GDP a mixed bag

Charts: The S&P 500 closed at 988, up .07%. XLF (financial sector) was up .31%. CAF (Chinese stocks) was up 1.38%. So the broad index, the US economy’s Achilles heel, and the global leader all did well and all look bullish. However, Cit Group floating rate notes have fallen sharply this week, a technical sign that it may not be able to restructure its debt and avoid Chapter 11. Everything looks wonderfully bullish from a technical viewpoint, but if CIT Group goes bankrupt it will be a smaller version of Lehman’s collapse.

Fundamentals: The preliminary Q2 GDP report was a mixed bag. GDP was down 1%, better than the expected decline of 1.5%.Unfortunately consumer spending dropped a scary 1.3%. In Q1 consumer spending rose. So this indicates that the consumer spending uptick in Q1 was fueled by deferred purchases rather than the permanent upswing that a typical V-shaped recovery would usher in. In Q2 household savings popped up to the highest rate in over a decade, again a mixed bag. Savings are good but they take away from consumer spending. Exports in Q2 were better than expected, an unmitigated piece of good news. The real bad news was two-fold: The Q2 GDP beat was powered by unsustainable US government deficit spending and Q1 GDP was revised downward sharply, hinting that today’s Q2 data will probably get revised down as well.
There was very bad news on the Cash for Clunkers program. It worked as originally designed, artificially stoking car sales by handing out stupid subsidies based on government debt. And now the Clunker’s $1 billion funding limit has been hit. The program is supposed to die at this point. But it looks like Congress is going to pour more money into this idiotic scheme. If Clunker keeps getting extended it will create billions more in new government debt. The real issue goes beyond this one program. What happens when the first time home buyer tax credit expires in a few months? What happens when the trillion dollar stimulus package expires in two years? Over $200 billion in Treasury debt was sold this week and overall the auction was very sloppy, foreign buyers were scarce. It is conventional wisdom that China cannot stop buying treasuries because it already owns $1.7 trillion of dollar denominated debt and won’t let the value of this stash fall. But remember last year China stopped by buying Fannie and Freddie mortgage backed securities even though it owned and still owns a pile of F & F debt. Before we all commit suicide there is good news on this front: a New York Times/CBS poll shows that 69% of Americans think Obama-Care will deliver low quality healthcare. So maybe this monster will get killed off.

Geopolitics: Nigerian security forces captured the leader of the Nigerian Taliban and executed him without a trial, using a firing squad in a very public manner. Human rights activists went nuts… but, I’m sorry to say, we have to count this as a bullish event since it probably marks the end (for now) of the Nigerian bad guys’ mini-revolution.
It turns out that the Iraqi Army did not rout the highly militarized Iranian insurgents called MEK as originally reported. MEK still has control of most of its camp and the two antagonists are locked in a stand-off. This has to be terrifying to the Iranian regime because the situation is fluid and unpredictable. The job of Supreme Leader of Iran was already getting tougher before this news came out. Iranian forces cracked down on a funeral of slain political prisoners that the government had released to bereaved families. The Iranian theocracy is under tremendous strain because of all this.
Islamic hotspots in China, Russia, the Philippines, and Indonesia have cooled off recently (good news). Also, Iraq has become very quiet lately. So we’re back to only two Islamic wars: Afghanistan and Pakistan. The fighting is heating up in Afghanistan as an election approaches; in July, 42 US soldiers have been killed. The Pentagon won’t give us a bad guy body count, but it is somewhere in the low hundreds. The Paki Army has killed about 2000 bad guys this year and suffered about 200 good guy deaths. Stepping away from the day to day headlines it pays to remember that the Iraq War is now over and America won. History tells us that America winning a war is always a bullish event. So the very weak fundamental picture has to be balanced against a bullish geopolitical backdrop.