Archive for May, 2014

Is the U.S. Economy Growing or Not?

The recent revision to Q1 real GDP growth, all the way down to a dismal -0.6%, has sparked a debate in the financial media that is somewhere between wild and desperate. CNBC trotted out the usual cast of “experts,” some pontificating that negative GDP growth “didn’t matter,” with others proclaiming that negative GDP growth represented truly good news, as economic activity for the rest of the year was poised to rebound (reminiscent of Liz Ann Sonders’ “coiled spring” hypothesis, which she hyped steadily from 2009 to 2012, before finally letting the meme drop). And just this week, Charles Hugh Smith posted an elegant diatribe (Our “Make it Look Good” Economy Has Failed) in which he claims that the numbers used to portray economic activity have been massaged into a positive narrative that is completely disconnected from reality.

In this post I will provide graphs of the long-term trend in several key economic indicators (most of which are included in The Conference Board’s leading or coincident economic indexes) and let readers answer the key question for themselves: “Is the U.S. economy growing or not?”

Let’s start with the biggie, growth in real GDP. The graph below shows that growth has been trending inarguably lower since the late 1990s.


Next is nominal and real Durable Goods orders. If the following graph were a stock chart, we would immediately recognize a classic “triple top” formation. (The resemblance to the S&P 500 is also clear.) We have achieved the same level of Durable Goods orders as in 2000 and 2008 — with both previous tops immediately preceding recessions!


Next we’ll look at real and nominal Capital Goods orders, ex-aircraft to smooth out unusual one-time data points. The real series is in a protracted bear market — not only is the series not growing, it’s clearly shrinking. Capital Goods orders have failed to keep up with inflation (which is negligible, given all the deflationary fears permeating the environment).


How about New Building Permits for Private Housing? After all, we’re allegedly in a housing boom, are we not? If your definition of “boom” is when builders pull the same level of permits as during the depths of the 1982 and 1991 recessions, then I guess we’re in a boom.


Overall, it’s hard to miss Charles Hugh Smith’s point: the trends in these key economic variables are anemic, and bordering on pathetic. Yet, every day now, “the same Broadway kick-line of dancing clowns” (in John Hussman’s words) that told us credit risk was contained in 2008 are telling us that all the numbers are pointing toward sustained economic recovery.

All of this makes me nostalgic for the days of relatively harmless memes, like “ketchup is a vegetable.” Now, before you scoff, did you know that the king of condiments was officially classified as a vegetable by a 2011 Senate bill? Maybe all we need is for Congress to pass a law declaring that negative GDP growth is officially good news, and we can all stop worrying.

Categories: Market Commentary

Gentlemen, Start Your Hedges: “Hedge in May” Option Strategies

Permabull David Tepper of Appaloosa Management spooked investors at this year’s SALT Conference with his “I am nervous, I think it’s nervous time” pronouncement (read more at Zero Hedge or Business Insider). One year ago Tepper gained credibility with his prescient warning that short sellers were “digging their own graves,” as all the major stock market indexes continued rising for the rest of 2013. Now that Tepper is signaling something between caution and bearishness, suggesting that Central Banks have contributed to a mindset of “coordinated complacency,” it looks like a good time to review some hedging strategies for the downside-minded among us (I’ll use pre-open charts and prices from May 15 2014).

Adding to investors’ nervousness is the disconnect between small-cap stocks (measured as the Russell 2000 index), which are struggling to find support at their 200-day moving average:


and the S&P 500, which has found consistent support at its 50-day moving average:


If you’re interested in speculating on a mild May correction, you might consider a bear put spread. Below I’ve graphed the payout from buying 1 Sept. SPY 190 put ($6.92) and financing most of that position by simultaneously selling 1 Sept. SPY 187 put ($5.62). The position costs $1.30 net, and pays off a maximum $1.70 if the SPY declines by 1.5% or more).


For those of us who are only short-term bearish and interested in hedging a long equity portfolio, buying the Sept. 187 put for $5.62 provides a little portfolio insurance, as shown below. Based on a May 14 closing price of $188.75 for the SPY, this position caps your losses at -3.9%, including the cost of the put option.


And, for those who think a market decline much larger than -3.9% is likely, simply buying the Sept. 187 put allows for a more aggressive downside bet:


I recommend watching the Friday closing action closely — it will be interesting to see the extent to which traders will feel comfortable staying long over the weekend. A weak final trading hour on Friday would add to the market’s nervousness.

Categories: Market Commentary