider the problem. when both government spending and private sector decrease in the same quarter there will be a decrease. the goal is for one to increase as the other decreases thereby creating an equilibrium....balance. If both decrease you have problems but a decrease in government spending is what GOP wants right? this is not the first time the markets did not base their estimates on fundamentals......remember the housing bubble. They are speculators and gamblers.
Why not invest in job creation, and get Federal Revenues up, as well as cut waste and fraud in the existing programs. While they were at it, they could take a look at how Canada manages to insure all of its people with universal coverage, spending half per capita as we do for those who are insured, and while our system is rated at number 37 in the world for health care.
So many solutions, yet so many legislators blocking them, all in the name of political theory, and party loyalty.
I see the obama haters got in quick.
Here's a profile on Buffet that actually tells the truth about Mitt Robmey.
The way Buffett runs his company, Berkshire Hathaway, which owns more than eighty other companies outright, is similarly out of tune with the times. In the current stereotype of corporate acquirers, firms like Bain Capital load companies with debt, downsize their workforces, and strip them of assets. Buffett doesn’t do hostile acquisitions or major restructurings, and he almost never sells the companies he buys. He admits that this isn’t purely rational, although Berkshire is very profitable. But it plays to his strengths (he likes buying companies and building them) and mitigates his weaknesses (as he told me, he hates confrontation). "You’ve got to create the structures consistent with what your temperament needs to be," he said. Whatever the personal reasons for his approach, it’s one that seems reassuring
I never did see the economy inprove.still have high gas prices ,high food prices .no one is buying anything.and we are all just trying to make it.
now are taxes go up .Thought it was just for the rich HMMMMMM. sounds like someone lied.just lost anouther 40.oo per paycheck .
We never had a recovery folks, we had some faked job,housing ,economy nimbers from the whitehouse that were 100% straight from the Obama Myth Statistics Bureau!
What we do have is more jobless people,less jobless benefits,unreported inflation on goods and Obama's ego,higher debt,taxes and more gang crimes.....thanks for voting Obama enjoy the epic fail that is happening!!
His taxes will kill this country and that is exactly what he and his MUSLIM brothers want
Copyright © 2014 Microsoft. All rights reserved.
Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.
The precious metal has suffered as the dollar climbs, geopolitical risks abate and demand from key consumers slows.
VIDEO ON MSN MONEY
Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.
Contributors include professional investors and journalists affiliated with MSN Money.
Follow us on Twitter @topstocksmsn.