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GDP Friday – “Some Say 5.3%, Some Say 3.7%, If it has a 4 in Front of it, We’re Happy”

That's right,the President is at it again.

Less than a month after bragging about the jobs numbers before they were released, President Trump told a rally yesterday:  "Somebody actually predicted today, 5.3.   I don't think that's going to happen — 5.3. If it has a 4 in front of it, we're happy. If it has like a 3 but it's a 3.8, 3.9, 3.7, we're OK."  So of course the market rallied yesterday as earnings have been decent and we must be having spectacular growth if the President says so.  After all, when has Donald Trump ever lied to us?

We get the official GDP Report at 8:30 but, as you can see from the St Louis Fed's chart above, Real GDP, which takes into account that the Dollar is still down 7% from when Trump took office, has been a disaster under Trump with just 2.5% average growth and, as you can see, we've had 6 quarters of growth over 3.75%, 3 of which were over 4.5% since the Recession and none of those were under Trump (I won't say who it was because the President will say it's FAKE NEWS).  

The Atlanta Fed is sticking to their 4.5% forecast (see Wednesday's notes) and we might hit it with the inventory growth but piling up inventory at the docks because of a sudden tariff tiff is not a true positive on the GDP – the assumption is those goods will ultimately be sold but maybe not as Trump is already bailing out the Farmers who can't sell $12Bn worth of crops.

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Yesterday's Durable Goods Report was a big miss, increasing just 1% vs 3.2% expected and, excluding Transportation (Boeing is a huge variable), it was only up 0.4%.  May was -0.3% and April was -1% and that's the quarter so the economic strength, assuming we are getting it, is not coming from things that will last and it's not coming from housing and it's not coming from commercial development – it will be interesting to see where the GDP number does come from.

Meanwhile, I already put out a note to our Members to short the Index Futures as we expected some earnings misses this morning (and nothing last night was very exciting) and Twitter is now the 2nd big Tech company to do a face(book) plant with a 15% drop this morning as they reported an already expected net loss of users after their massive purge of fake accounts.  The company still made $100M on better than expected revenue but, like Facebook – it's just not enough to support the kind of multiples on earnings we have on these high-flyers.My morning note to our Members was:

Things seem to be holding up so far.  /YM back to 25,550 and also /RTY 1,700 along with 2,845 on /ES and 7,440 on /NQ so shorting the laggard but favoring the /YMshort still.

/RB testing $2.17 makes a nice short into the weekend but might push higher first.

/KC back to $109.50 so I like that long and that's $121.20 on /KCN9

/SI below $15.40 so long there if it goes back over (only) with very tight stops below.

There hasn't been a dramatic move yet but we're grinding lower ahead of the GDP and, with Trump's pump job – anything less than 4% will now be disappointing and even 4.5% is now only in-line with higher expectations set by the President.  There's a lot of noise in a GDP Report but we'll try to get the Final Sales number, which is the most reliable component and Retail Sales have been strong, albeit on borrowed money.  Also, Government Spending is a huge wildcard and the timing is under Trump's control – so he may have stuffed that number in Q2 (was 1.3% in Q1).

8:30 Update:  LOL!  GDP expanded at 4.1% which, thanks to Trump overselling it, is now a disappointing result and the indexes are indeed turning down, despite growth officially doubling from Q1.  Consumer spending did lead us higer – up 4% but the real star was Commercial (non-Residential) Fixed Investment, which popped 7.3% and that's something you can see all around you by counting cranes.   Final Sales were indeed up 4.3% so this is a good GDP number overall.  

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Exports contributed 1.06% to the GDP as farmers rushed to ship Soybeans ahead of China's tariffs – that will come back to bite us next Q.  Another huge bump was the 3Mb/day of Petroleum Products we are now exporting at decade-high prices as oil topped out at $75 during the quarter – another item that will reverse in Q3.  Housing was weak, as expected and Government Spending went up 50%, to 2.1% and added 0.4% to the GDP led by defense spending so, in other words, Trump wrote a big check (with your money) to his Defense Contractor buddies to push the GDP over 4% so he could crow about it and tell you how great he is.

Keep in mind that 4% GDP growth pretty much forces the Fed to keep raising rates!

Amazon is doing great in the race to a $1 Trillion valuation with an earnings beat last night that should be good for a 5% bump that will take them to $1,900/share and they need $2,063 to hit that target.  As usual, Amazon's earnings pretty much all came from Cloud Services, which are up 50% since last year at $6.1Bn and pretty much all profit since the costs of their cloud is borne by the retail operation.  There was also $2.2Bn in Advertising Revenue.  Nonetheless, overall operating profits were "just" $2.9Bn, which means the Retail Segment continues to bleed cash but kudos to Jeff Bezos, who managed to find other, much more profitable businesses to run and cover up the fact that the core operation is a money pit.

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The problem with this, however, is that Amazon's ability to run on-line retail at a massive loss is forcing other retailers out of business and that's simply not fair and fair business practices used to be something we were concerned about in this country.  There's nothing we can do about it (other than, ROFL, vote for Democrats) – just an observation.

I'm always amazed at how analysts seem unable to understand that AMZN has a profitable CLOUD business, like many other cloud companies, and a profitable ADVERTISING business (like GOOGL, TWTR, FB) and a very, Very, VERY UNprofitable Retail Business – like no one else who is able to stay in business for very long (except SHLD, apparently).  

Then these "analysts" latch onto news like AMZN's push into the MASSIVLY UNPROFITABLE grocery business and begin saying silly things like "Groceries can double their business so I'm raising my price target to $4,000."  The margin on groceries is even worse than the margins on retail – and that's before you start delivering them!  What saved AMZN this Q is that they MISSED their retail sales number, so that division lost LESS money than it was projected to but, if you want to properly value AMZN, you have to break it up into 3 companies, not just extraplote numbers on Retail.

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Even if AMZN makes $12Bn this year, that's still less than AAPL will make this quarter, yet those two companies have the same valuation?  Why am I the only analyst who sees how ridiculous that is?  If AMZN is a Trillion Dollar company then AAPL is good for $2Tn at least and Microsoft, who makes over $20Bn a year (about double AMZN) has all the good parts of Amazon with cloud services and advertising but it doesn't have the money-losing Retail Operation to drag it down.  Even MSFT seems a bit expensive at 40x earnings but still a huge bargain compared to AMZN's 80x (AAPL is below 18x earnings at $954Bn – they deserve their Trillion!).  

Remember, until yesterday, Facebook was in the running to become the World's first Trillion Dollar company.  Had they gone up 20% instead of down 20%, they would have been neck and neck in the race.  GOOGL is the other contender at $850Bn but we're past their earnings and it's not happening this quarter and, like MSFT, they too are in the $20Bn earnings club trading at 42x earnings.

We have until next Wednesday to see if Tesla (TSLA) will destroy the market by losing $2Bn in the quarter and dropping over 20%, spooking investors out of many other high-flying stocks but, having cleared the FB hurdle, I'm a little more confident that the market can withstand it and 4% GDP is not bad, no matter how you slice it.

Have a good weekend, 

  • Phil