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Two Ways: Investors Find Silver Lining in GDP


Strengthen your portfolio in good times and bad.

The big economic piece of the day was US gross domestic product. The Financial Times reports the US economy continued to contract in the first quarter of 2009, yet improvements in specific categories did give a boost to investor sentiment.

Preliminary estimates by the Bureau of Economic Analysis released today suggested that the nation's GDP fell at an annualized rate of 5.7% in the first quarter. Although this was more than expectations of a 5.5% decline, it was still better than the previous month's estimate of a 6.1% drop and far better than the fourth quarter where GDP fell at a 6.3% rate, the sharpest since 1982.

Notable improvements were in corporate profits which rose 3.4% to $1.3 trillion. This follows a 16.5% decline in the fourth quarter. The improvement was mainly due to the financial sector where income surged 95% as banks cut costs by laying off workers and were able to borrow from the government at very low rates.

For more analysis on these numbers, see Professor Jack Lavery's Real GDP Declines Far More Than Predicted.

In an issue of The Lavery Insight following today's release, Lavery also noted: The first quarter GDP data leave us with the reality of the economy needing to shed inventories even faster in the current quarter. Sustained labor market weakness, a housing decline that persists, a cautious consumer, the lingering credit squeeze (with actual upside moves in long –term interest rates lately), and still meaningful erosion in business spending lead us to our worse than consensus expectation for the current quarter, though we feel it will decline at a lesser rate than the 5.7% annualized pace in the first quarter.

From the Bull Pen: Bulls can continue identify sectors of strength. Commodities have been a hot topic but one can also consider railway companies. Union Pacific (UNP) gained 7% in a lethargic tape. Those bullish can set a sell stop near $46.50-47.

From the Bear Cave: For a bear play, one might want to keep an eye on Texas Instruments (TXN). Professor Steve Smith highlight the suspicious put activity on the Buzz today. Bears attempting the downside can set a buy stop 2% above entry.

Have an excellent weekend!

No positions in stocks mentioned.

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