- - Thursday, May 27, 2010


The roller-coaster stock-market ride continued this past week amid worries over Europe and the euro early in the week followed renewed concern over the state of the economy asrevised gross domestic product (GDP) and weekly jobless-claims data became available.

Concerns over the ability of Europe to solve its debt-related problems and for the eurozone to eventually recover lifted when People’s Bank of China issued a statement dismissing “groundless” reports that the State Administration of Foreign Exchange was evaluating its investment in eurozone debt.

The People’s Bank of China went on to say it was committed to long-term investment in Europe. With People’s Bank of China holding more than $600 billion, the support for Europe lifted the euro and fueled a strong reversal in the stock-market indexes. As I discussed several weeks ago, volatility gives way to opportunity for prepared investors.

Despite this fragile but solidifying position on Europe, fresh domestic economic data points to some slowing in our economic recovery. On Thursday, the Commerce Department shared its latest view on the economy when it issued its update to first quarter GDP. GDP increased by a 3.0 percent annual rate for the first quarter, which was lower than the 3.2 percent rate previously reported by the Commerce Department. Moreover, the revised 3.0 percent rate was below the 3.4 percent rate expected per a Dow Jones Newswires survey of economists and analysts.

Digging deeper on the revised data, we find what I would call at best a mixed bag, as consumer and business spending were both revised lower. Business spending for the first three months of the year was revised to up 3.1 percent compared with the initial read of up 4.1 percent and 5.3 percent for the last three months of 2009. The vast majority of that negative revision was due to weaker than previously thought business spending on software and equipment, which increased 12.7 percent on a revised basis versus the originally thought 13.4 percent.

While that revision covers the business output side of the equation, negative revisions were also seen for domestic demand and consumer spending. To be fair, the revisions for those two data streams were far less than those for business spending but the revisions were still negative, not the positive revisions many had anticipated. Real final sales to domestic purchasers, considered a good measure of domestic demand, rose at 2.0 percent rate. Sales were previously estimated to have increased at 2.2 percent after a 1.4 percent rise in the fourth quarter. Up, but not up as much as originally thought. In terms of the consumer, the latest report showed consumers increased their spending by 3.5 percent, which was below the previously estimated 3.6 percent, but was more than double the 1.6 percent increase of the fourth quarter.

As we all know, consumer spending is a key component to the domestic economy as it accounts for close to 70 percent of U.S. economic activity. As such, it’s estimated that consumer spending added 2.42 percentage points to first quarter GDP, its largest contribution since the same quarter in 2007.

This spending is confirmed by recent earnings reports from a number of companies including Home Depot Inc., Big Lots Inc., Costco Wholesale Corp. and others that posted better than expected corporate earnings. Even here, however, we need to be careful. Consider Costco’s report, which signaled a 12.5 percent sales increase on a 10 percent increase in comparable-store sales. Excluding foreign exchange and gasoline sales, comp-store sales rose just 4 percent, companywide.

Still good don’t get me wrong, but not as rosy as the headline would suggest.

That’s kind of the point in breaking down the most recent economic data. While consumer spending was good in the first quarter, we continue to see the number of U.S. workers filing new claims for unemployment benefits at lofty levels. Despite the modest drop in weekly unemployment claims Thursday, the sequential drop was modest and with fresh weekly claims still north of 450,000, the figures still don’t signal any meaningful improvement in the labor market.

Next week, the unemployment report for May will be released and clearly it will be one to watch. Without any meaningful improvement in these indicators, one has to wonder how much longer the consumer can dip into his wallet or her savings account or utilize their credit cards?

Shake and stir the above and we continue to favor companies that manufacturer inelastic goods and services and are high dividend paying ones as part of our “cash strapped consumer” view. To the extent companies such as Family Dollar Stores Inc., McDonald’s Corp., Kimberly Clark Corp., McCormick & Company Inc., and others lie in the intersection of inelastic goods and high dividend bearing companies, I would encourage patient investors to begin doing their investing homework with those.

Good hunting.

Chris Versace is director of research at Think 20/20 LLC, an independent research and corporate access firm based in Reston, Va. He can be reached at [email protected] times.com. At the time of publication, Mr. Versace had no positions in companies mentioned. However, positions can change.



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