Keeping Your Eye On The Ball

November 29, 2010

Weekly Market Commentary 11-29-10

real GDP changes quarterly

With official earnings season concluded, market participants are clearly re-focusing their attention back on to macro economic data. GDP, Income, Savings, European Financial Crisis, and Jobs; all were part of headlines that moved the markets.

The data noise can almost be mind numbing particularly when everyone is trying to find a direction to our economy.

Let's start with two simple facts, GDP and Personal Consumption are very muted in the current "Economic Recovery" we are currently being tortured with.

Naturally, the real data I am continuing to look for is a resurrection of the consumer. Consumption being 70%+ of our GDP (http://bit.ly/eLCMaO) it’s the ball we need to keep our eye on.

Source: St. Louis Fed

This last week was going to be a strong indication of what lies ahead for consumption and therefore GDP growth. While it's hard to compare data from a year ago due to so many variables here's the early take.

On-line shoppers gave merchants a 16% boost to revenues according to Coremetrics an on-line tracking firm. Not bad so far unfortunately, on-line shopping is still a small but growing part of the retail landscape.

According to ShopperTrak, "Black Friday sales rose only slightly from a year ago even though more shoppers visited stores, retail traffic monitor ShopperTrak said Saturday, setting the stage for another uncertain holiday season for retailers. Sales increased 0.3% to $10.7 billion".

So like most things about investing it's never a clear cut picture and will continue to require good judgment when it comes to selection and timing of investments.

My personal sense of what's next on the macro investing environment will be the pending tax cuts. I know Europe is falling apart and much of that is being discounted into our markets. I'm talking about what's beyond that crisis. The Tax Cut Showdown - we really need to keep our eye on this ball.

To set the stage for this epic battle of policy, economics, stability and future growth allow me to summarize a very nice analysis by the folks at Moody's Analytic's.

  • If Congress were to allow the tax cuts to expire by year end for everyone the budget deficit would drop to $732 billion from the current $1.3 trillion in 2010. GOOD

  • Again according to Moody's (don't shoot the messenger) GDP growth would tail off to 0.9% and unemployment would average 10.7%. BAD

  • If Congress were to extend the tax cuts permanently to everyone other than top earners (over $250K) then according to Moody's the economy would grow 2.6% because low and middle income earners spend more of their take home pay than the highest earners do. GOOD

  • Unfortunately, those that create the jobs will be less likely to hire more people and unemployment will likely average 10% in 2011 from 9.7% currently. BAD

  • The budget deficit will likely gravitate around $900 billion in 2011. BETTER than $1.3 trillion in 2010. Again this according to Moody's

  • If Congress was to simply extend the tax cuts for one or two years for high earners and permanently for everyone else, the economy would grow 2.95 percent next year, unemployment would average 9.9 percent next year. OK

  • Even though no one's taxes would rise in 2011, the budget deficit would drop to $943 billion from $1.3 trillion this year. GOOD

  • The other scenario to keep our eye on is to make the tax cuts permanent for everyone. By Moody's calculations, the impact on unemployment, growth and the deficit in 2011 would be the same as if Congress extended tax cuts permanently to everyone other than top earners. GOOD

However, extending the tax cuts across the board would swell the debt over the next decade by nearly $4 trillion, according to the Congressional Budget Office. Not that the CBO can be trusted either.

So the battle is starting to take shape. Compromises are being discussed and negotiations are pursued. Certainly political posturing is being considered in every move. How to pin the blame for more economic failure is the undertone.

The outcome of this debate matters terribly. However, what matters most in my mind is a set of rules that businesses can rely upon to make decisions. Keynes often said it was important to have consistent tax policy to create economic stability. One thing we have not had in the last three years is stability.

I'll keep my eyes on this ball and hope policy makers do the same.

My investment themes continue to be:

  • Luxury Goods with growing emerging market exposure
  • Weak dollar opportunities - exporters
  • Select technology - specifically business processing
  • Media (Print that is adapting to on-line)
  • Rare Earths (again see our Tweets on this)
  • Emerging Markets Debt and Equity that is driven by US dollars finding better investment environments
  • Mega Cap US companies that are finding great margins with little top line growth, especially exporters.

Tim Phillips, CEO