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Monday, October 30, 2006

The Monday Edition: A Look At- 1) Housing, GDP & Consumer Spending 2) Earnings 3) Gold & 4) Four Major Global Markets.

From Yaser Anwar, CSC of Equity Investment Ideas

As usual the Monday edition is long, but I promise to add value to your investment outlook. Thank you in advance for your time and patience.


Fears that the US housing market crash will deflate global economic growth and commodity markets have grown in recent months. Housing starts have plunged, unsold housing inventories have piled up, and prices have had severe declines. Given that home equity withdrawals have financed a huge portion of US consumer spending growth in recent years, a housing market crash has the potential to eat away at the GDP, which it has done.

The GDP came in at the lower level, 1.6%, well below expectations. The culprit of this low number was a 17+% drop in residential investment spending. Housing alone took 1.1% off GDP growth. Net exports subtracted 0.6% from growth in the 2nd Q.

With the Big 3 automotive production plans looking lean for 4th Q, this could lead to substantial build up in inventory, which was only a touch lighter in 3rd Q, could increase as a drag on growth in the quarter ahead. On the positive side, business and government spending functioned as the source of growth. But business capital spending is unlikely to accelerate from here as the profit share of GDP begins to erode due to a slowing economy.

Neither cheaper gas nor cheaper homes (30 year pricing lows!) should send holiday sales on a rocketing path upwards. Since consumers did not pull back spending during periods of high energy prices in the past two summers, I believe consumers will remain buoyant about spending. That being said, I doubt that we will see any further acceleration in spending, even though the receding energy prices should improve household cash flows.

The high share prices of consumer discretionary stocks (retail sector especially) mean the risks of disappointment have now increased. This is evident by the downside risks due to high short interest in the sector.

The average EPS growth for the S&P 500 stands at approximately 12% and positive surprises outnumber negatives by 5:1. For the S&P 500, analysts are expecting 10% 3Q growth, up from 8% since the start of October but down from almost 13% last quarter. Of those reporting, more than 71% have come in better than analyst expectations while only about 10% have fallen short of Street consensus. (Source: Zacks)

According to the World Gold Council’s latest publication, the long-term outlook for gold remains positive due to a combination of rising wealth levels and favorable demographics, among other factors. However they published some conflicting data such as- Jewelry demand in India and the Middle East was down 43 percent year on year and 32 percent, respectively, according to the World Gold Council.


While the US is slowing down, growth continues to advance at an exorbitant pace in China and the rest of developing Asia, OPEC countries and Russia. For the most part, that growth is not dependent on exports to a potentially vulnerable US economy. Last year China produced 6.5 million motor vehicles without exporting a single car to the US market.

Exports to the US account for only 8% of China’s GDP (vs. 30%+ for Canada) , and mean significantly less for other rapidly growing economies like Russia or India. Despite a marked deceleration in US global GDP growth to approximately 2% next year, global economic growth will continue at a robust 4%, more than sufficient not only to sustain today’s level of commodity prices but to push some, energy prices to record highs.

The economic picture in Europe is brighter than it is in North America. For the first time in more than half a decade, Eurozone GDP growth outpaced America’s in Q2 of this year.

Domestic demand appears to be stronger in the big Euro players this time around, with Germany’s IFO index close to 15-year highs while its industrial production is growing at around 5% YOY. The rest of the Eurozone’s industrial sector is following a similar course, with region-wide production tracking a healthy 4%+ growth rate.

Property and banking sectors in Hong Kong should benefit from Fed's decision to leave interest rates unchanged amid moderate pace of US economic expansion.

The last market I’d like to inform you about is Tel Aviv, Israel. The market comprises of some of the best upcoming technology companies, yet investors continue to shun it due to geopolitical tensions. According to ETF Connect, Israel’s ETF is trading at a 10% discount to underlying assets. With a forward and trailing PE of 5, I urge you to consider it.

I hope you found my analysis and thoughts insightful. Thank you and take care.

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