SECOND QUARTER GDP, GOOGLE, THE FED MEETING AND JOBS

Initial estimates suggest the economy expanded at a 2.1% annual rate during the second quarter.  Analysts had expected a 1.8% increase.  The increase was the result of increased consumer spending.  Excluding the volatile trade and inventories, final sales to domestic purchases increased at a 3.5% pace, the best in a year.  Most monitor this measurement for a better sense of underlying demand.

The inverse of the first quarter, inventories subtracted 0.86% from growth after an adding a similar amount during the prior period.

The Fed’ preferred underlying inflation measure, the personal consumption expenditures price index excluding food and energy firmed to 1.8% annual pace in the quarter, closer to policy maker’s 2% objective.

In some regards the data did alter a possible outcome of this week’s Fed meeting, defined as a eliminating the possibility of 0.50% reduction in the overnight rate.

Radically changing topics, Google exceeded expectations and shares surged almost 10.5%.  All must remember that Google has one of the greatest market capitalizations in the world…$871 billion.  The buying power required to move Google by this amount is gargantuan.  According to Dow Jones increase is value was the greater than all but the market capitalization of 72 members of the S & P 500.  Talk about that “massive sucking sound.”

Twenty years ago all looked for the under owned companies to purchase, waiting for others to discover the proverbial hidden gem for such has been the strategy since the inception of trading securities.

To write the obvious, this is no longer the case today for a growth company is now defined as the largest capitalized companies sucking all monies from all others to move shares to yet even higher level at the expense of most others.

As noted many times, the discrepancy between value and growth are now at proportions greater than the infamous 2000 NASDAQ bubble.  At some juncture this will change however the timing and catalyst of such will only be known after it occurs.

The much awaited Fed meeting concludes Wednesday.  As noted above, second quarter GDP data all but assured that a 0.50% reduction will not occur.  Consensus is now expecting a 0.25% decrease.

The Fed is now in a delicate balancing act the data is describing a stronger than expected economy.  As noted above final sales to domestic purchasers is at the highest level in a year.  The June’s jobs report was positive bouncing back from a soft picture in May.  Some regional manufacturing surveys have been showing a good rebound.  Sentiment surveys are rising and are approaching record levels.

Any less than dovish monetary statements can increase volatility. To write the incredibly obvious if the Fed surprises as does not act, there will be an immediate sharp increase in volatility.

Friday the all-inclusive July BLS employment report is released.  Wage gains are still relatively muted but wages are increasing at the greatest pace in about a decade.  Generally speaking wages tract the CPI and as greatly discussed inflation at this juncture is still benign.  I am relatively certain the Fed will have July’s data at the meeting and will perhaps comment about at the conclusion.

Last night the foreign markets were mixed.   London was up 1.4%, Paris down 0.10% and Frankfurt up 0.01%.  China was down 0.12%, Japan down 0.19% and Hang Sang down 1.03%.

The Dow should open   mixed ahead of new trade talks, a Fed meeting and the busiest week for earnings releases.  The 10-year is up 5/32 to yield 2.06%.

kent
The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. The information contained herein has been compiled from sources believed to be reliable; however, there is no guarantee of its accuracy or completeness. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. The material provided in Daily Market Commentaries or on this website should be used for informational purposes only and in no way should be relied upon for financial advice. Please be sure to consult your own financial advisor when making decisions regarding your financial management. Members of FINRA and SIPC, Capitol Securities Management is a privately owned full-service retail brokerage and investment advisory firm headquartered in Richmond, Virginia. For nearly 30 years, we have been serving the needs of our investors. Today, more than 200 Capitol Securities Management investment professionals and support staff serve approximately 18,000 customer accounts from Southern Florida to the New England coast.