Replies to post #113622 on Biotech Values

[bladerunner1717]

The consumer went on a buying spree in the 4th quarter. There is no doubt about that. But that buying spree was partially the result of the decline in personal savings from 5.9% to 5.4%. Real wages have declined in three of the last four months. If unemployment stays high and real wages continue to decline and home prices continue to deflate (They are deflating at a 10% annual rate.), there's no way that this kind of growth can be sustained.

When Uncle Ben's largesse and the wealth effect from the stock market taper off, we'll see if this growth rate is sustainable.


Bladerunner

[oc631]

So much for the babbling about the imminent double-dip recession by bladerunner et al on this board during the past 18 months.

It's unfair to claim victory while the Fed continues to interfere in the bond market keeping interest rates artificially low. How would our economy fare without stimulus and the current borrowing and spending that is destroying the future of our country? I would look to the bond market after QE2 and belated spending cuts (if they ever come) for an honest read on recovery.

As for the GDP number, this article factors in the deflator. From John Mauldin's weekly newsletter.

The Recent GDP Numbers – A Real Statistical Recovery



Now, before we get into our panel discussion (and the meeting afterward), let me comment on the GDP number that came in yesterday. This is what Moody’s Analytics told us:

“Real GDP grew 3.2% at an annualized pace in the fourth quarter of 2010. This was below the consensus estimate for 3.6% growth and was an improvement from the 2.6% pace in the third quarter. Private inventories were an enormous drag on growth, subtracting 3.7 percentage points; this bodes very well for the near-term outlook and means that current demand is very strong. Consumer spending, investment and trade were all positives for growth in the fourth quarter; government was a slight negative. The economy will see very strong growth in 2011 as the tax and spending deal passed in December stimulates demand and the labor market picks up, creating a self-sustaining expansion.”

This 3.2% followed a 1.7% in the second quarter and a 2.6% in the third quarter. The trend is your friend.

Well, maybe not so much. That inventory number seemed odd to me, and looking into it with Lacy Hunt, it turns out there is more than the headline number. For some of you, this is going to be a little like “inside baseball;” but the way they calculate the GDP number can have some odd effects every now and then. And this quarter the effect was way more than normal. This is going to be somewhat counterintuitive, but hang in there with me as I try to make it simple.

You remember our old friendly equation:

GDP = C + I + G + (Net Exports) or

Gross Domestic Product is the combination of domestic Consumption (both consumer and business) plus Investments plus Government Expenditure plus Net Exports (exports minus imports). This latter category has been negative for quite some time, as imports, especially oil, have been larger than exports.

Now to get Real GDP (actual GDP after inflation) you have to take away the effects of inflation/deflation. This is done by the use of a deflator built in for each category. But the deflator for exports/imports is a little tricky at times.

Moody’s correctly noted that “private inventories were an enormous drag on growth” and concluded that this was a good thing, in that they assumed that meant inventories went down and thus inventory rebuilding in future quarters will add to GDP growth. And that is where you have to look at the numbers, and there we find our anomaly. There really wasn’t that big a drop in inventories. It was in large part in the statistics, not in the warehouse.

Oil in the 4th quarter rose from roughly $81 to $89, or about 10%. On an annualized basis, this is 40%. Inventory investment is equal to the change in book value of the inventories, minus what is known as the IVA, or inventory valuation adjustment, which is used to correct for prices going up or down. Because the value of oil rose and thus cost more to acquire, the accounting requires that you reduce the value of the current inventories. Thus “real” imports fell at a 13% annual rate. Why? Because the deflator rose by 19%, largely because of the rise in the price of oil.

I know, I know, I just wrote that because the price of oil went up, the “real” value of imports went down, as well as inventories. Some of you are getting economic whiplash right about now.

If oil were to go back down this quarter by the same amount, that “growth” could be wiped out. [Unlikely this quarter if problems persist in Egypt without resolution. But high oil prices are even more of a danger to recovery] There is no conspiracy here. It is just a statistical necessity, like hedonic measurements, and it is all very clear in the fine print; but when there are wide swings in oil prices over a quarter, and because our imports of oil are so large, you can get these odd accounting factoids. Which the gunslingers on TV (and elsewhere) miss in their urge to be the first to get out a bullish statement!
How much did it change things? Lacy thinks by anywhere from 0.5% to 1%. That means GDP is still a positive number, but there is not a “3” handle at the beginning of it. In the grand scheme of things, no big deal, as it will balance out over the coming quarters and years. But I just wanted to point out (once again) that you have to take some of the numbers we get from our government with a few grains of salt. That’s the key takeaway here. And they CERTAINLY should not be traded upon. (Anybody who trades on the employment numbers deserves what they get, which is usually a loss. But back to our story.)

[DewDiligence]

S&P forecasts 32% YoY growth in 4Q10 aggregate profits for companies in the S&P 500, one of the highest quarterly growth rates on record for this universe of companies:

http://online.wsj.com/article/SB10001424052748703956604576110612955564394.html

About half of the 500 companies in the S&P 500 have already reported earnings for the fiscal quarter ending 12/31/10 or earlier (but later than 9/30/10).