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Monday, February 1, 2010

GDP


by Larry Levin


Friday's GDP report was a huge number: +5.7%. A few thoughts on the report from analyst David Rosenberg follows.

First, the report was dominated by a huge inventory adjustment - not the onset of a new inventory cycle, but a transitory realignment of stocks to sales. Excluding the inventory contribution, GDP would have advanced at a much more tepid 2.2% QoQ annual rate, not really that much better than the soft 1.5% reading in the third quarter.

Second, it was a tad strange to have had inventories contribute half to the GDP tally, and at the same time see import growth cut in half last quarter.

Third, if you believe the GDP data - remember, there are more revisions to come - then you de facto must be of the view that productivity growth is soaring at over a 6% annual rate. No doubt productivity is rising - just look at the never-ending slate of layoff announcements. But we came off a cycle with no technological advance and no capital deepening, so it is hard to believe that productivity at this time is growing at a pace that is four times the historical norm. Sorry, but we're not buyers of that view.

In the fourth quarter, aggregate private hours worked contracted at a 0.5% annual rate and what we can tell you is that such a decline in labour input has never before, scanning over 50 years of data, coincided with a GDP headline this good. Normally, GDP growth is 1.7% when hours worked is this weak, and that is exactly the trend that was depicted this week in the release of the Chicago Fed's National Activity Index, which was widely ignored. On the flip side, when we have in the past seen GDP growth come in at or near a 5.7% annual rate, what is typical is that hours worked grows at a 3.7% rate.

No matter how you slice it, the GDP number today represented not just a rare but an unprecedented event, and as such, we are willing to treat the report with an entire saltshaker - a few grains won't do.




Previous Day's Trading Room Results:

Trade Date: 1/
29/10

E-Mini S&P Trades*
(before fees and commissions):


1) VA buy @ 8:34am at 1085.25 = -1.50 (1 lot)

2) FT sell @ 2:54pm at 1085.25 = +1.25 (1 lot)

3) Algorithm positions (10)

4) "Reading the Tape" positions (10) ...combined Secret's, Algo, & "Reading the Tape" total...+16.25




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