GDP Report

Yesterday the Department of Commerce reported that GDP grew 3.5% in the latest quarter, after four previous consecutive quarters of contraction. The market cheered the news and the Dow jumped a massive 2%. However, as often happens, the market is not always justified in its reaction to news releases. Iacono Research pointed out that when taking a closer look and disecting the number, it is not very impressive. In fact it is highly deceiving.

Three significant factors- personal consumption, residential construction, and inventory change- comprise the majority of the expansion. We all know how heavily these three factors have depended on government stimulus. The increase in personal consumption was primarily due to the Cash For Clunkers program- something that was a one time short term boost. Residential consutruction is massively subsidized by the government. Considering the success in keeping interest rates low, government tax credits and so on, it is no surprise that this sector also received a boost. Inventory changes too are a short term phenomenon.

So taking these three factors out of the equation would actually turn the 3.5% expansion into a -0.3% contraction. The conclusion is that it would be highly unwise to use yesterday's GDP report as an affirmation of improving future economic prospects.

Strong Indications of Market Top

Multiple pieces that would indicate a very likely top in the market seem to be converging. There have been a couple of instances in the past few months of what would look like a possible top in the market, but after a swift reversal the market has continued it's stimulus-driven rally higher. However we now have a majority of factors all pointing to what could be the start of another downleg in this far over-extended market.
Financials and Real Estate, the two most critical factors underpinning the foundation of the U.S. economy- both of which have moved up most sharply during this rally- are both faltering. Both indices (KBW Bank Index and Dow Jones U.S. Real Estate Index) have recently turned bearish from a technical perspective as illustrated by the charts below.












The Nasdaq and S&P both have broken the 50 day Moving Average for the second time this rally. The first time this happened was in early July, when what looked like a highly bearish picture for the overall market quickly turned bullish again. Could this be a more convincing top formation?



Emerging Markets too have succumbed to the bearish technical forces.

Stocks 'Overvalued By At Least 20%- Rosenberg

http://www.cnbc.com/id/33490922

The stock market has become overheated since exploding off its March lows and could be in for a strong correction, economist David Rosenberg told CNBC.

"It is overvalued by at least 20 percent," Rosenberg, formerly chief economist at Merrill Lynch and now with Gluskin Sheff, said in a live interview. "But it comes down to what your view in corporate earnings (is) going to be. By the time you're up 60 percent from any egregiously oversold low, you've already got the earnings recovery."

Quick thought on the current state and future of capitalism

Capitalism is in trouble. But not because of what it is, but rather because of what it is perceived to be. Too many people today blame the crisis on capitalism, when in reality it has been the government's butchering of capitalism that has created the problems. Gross government intervention in an attempt to control the natural business cycle, fight recessions, inflate credit bubbles, and artificially postpone economic contractions has brought us to the brink. A collapse is definitely inevitable and the worst is still ahead of us. The depression that should have been allowed to run its course and cleanse the imbalances and malinvestments in the system (such as an overbloated finance sector) might have been postponed for now, but it will only come back and attack us with a vengence some point in the future...and this could be the final nail in capitalism's coffin, once politicians and the public once again resort to blaming "speculators", "greed", and capitalism. It's a Marxist's dream come true. Currently the economy is on government life support, and the government has become the final "safe" haven- the only entity left that is capable of artificially and temporarily shielding the economy from a severe depression (more recent safe havens manifested themselves in the form of the Nasdaq bubble, which collapsed in 2000, and the housing bubble, which collapsed in 2007. Once the government runs out of ammunition and oxygen, something inevitable since a flawed and dishonest system of debt-sustainence can only last so long, the ultimate collapse will occur.

Keep close eye on developing EEM triangle wedge

Investment opportunities in Gaza!

A bloomberg article today talked about an amusing yet unfortunate state of affairs in the limited investment sector of the Gaza Strip. Does not involve AK-47's shops or olive harvesting- but illegal tunnel systems used to smuggle goods. "Investors" put millions of dollars into building these tunnels but are yet to see a return. Full article at http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aFLJhn4jQA3k

Oct. 7 (Bloomberg) -- Investment opportunities are rare in the Gaza Strip. So when Nabila Ghabin saw one last year, she pawned her car and jewelry and put $12,000 into a network of tunnels that brought in supplies smuggled from Egypt.
She was one of about 4,000 Gazans who gave cash to middlemen and tunnel operators in 2008 as Israel blocked the overland passage of goods. Then Israeli warplanes bombed the tunnels before and during the Dec. 27 to Jan. 18 Gaza offensive and the investments collapsed.
Now investors, who lost as much as $500 million, want their money back from Hamas, which runs Gaza. Hamas Economics Minister Ziad Zaza says about 200 people were taken into custody in connection with the tunnel investments; most have been released. Hamas is offering a partial repayment of 16.5 cents on the dollar using money recovered from Ihab al-Kurd, the biggest tunnel operator.
The imbroglio over the 800 to 1,000 tunnels has deepened Hamas’s decline in public opinion in Gaza and highlights the Wild West nature of the underground economy that supports this jammed enclave of 1.4 million people.

Another leg up in the markets?

There has been a relatively strong inverse correlation between the US dollar and the markets, particularly commodities. Just when it looked like the USD might be turning bullish again (thus bearish for markets), it turned back down over the last couple of days. It was unable to breach the support level (blue line), making it the fourth failed attempt since the beginning of the rally in March. A turning point in the USD would need this support level to be breached, and that might signal a more definitive top in the market.

Rosie on the market rally

David Rosenberg had another piece up today. I took out an excerpt that highlights the irrationality of this current market rally and why a correction is long overdue:

"To think we can have a 60% rally from the lows in six months and believe that somehow this is normal – please. By the time the market is up 60% from any low, it usually is up that amount in three years, not six months; and over 2 million jobs have been created. This is the first time the market has rallied this much with the economy shedding 2.5 million jobs."

Full article is at: http://www.zerohedge.com/sites/default/files/Lunch_with_Dave_100209.pdf

Good piece from "Rosie"

Good piece from David Rosenberg (former Merril Lynch Chief Economist)- I always enjoy reading his insightful, albeit very bearish, pieces. In this one he analysis the prospects of commodities, Asia, and does a good comparison of Canada vs. U.S.

http://www.zerohedge.com/sites/default/files/Special_Report_TripleC_092509.pdf