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Confusing Data

August 11, 2010 – 5:03 pm

The market fell sharply this morning as it continues to trade in a range. This trading in a range activity is likely to continue for the month as investors digest strong earnings and growth of earnings versus weakening economic data.

The second quarter GDP was up 2.4%. This number will be revised two times by the end of the third quarter. Recently, there was a sharp increase in the trade gap for June as imports increased 3.0% and exports fell 1.3%. The increase was not due to oil prices, though that trade was up a little, and not due to an increase from China. It was European countries and Mexico increasing their exports to us. The result of this increase in the trade gap will be a downward revision of the second quarter GDP growth. Expect that 2.4% number to fall below 2%.

However, the market is looking forward. What does this increase in imports mean? Most of the increase was for consumer goods which begs the question: Are U.S. consumers going to spend to buy these goods? What has been interesting is that inventory is not growing to any extent which would suggest tight controls by companies. So where are these consumer goods going?

The next month or two will be interesting. Will the consumer increase his/her spending to absorb these goods or will inventory spike? Very weak job growth suggests a weakened consumer, but those who have jobs have started to increase their spending while at the same time reduce debt and save a little money.

Corporate earnings up and growing while the economy weakens, a tug of war that is reflected in stock prices. Trading will continue in a range until the tug of war is won by one side or the other.

Good Trading
Steve Peasley

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