Lost in the Shuffle (intc, rtn, msft, tlt, aapl)
It was somewhat lost in the shuffle in Wednesday. Investors were so stunned at Fed Chief Ben Bernanke's admission that commodity inflation might accelerate over the next few months before the Fed is forced to act on interest rates, they missed the part where the Fed lowered its 2011 GDP growth estimates from a range between 3.4% -- 3.9% to 3.1%.
For anyone pinning his or her hopes on 3.9%, that's got to be disappointing.
But after yesterday's first read of Q1 2011 GDP growth -- a measly 1.8% -- investors are likely to take another look at the total message delivered by the Fed.
Let's start with this: the U.S. economy grew 2.9% in 2010. The Fed currently hopes we get 3.1% growth this year (after all it's paying $600 billion to get a little growth). The first quarter isn't getting off to a roaring start, despite QE2.
We can certainly look to the budget battle going on in Congress as a source for some 1Q weakness. Defense spending was down 11.7%, annualized. Government purchases as a whole were down 5.2%, following a more modest 1.7% decline in the fourth quarter of 2010.
(As an aside, defense contractor Raytheon (NYSE:RTN) reported a 15% drop in Q1 profits.)
Given the push for austerity in government spending by Congress, it's reasonable to expect that government spending may continue at more depressed levels.
*****Once again, the American consumer did its part -- consumer spending was up 2.7%, after 4% growth in Q4. And the manufacturing sector has responded -- inventory building came in at $43 billion, and represented the full 1% of the 1.8% Q1 growth.
That's right, without the inventory build, the economy grew just 0.8%. That, to me, is a real red flag. Because if the consumer gets skittish, we'll lose a good portion of both consumer spending and manufacturing, which are the only real strong points of growth right now.
And with the Fed looking for inflation to possibly accelerate, the potential for the consumer to close the old wallet seems high.
*****I would be remiss if I didn't mention that technology spending was another strong point. Spending on equipment and software rose at an 11% annualized rate. But even in tech there are some uneven signs.
Microsoft (Nasdaq:MSFT) reported a 4% drop in Windows sales that is roughly mirrored by a drop in PC sales. Tablet computers, like Apple's (Nasdaq:AAPL) iPad are clearly cannibalizing laptop PC sales. That's impacting Microsoft. It's also obscuring corporate PC purchases.
Intel's (Nasdaq:INTC) recent strong earnings report indicated solid corporate IT spending. But the IDC research firm is reporting declining PC sales. And Microsoft's results would seem to back this up.
******Stocks rose yesterday, and commodities like gold, silver and oil posted gains as well. But don't miss the action in bonds. The iShares Barclays 20+ Year Treasury Bond ETF (TLT) was up nearly 1%, a clear reaction to the weak Q1 GDP number.
In my opinion, these are the assets to watch right now. Slowing growth will pressure commodities. Investors have been immediately focused on the Fed's comments on inflation, sending silver to $50 an ounce, for instance. But bonds are a far bigger market. It takes more money to push bond prices higher.
If investors perceive that the economy is slowing, bonds will continue to rally. The U.S. dollar will even push higher. Keep your eyes on commodities and bonds to anticipate the stock market's next move.
