U.S. stocks endured the worst beat down…well, it hasn’t been that long… in 20 sessions after lower growth rates appear to be occurring in Asia and the past couple of days of domestic data make clear second-quarter growth will be revised substantially lower.

The past six weeks of data have portended an economic weakening, and the past two days have been particularly poor as the June inventory and trade figures came in well-below expectations – the initial estimates for GDP rely on estimates for June and we’re seeing those estimates were too optimistic.  What was already a weak 2.4% initial reading on Q2 GDP looks to be closer to 1% right now, and with little if any momentum for the back-half of the year. 

It’s no wonder the Fed is so focused on buoying the stock market, it’s really all they can do as boosting job growth depends on confidence and there just isn’t any with the policy direction coming down the pike.  Let’s hope the weakening foments Congress to extend current tax rates, although both President Obama and Treasury Secretary Geithner have very recently stated that increasing rates on the upper-income earners is a must.  Since this is the group that provides the most capital, which engenders job growth, a half-hearted policy shift isn’t going to do it. 

Combine this with health-care and financial regulations that do nothing but make managing a business all the more difficult and it’s no surprise the economic wheels can’t keep traction – as if the aftermath of a debt-driven recession and the following deleveraging wasn’t enough to contend with, here we have Washington royally screwing things up again.

All 10 major industry groups closed down yesterday.  The outperformers were telecoms, consumer staples and utilities.  The worst hit were industrial, financial and basic material shares.

Market Activity for August 11, 2010

Mortgage Apps

The Mortgage Bankers Association reported that their applications index rose for a second straight week, but just barely as it ticked up 0.6% last week; the index rose 1.3% the week prior.  Purchases rose 0.3% and refinancing activity increased 0.6% -- both are pathetic considering the average contract interest rate on the 30-year fixed mortgage hit a record low of 4.57% for the week. 

Purchases remain on the mat.  While applications to purchase a home have risen for four-straight weeks, the increases have been very week as they’ve risen just 7.2% over this stretch.  And that’s following the 44% plunge in the 10 weeks that followed the April 30 expiration of the tax credit.  Purchases are down 25% from the level even before the credit was initially put in play. 

June Trade Deficit

The trade deficit widened a huge 18.8% in June, coming in at -$49.9 billion (way deeper than the -$42.1 billion expected) after a -$42.0 billion shortfall in May.  Excluding petroleum, the widening was ever greater, deeper by 40%, coming in at -$28.69 from -$20.49 in May. 

The real goods balance, which is what matters for the GDP reports (this real figure adjusts for price changes) widened by 17.7%.  Ex petro, the figure widened by 22.6%.  Real exports fell 1.6% in June – this may be the beginning of that European weakness showing up, while real imports rose 4.8% -- fueled by big gains in aircraft, autos and telecom equipment; I hope inventories in these areas get absorbed. 

So we have this much wider-than-expected deficit in trade (that means imports outpaced exports by a greater degree than expected – and a wider deficit subtracts from GDP) and lower-than-expected inventory increases, as we touched on in Wednesday’s letter.  The downward revision to second-quarter GDP is going to be big.  Economists had already been revising second-quarter GDP lower, some had it pegged at 1.3%, down from the initial estimate 2.4% that we received on July 30.  This trade number may drop it to 1.0%.  This recovery is fading faster than even I believed it would and the double dip scenario is completely in play. 

Have a great day!

Brent Vondera, Senior Analyst