PowerTrend Brief: When Bad News Means “Good News”

Chris Versace

Chris Versace is a financial columnist and equity analyst with more than 20 years of experience in the investment industry.

There are many types of bad news in the world around us. They include accidents, the loss of a job, physical and mental issues, and the loss of a loved one. It’s pretty safe to say that no one likes to get bad news.

An exception is if you are a stock market trader who is hoping for the Federal Reserve to further stimulate the economy come September. For those people, the more bad news we get in terms of the domestic economy, the better, because it opens the window even wider for the Fed to act once again. It is not as if past efforts managed to stoke a tepid economy into a roaring one. With second-quarter 2012 job creation averaging a paltry 75,000 jobs per month and gross domestic product (GDP) averaging 1.75% during the first half of 2012, the economy is far closer to being stuck in neutral than it is to moving forward.

July retail sales were stronger than expected, up 0.8%. But the recent rise in gasoline prices — up 9% in the past month and likely heading higher, near-term — and the ripple effect associated with a move higher in corn and soybean prices, will hit consumer spending in the coming months. Not good, seeing as how consumer spending drives nearly two-thirds of the domestic economy.

A quick look at the manufacturing economy shows it is not doing much better. The August Empire State Manufacturing Survey indicated that conditions for New York manufacturers have deteriorated. The general business conditions index slipped below zero for the first time since October, while the new orders index was below zero for a second consecutive month. That order weakness echoes the one found in the Institute of Supply Management’s manufacturing index for June and July. While manufacturing shipments have held up, manufacturing production is unlikely to keep its current pace without an influx of new orders.

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These data points give credence to the recent round of GDP cuts by economists. Economists surveyed by the Federal Reserve Bank of Philadelphia have reduced their GDP forecasts for the current quarter to 1.6%, down from 2.5%. Those same economists also trimmed their expectations for the last quarter of this year and for the first half of 2013. Some simple math reveals that the economists now expect GDP to average 2.0% during the next 12 months. That is 20% slower than their prior forecasts and means that despite all the measures and stimulus put into place, GDP during the coming 12 months will be on par with that of 2011. That slowdown gives scant evidence of moving forward.

If that were the only group of economists that cut forecasts, conditions may not be that dim. But that situation is not the case. In recent days, the Blue Chip Economic Indicators released survey results of 50 economists, and that consensus calls for GDP growth of just 1.8% in the fourth quarter of this year.

One would think that weakening economic data would have the stock market floundering, yet just the opposite has been occurring. August to date, the S&P 500 is up nearly 3%. Why? Well, the worse the economic news becomes, the better the prospects for another round of the Fed’s stimulus. At least that’s what the herd mentality on Wall Street believes. But just how good that news really is for us, I’m not sure. As Albert Einstein said so eloquently, insanity is doing the same thing over and over again and expecting different results. If we continue to repeat the same mistakes, it doesn’t seem like we will ever get out of neutral… at least not while issues in Europe remain and the Chinese economy continues to slow.

Sincerely,

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Chris Versace
Editor, PowerTrend Brief

P.S. Today’s challenging market conditions require even more knowledge than ever for investors and traders like you to keep pace with the latest market intelligence to safeguard your portfolio and to profit from opportunities that only may be available for short periods of time. Join me at this year’s MoneyShow San Francisco, Aug. 24-26, at the San Francisco Marriott Marquis to hear recommendations and advice about how best to profit in 2012 and beyond! Register FREE today by clicking here, by going to ChrisVersace.sanfranciscomoneyshow.com or by calling 1-800/970-4355 and mentioning priority code 027877.

This Week Ahead

As we enter the back half of August, the economic and corporate reporting begins to slow, becoming almost molasses-like. But it would be a mistake to equate that slowing velocity to irrelevance. The company reports we get this week will clue us into the back-to-school spending situation as we hear from a number of retailers, including Urban Outfitters (URBN), Best Buy (BBY), DSW (DSW), Shoe Carnival (SCVL) and others. We’ll also get the latest behind-the-scenes scoop from the last Federal Reserve Open Market Committee meeting. In my view that meeting will be a near non-event as most of the financial community waits for the group’s September meeting.

What will be telling this week is Markit Economics’s purchasing managers’ indices for China, the euro zone and the United States. All of those readings are expected on Aug. 23 (Thursday). More bad news likely will be met by traders as even more good news in the form of an improving likelihood that stimulus from China, the euro zone and the United States are on tap.

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Here’s a more granular look for what’s ahead this week:

Monday, Aug. 20
dEliA*s Inc. (DLIA)
Lowe’s Corp. (LOW)
Urban Outfitters (URBN)

Tuesday, Aug. 21
FOMC Minutes (July)
Analog Devices (ADI)
Best Buy Co. (BBY)
Barnes & Noble (BKS)
Dell Inc. (DELL)
DSW Inc. (DSW)
Intuit Inc. (INTU)
Williams-Sonoma Inc. (WSM)

Wednesday, Aug. 22
MBA Mortgage% Index (Weekly)
Existing Home Sales (July)
American Eagle Outfitters (AEO)
Chico’s FAS Inc. (CHS)
Express, Inc. (EXPR)
Guess?, Inc. (GES)
Hain Celestial Group, Inc. (HAIN)
Hewlett-Packard Co. (HPQ)
Toll Brothers (TOL)

Thursday, Aug. 23
Initial and Continuing Jobless Claims (Weekly)
New Home Sales (July)
Bebe Stores, Inc. (BEBE)
Big Lots, Inc. (BIG)
Salesforce.com, Inc. (CRM)
Hormel Foods Corp. (HRL)
MICROS Systems (MCRS)
Patterson Companies (PDCO)
Regis Corp. (RGS)
Shoe Carnival (SCVL)

Friday, Aug. 24
Durable Orders (July)

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