GDP release this week could trigger stock sell-off, even with positive number
Filed under: Economy, Wells Fargo & Co.
The much-awaited third-quarter gross domestic product number to be released Thursday is expected to show a 3.5 percent increase. In the view of most economists, a positive number will mark the end of the recession which began in late 2008. But a positive print in the GDP is so widely expected that it is now old news, and as a result, the market is primed for a "buy the rumor, sell the news" moment.Though this increase in GDP is almost universally viewed as "proof the recession is over," the market may not play along. Why? The federal borrow-and-spend stimulus and bank bailout was intended to act like lighter fluid on the real economy's damp logs: contracting credit, declining employment and tax revenues, and a housing market that is still weak.
Now that the flammable liquid has been expended, the market is looking for evidence that the logs of the Main Street economy have actually caught fire. The data is mixed, at best. While housing sales have risen, some analysts are saying that's a result of the data being fudged in "seasonal adjustments": sales are considerably lower than last year's.
That isn't the only questionable data.
While many pundits are already announcing that the recession is history, at least a few economists are noting that when the economy turned the corner in downturns past, employment has recovered quickly. Yet here we are with a positive GDP, and job losses are still piling up.
If payrolls are still falling by 500,000 a month, how much does the announced "end of the recession" actually mean to Main Street? If real estate is still falling in value, revenues are declining and jobs being lost, then exactly what is powering the rise in GDP?
The answer, of course, is government spending.
The federal budget deficit this fiscal year ($1.4 trillion) was about 10 percent of the nation's annual GDP. Add in the hundreds of billions in guarantees, backstops, loans and other giveaways to banks and financial institutions like Fannie Mae and AIG, and it can be argued that the federal government borrowed and then injected well over 10 percent of the annual GDP into the economy.
From this point of view, spending 10 percent of GDP and only getting a 3.5 percent uptick is a rather paltry return on an investment made with borrowed money.
Have the logs of the real economy caught fire? If so, they might be smoldering but they certainly aren't burning brightly. Many analysts look at rail traffic as evidence of the real economy's health -- freight is not a data point which can be spun with "seasonal adjustments" or other accounting trickery.
Rail traffic has plummeted, and while it has stabilized, it has done so at a very low level of activity. If the economy is indeed growing organically -- that is, not just from Federal stimulus -- then we would expect to see a spike in rail traffic. Such an increase isn't visible yet.
Since the financial sector launched the current stock market rally eight months ago, we might look to this same sector to lead a decline. If so, one analyst's change of heart on Wells Fargo Bank (WFC) might be a harbinger of things to come: The analyst issued a rare "sell" on WFC as credit card and mortgage losses continue piling up.
If we look at a chart of WFC, we notice that the stock has more than tripled from its March lows -- a fantastic return in only eight months. But we also notice volume -- the weapon of the bull -- has been declining since May, other than a brief spike earlier this month.
That spike in volume drove the price above $30 per share, but it quickly dropped back to a level around $30 which has acted as congestion/resistance for this stock in the past.
Having closed at $29.32, the stock is only $1 above its 50-day moving average -- a line used to gauge trend. A close below the 50-day MA line would suggest weakness and a possible reversal of trend should Wells Fargo not quickly bounce back to the $30 range.
Low-volume rallies worry technical analysts, as they often presage nasty sell-offs when buying dries up and reasons to sell (such as a close below a key technical level) materialize.
Any weakness in financial stocks before Thursday's announcement of GDP would suggest that some players aren't waiting around to sell the news -- they're booking their profits from the rally now while they still have them.
Charles Hugh Smith writes the Of Two Minds blog and is the author of numerous books. His most recent is Survival+: Structuring Prosperity for Yourself and the Nation.
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Reader Comments (Page 1 of 2)
10-26-2009 @ 11:26AM
john said...
The reason "Sell the News" takes on a greater meaning now is that the stimulis package is the main economic driver. Ask yourself a simple question: Do you feel the economy is recovering and rebounding on its own OR do you feel the Gov't money/intervention is pushing it along for the most part? IF your answer is "on its own" stay in the market and keep buying, IF answer was Gov't - then ask yourself one last question- What happens when that Gov't money/intervention stops? THAT is why the "Sell on the News" takes on a greater weighting this time around.
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10-26-2009 @ 12:03PM
nick said...
Charles Hugh Smith why should you be surprised??? With Obama Chavez Jr. running the show and taking us far to the left with his slugs in Congress, the guy who is giving up all our freedoms to slugs overseas. We got Chavez, Putin, and the slug in Iran laughing their ass off. Everytime he sends Hillary or his other hired thugs out they laugh their ass off at this guy, the ACORN thug from Chi town, give us a break.
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10-26-2009 @ 12:37PM
kdnorcutt said...
I always knew this run up off wall street was led by a false sense of security. You keep reading stories how we the people are responsible for 70 % of this economy. All you also read is how our fellow Americans are still loosing jobs at an alarming rate and people are still loosing their homes. Our idiots in congress with their stupid stimulus package had no long term effect on our economy. It did not create or even slow down the lose of jobs, it did nothing to help home owners keep their homes. It will come as no surprise to me to watch the dow and other indicators to drop like a rock. Dow around 4000 sounds realistic. We are not in a recession we are in the beginning of a depression. The only way to correct this problem is to remove corporate greed with the collapse of wall street.
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10-26-2009 @ 3:24PM
mike said...
Rail is a good place to look. just take a drive to one of the classification yards in your area and look for yourself. You will see they are empty , very little traffic. Not to mention that Frontier Yard in buffalo closed all together.
Recovery? It's not happening. Look for another correction in the markets soon.
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10-26-2009 @ 3:29PM
Randy said...
If the corrupt obama administration and their inept ivy league indoctrinated keynsian economists come out and declare a 3.5% improvement in GNP.... it should be obvious to everyone (except the brain dead liberals) the BOOKS HAVE BEEN COOKED!
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10-26-2009 @ 3:50PM
Doug said...
The way to get the economy moving upward again is to give tax break incentives to businesses and others who create new jobs. The country needs jobs, not hand-outs to banks and big businesses. Somehow the democrats in Washington don't seem to get it. They are happy to just hand out money to those who subsidize their campaigns. It pays better. The only time the ordinary citizen is important is at election time, otherwise he is pretty much just a nuisance.
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10-26-2009 @ 4:07PM
Gary said...
That's the Chicago way that the majority voted for....mindlessly. Grew up there, Obama and his group are no different from any other Chicago politician.
10-26-2009 @ 5:16PM
ALLAN said...
DOUG,THATS THE SMARTEST THING I HEARD ALL DAY.GREAT POINT
10-26-2009 @ 4:41PM
john said...
ORGANIC growth is the ultimate key to success for our economy, for our country, for every person in and looking for a job. The Administration needs to remember that and focus on that, for us to succeed in the ultimate goal. You can not punish innovation, you can not burden small business, you can not tax the very people that are the job creators for 80% of the economy... you also can not spend money you don't have, pay for things inefficiently, ring up a huge debt and then turn around and NOT make an adjustment to pay for it all... "pay me now, pay me later", as the saying goes... as much as I am philosophically for FREE trade, I believe that takes a trading partner of similar mindset to work, so maybe FAIR trade is the way to go... we can't be protectionist, but we do have to incentivize domestic job creation and retention... JOB CREATION is the ONLY way out of the economic debacle we are in(why the Small Business Administration has not recieved several Billion to create business loans/jobs is bizarre)... My question for this Administration would be very simple- Your campaign was built on "creating or saving 3-4 MM jobs" so where is YOUR BLUEPRINT for how to do it? You didn't just say it, without any idea of how to do it- did you? THAT answer is crucial in the countries' hope. It sure would be important to me.
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10-26-2009 @ 4:49PM
GB said...
Glad to see that the recession is offically over.
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10-26-2009 @ 6:01PM
ajgorm said...
When you throw that much money at a recession and it does not work we may be headed for a double dip recession.. So they need more stimulus because of less tax revenue in 2010 we just keep digging a deeper hole. If we all have nothing but losses next year 2011 may be terrible. The only one making the economy work is Obama letting Geitner support the Bubble his lips must be turning purple keeping the ballon pumped up for us . Raise minimum wage and print more money is that a crime ? CONSERVE even more and they will beg us to go further in debt it is OVER. If we make more oil prices will go up getting us no where quick so we hold our course of nobody wins.Boycott the BANKS till they give us some money to spend..SOUNDS like Ka\ching da/fu four letters.
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10-26-2009 @ 6:17PM
MyKisa said...
Fair Tax.Org
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10-26-2009 @ 6:38PM
mykittywinks said...
Hey don't start the party just yet....It takes three consecutive quarters to declare a increase in the GDP. we havet had one of them in over a year.
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10-29-2009 @ 11:46AM
AnimalsHaveCars said...
What ECONOMY!!!
Both Political patries have DESTROYED it. We are forever indebted. Losers and no talent human beings run this country now.
Took us sixty years and no wars to ruin a country that MILLIONS of human beings lost their life saving..
R.I.P.
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10-27-2009 @ 1:32PM
Indy500OnSkates said...
So very true! Two parties is a misnomer; they are just two competitors for special interest money. We continue to drink the hair of the dog that bit us some 30 years ago.
10-26-2009 @ 9:22PM
purple112633 said...
doug and john tax breaks will not work because there is no demand and consumer confidence is at an all time low since the30's. Your ideas will work after the economy, housing, and consumer confidence stabilize. Follow the Clinton model 23 million jobs created, Bush model 5.5 million jobs created, taking your head out of the republicans ass PRICELESS.
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10-26-2009 @ 9:50PM
rod said...
maybe if we all stop paying are mortgages. that would send a strong message.
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10-27-2009 @ 1:23AM
ram the roughneck said...
I am still waiting for my green energy. Please give me some advice , as I am running out of cash.
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10-27-2009 @ 1:43AM
Tony said...
I think the rail has stabalized to the low point of just what is needed to off load the huge ships at California from overseas Asian markets to the eastern part of the US. It won't go below that point until we are dead broke and our dollar is worthless. Thanks for voting for change.
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10-27-2009 @ 8:24AM
gere said...
More spin from the pro Obama administration news media aimed at the sheeple who voted this shallow narcicist from Chicago into power wanting change. I wonder aloud just how many of these same sheeple have lost their homes or jobs, as I have, since January's inarguration? I work in the oil fields, and have been out of work since last October. We have seen the bottom fall out since Obama took office, and I have yet to see the first ounce of green alternative fuel hit the market. Has anyone out there seen an uptick in electric car recharging stations under construction anywhere in this country? Or a surge in gree technology jobs happen?As a result, I can't wait to see the millions of jobs were likely to lose in my field alone due to the carbon cap and trade nonsense thats fixing to be mandated after the health care fiasco is pushed thru the Democrat controlled Congress thats designed to put the Insurance companies out of business. At some point someone in the administrations inner circle has got to bitch slap Obama and tell him we are still hemorraghing jobs at an alarming rate and thats got to be the priority he needs to actually focus on. Gays in the military, soda taxes, and other minor sidebar issues can wait. Seeing the plan of attack so far, is hardly going to enhance consumer confidence either. The only thing likely to spark this economy and get things moving once again is consumer spending, but thats unlikely as most folks have already been foced to cut personal spending just to survive as it is. I predict very high unemployment numbers for a couple of more years at least, as we are in the very jam we were after Carter left office, when Reaganomics took place in the 80s. Obama won't be around to see all the damage he's done and neither will the Democrats after the stimulus money we've borrowed so heavily is finally used and these inflated GDP numbers are shown to be more of the same rosy scenerio, produced out of thin air, wishful thinking out of Chicago, with no real basis in reality. You can only cry wolf so long , before the people start ignoring all the pundits who are trying to prop up the incompetent Obama administration. The 30s style populist socialism economic approach was tried and it failed miserably 75 years ago. Why the Democrats think that trying it again will get a different result is the big mystery no one seems to have an answer for.
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