It is likely we continue to slow and choppy action this week just like most of last unfolded. Volumes are way down – likely from a combination of the Holiday week here and overseas, Spring Break and kids out of school.


GDP revised numbers came out a tad better than expected while all were away on Friday. Of course, the growth rate is still paltry as we work through the energy, materials and related industrials adjustments given the shift in oil prices.
Let’s take a deeper look with data provided by Dr. Ed and his team:

I could of course bore you to death with a deep dive into the details but for today, let’s focus on a few key elements and the larger picture at hand. Often investors make the mistake of assuming every single data point is critical – it is not.

So, the second revision to the numbers for Q4-2015 was released on Friday. This one always includes the figures for corporate profits and for national income shares. For those who are intellectually stimulated by diving into the National Income & Product Accounts (NIPA), much can be found – but in the end the conclusion is pretty basic:

The currents haven’t changed much for the economy.

Real GDP is still growing around 2.0%-2.5%, and should continue to do so this year and next year.

Consumers will probably do what they do best, while the capital-spending outlook is likely to remain relatively subdued and mixed, with pockets of strength and weakness.

Housing remains constructive.

Inventories are a bit bloated.

The profits cycle has turned down but is fundamentally masked by the energy price collapse as covered for months. It should turn back up soon, though modestly so, as the earnings reports begin to “lap” the beginning of the real pressures in profits for the sector. We stand by the idea this is done by the start of Q3 reports. Hence, a summer swoon should be very advantageous for long-term investors.

There is some good news: fiscal spending is no longer a drag, but trade continues to weigh on the economy.

National income shares show workers finally gaining some of it while corporations lose some of it.

Inflation remains subdued (but as we have covered, don’t be surprised if it picks up a bit soon.)

For those who prefer to jump into the the deep blue sea of GDP, click here for the finer details and lots of numbers to mentally crunch.

The Bigger Picture

In the past, when data seems to shift from week to week, I have found it has been more productive to ask different questions. Taking a different perspective from the mass media may produce better results as this tends to cause you to ponder things many others are not yet focused upon.

For example, it is clear that the headline “earnings recession” is being driven primarily by the adjustments working painfully through the materials/energy sectors. Without these rather disruptive events, earnings would be just fine. Indeed, the rest of the market is growing their earnings line by about 5% as noted in the NIPA details.

A Better Question

It could be much worse – we should be asking ourselves why it is not.

Back when we first warned of impending doom to the crude sector in early and mid-2013, the US had just crested a month of oil production at 7.7 mbd. We are now over 9 – and staying more steady at that level than many had assumed we could.

While painful, the oil industry created its own problem – it was too successful!

Now, they are working to mesh costs with the “new paradigm” revenues – an equally painful process – but one which tends to work out if time is provided. One can be relatively comfortable with the idea that oil prices will stabilize and rise again – in a normal cycle. But the cycle range has changed.

If we get lucky enough to see $60, be equally assured we will see a new flood of oil and the spigots will be turned on in earnest and capped wells will run freely. That’s all good news by the way.

But Why?

While the world is being told to fret over cheap oil and its’ damaging effect, more and more buildings are being built with different energy sources. I just read this weekend that one storage company had just opened their 10th completely self-sufficient rental center – all done with solar. Indeed, they create more power than they need.

Our GDP is not going negative because a) of our demographic benefits brewing under the surface and b) real shifts in future jobs and industry growth.

We are creating brand new industries. Self-driving cars, robotics, the cloud, nanotech, solar, wind…etc.etc.

In the not too distant future you will see new fleets of service vans. We are accustom to the ones that advertise, windshield replacement, plumbing and air conditioning services.

Wait for the ones which promote robot repairs and solar panel refurbishment services!

Years From Now….

…when the energy world has re-balanced and companies have right-sized their expenses and production levels – we will find we are in a different world. Battery-powered cars will be the norm – or even hydrogen by then.

Meanwhile new industries will be strong and growing, with plenty of higher-tech jobs to fill. Higher wages will have become the norm and Generation Y kids will be expanding further into the work-force…driving surprising home sales, condo sales and apartment rentals.

The Point?

Steady at the wheel as they say. Chop is likely for a bit longer. We may even have another swoon in store for the summer. But like the others, as fear rises, so do values for the patient, long-term investor.

Boring indeed….but here is the lesson:

There will be a time when things are exciting again – when trends are up, when stocks feel good and bonds “stink for their return”. You will then look back and think through years like 2015 and 2016 when it felt like we were all walking in quicksand.

It is then when the realization hits – that’s where the values were. Right in the middle of all those concerns, periods of confusion, angst and questions about our future.

Remember – think demographics, not economics.

We are in great shape indeed and the future – as is normally the case during times like this – is brighter than we can perceive.

In Closing

While the economy feels like a V-8 engine running on just 6-cylinders for the time being, jobs remain upbeat and will provide a solid foundation….

The economy is still in the midst of its weakest recovery ever for fiscal reasons we have covered many times before.

But the news is not all bad: the chances of a worker being fired today are lower than at any time in the past 50 years.

As the first chart above shows, the 4-week moving average of initial claims for unemployment has fallen to its lowest level since 1973.

In the second chart, one will note that as a percent of the workforce, initial claims are the lowest they have been since records were first kept in 1967.

In the past 4 weeks, initial claims dipped to a mere 0.18% of the 143.6 million people working.

So, heck…it is not all bad. Just a period of patience and discipline needed.