Stronger economic growth in Q3 – contrary to sentiment . . .

Here is a table of Q3 GDP statistics and a chart on growth in equipment and software investment provided by Brian Wesbury at First Trust.  There are several observations – 1) Q3 saw an acceleration in real and nominal growth  2) Business investment had the best quarter in over a year 3) Equipment and software investment had the third best growth since 2005.  These data points are dramatically better than would be expected given the dismal sentiment indicators.  They may suggest that expectations for earnings in Q4 and 2012 are too restrained.  Needless to say – strong growth in equipment and software is good for our technology companies.  Jeb Terry, Sr. Oct. 29, 2011

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The bullish contrarian indicators just keep on coming . . .

Here are yet two more charts that highlight how the markets have reached levels where pessimism turned toward optimism in the past.  The first comes from Yardeni.com and the second from the Bank Credit Analyst.  The ratio of bulls to bears has dropped to a level consistent with the bear market bottom in 2002 and the bottom in 2009.  The second chart shows that hedge funds are extremely bearish consistent with the intermediate lows seen in the market in mid-2010.  If the present market rally continues we can expect material short covering and purchase of high beta stocks before year end as hedge funds move to reverse their bearish bets.  Jeb Terry, Sr. Oct. 22, 2011

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Smartphones continue to be adopted faster than radio, TV or the internet . . . and adoption of innovative products are NOT slowed down by recession.

The adoption of innovative communications technologies has proven to be insensitive to economic cycles.  The following chart was presented at the Web 2.0 Summit last week in San Francisco.  The adoption of the mobile internet accessible phone has already reached ~60% of the population and is accelerating.  It should reach nearly 100% penetration as did TV only faster.  Jeb Terry, Sr. Oct. 22, 2011

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Smartphone adoption has HUGE upside – as in ~7X upside – eventually all mobile phones will be some version of a smartphone

Mary Meeker of KPCB included the following chart in her presentation at the Web 2.0 Summit last week.  The best is yet to come in terms of growth in content, commerce and advertising on smartphones.  The is a very long runway before the growth potential is fully achieved.   Jeb Terry, Sr. Oct. 22, 2011

Source KPCB, Mary Meeker Web 2.0 presentation on Internet Trends 10-18-11

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The ISM report on manufacturing says the economy is still expanding. It is at a level consistent with sustained GDP growth and rising stock market values.

The Institute of Supply Management (“ISM”) publishes a closely followed survey of manufacturing activity at the beginning of each month.  Its keynote survey diffusion index is the “PMI” or “purchasing manager index”.  The PMI for September came in at 51.6.  A PMI in excess of 42.5 percent, over a period of time, generally indicates an expansion of the overall economy. The September PMI marked the 28th consecutive month of growth in the overall economy, as well as expansion in the manufacturing sector for the 26th consecutive month. The ISM’s reports contained the following statement . . . “The past relationship between the PMI and the overall economy indicates that the average PMI for January through September (56.2 percent) corresponds to a 4.8 percent increase in real gross domestic product (GDP). In addition, if the PMI for September (51.6 percent) is annualized, it corresponds to a 3.2 percent increase in real GDP annually.”  I have charted the index since 1967 and shaded recession periods. The public’s concerns about a recession appear premature by this measureJeb Terry, Sr. Oct. 7, 2011

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Consumers are dejected, worried, scared and irritated . . . This doesn’t happen at economic or market tops, or middles – you guessed it – this happens at bottoms.

It seems everyone who has a survey service is coming up with the same results.  Consumers and investors are “disturbed” to say the least.  The following charts from ChangeWave Research (linked here) do an excellent job illustrating how extremely bearish people have become about the economy and the market.  Frequent readers of this blog know that my view of this type of negativity is . . . shall I dare say it – “wildly bullish”.  A casual glance reveals that previous spikes in negativity such as we now are witnessing have occurred at market bottoms almost to the day.  While the negative sentiment can suggest a short term, as in next 90 days, drag on consumer spending it is not very predictive beyond that time horizon.  It should be noted that the deterioration in sentiment was found by ChangeWave to be mostly due to “psychological factors than economic ones”.  Specifically people got spooked by the downgrade of the U.S. credit rating and the debt reduction impasse in Congress in August.  Jeb Terry, Sr. Oct. 7, 2011 

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81% of the population is dissatisfied with the way the nation is being governed – this is GOOD.

At 81%, people of the right, left and center are fed up.  When you have that degree of disgust you can expect “non-linear” events . . . incumbents are thrown out, new leaders emerge, new plans are tried . . . It will be fascinating.  Never before has the public been social media enabled to express their points of view and inform themselves from unconventional sources.  Just as in professional sports – the fans are calling for firing the coach and trading for new players.  The commanding viewpoint is current conditions are not acceptable.  BTW – after the spike in negative sentiment in 1974 (remember – back when President Nixon resigned in 1974 following VP Agnew’s resignation in 1973, back when we had NYC at risk of going bankrupt in 1975 and we had a recession and a bear market) the S&P 500 gained 31.5% in 1975 and 19.1% in 1976.  After the spike in 2008/2009 the S&P 500 gained 46.6% in the 12 months following the low in March 2009.  Change is on the way my friends.  Markets rise when people are looking up instead of down. Jeb Terry, Sr. Oct. 7, 2011

Gallup Poll Chart courtesy of  Scott Grannis September 28, 2011,
http://scottgrannis.blogspot.com/2011/09/people-are-very-upset-and-that-is-good.html

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Employment in September rose more than expected. Very encouraging development. Highest Y-o-Y gain since 2007. A 9.1% unemployment rate suggests low risk of recession. It is historically consistent with accelerating growth in nominal GDP.

The total number of employed rose by 103k in the Establishment Survey and by 398k in the Household Survey released by the BLS.  The Household Survey gain is the best since Jan. 2010 and second best since Nov. 2007.  Remarkably, the Household Survey gain of 691k new jobs over the last 90 days is the best since April 2010.  You would never have guessed that degree of strength in jobs – and it has gotten stronger sequentially for 3 months – given the absolute despair expressed in consumer and investor sentiment over the same period.  What does this mean?  It means the underlying economy is in better shape than the sentiment and stock market indicators suggest.  It means the recent panic attack in the markets has been driven by psychological factors such as fears of a European financial meltdown and continuing political theatre in Washington.  Something to keep mind – recessions start when the unemployment rate is low- not high as it is now.  Nominal GDP growth is normally over 25% FASTER when the unemployment rate is above the average rate of 5.8% since 1948.  Nominal GDP has grown 50% faster than average when the unemployment rate has been above 9%.  Jeb Terry, Sr. Oct. 7, 2011

 

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More Bear Markets have bottomed in October than any other month since WWII.

Half of the 12 bear markets in the S&P500 since WWII have ended in the month of October.  Four of them ended in the first 11 days of October.  This tendency may relate to a Q3 earnings season as well as the historical seasonal strength of the fourth quarter.  Notable bear market bottoms occurred on Oct. 3, 1974, Oct. 11, 1990 and Oct. 9, 2002.  The current market drop is increasingly acting as if it has bottomed or is within days of a bottom.   Jeb Terry, Sr. Oct. 7, 2011

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Recession? What recession? There won’t be one in online advertising. The inexorable shift from analog commerce and marketing to digital e-commerce and marketing continues. Online ad spending grew 23% in the first half of 2011.

Total online ad spending will exceed $31 billion this year.  Aberdeen has multiple points of exposure to this flood of spending although you wouldn’t know it from the recent stock price movement of our portfolio companies.  Sometimes the stock market gets just scared silly and sells everything regardless of fundamentals. (see eMarketer linked here).   Jeb Terry, Sr. Oct. 6, 2011

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