Gross Domestic Product

GDP = Consumption + Foreign Direct Investment + Government Expenditures + Net Exports

Second quarter GDP came in at an annualized 2.4 percent growth, following a revised first quarter gain of 3.7 percent. Today's release includes annual revisions going back three years. The second quarter advance estimate is just barely below analysts' projections for a 2.5 percent increase. But the first quarter upward revision of a full percentage point from the prior estimate of 2.7 percent is a positive surprise.

The latest quarter was led by a rebound in residential investment, a jump in investment in equipment & software, and by inventories. PCEs also posted a moderate gain along with government purchases. The big negative is a worsening in net exports.

Bloomberg.com

Equities tanked early in the trading session, but managed to eke out minimal gains by the close. I did not execute any trades today. However, I simulated some options trades with GLD and SLV. Needless to say, the new strategies look good. Look for M&A news on Sunday to boost equities on Monday morning. Have a great weekend!

Patrick M. Ambrus
Analyze Capital LLC
Twitter: Analyze Capital

Consumer Confidence

Consumer confidence dipped in July-again over worries about the jobs picture and over income prospects. The overall consumer confidence index slipped to 50.4 in July from an upwardly revised 54.3 in June (initially 52.9). Analysts projected July to print at 51.0. The latest decrease was led by a drop in expectations to 66.6 from 72.7 in June. But the present situation sub-index also declined-to 26.1 from 26.8.

Those seeing jobs as hard to get rose to 45.8 percent in July from 43.5 percent the prior month. On the issue of expectations of income, 17.5 percent see income down in six months, compared to 16.8 percent in June. Only 10 percent expect higher income in six months, compared to 10.6 percent in June.

The good news, however, is that buying plans have picked up in some categories-albeit from low levels. Those planning to buy a car within six months rebounded to 4.5 percent from 4.1 percent in June. Those planning to buy a major appliance within six months jumped to 28.5 percent in July from 23.7 percent in June. However, those planning to purchase a house edged down to 1.9 percent from 2.0 percent in June.

Patrick M. Ambrus
Analyze Capital LLC
Twitter: AnalyzeCapital

Californication: More Problems in Cali- Part Deux

The California budget project, a think tank, indicates that the states university system remains the largest employer at 38%, however no one wants to make any cuts in that sector because of the powerful teachers union (the largest lobby in the state) that is vehemently opposed to any new measures to raise standards, change probation periods, and alter the ‘laughably easy teacher tests’ which dictate hiring. The State has the largest classrooms with 23.4 students, almost twice the national average, and spending per pupil has dropped 11% in the past two years and is likely to drop even further now that the stimulus package has run out. And, considering that the states 8th graders ranked 46th in the nation last year as well as the fact that the state sends fewer high school graduates to college than all but three other states, there are many arguments for reorganizing the entire education system, however the possibility of that becoming reality remains improbable.

Consequently, the school system is not the only pressing issue of economic consequence. The rich and fertile central valley of California is running out of its most valuable resource, water. Geologically the region was once, thousands of years ago, an inland sea, however now the cumulative abuse of resources and successive droughts since 2006 have severely reduced the natural water supply. Importing water has increased the cost of acquiring the resource for local farmers, which is now accounting to above 30% of their expenditures. Even the use of “micro-sprinklers”, aimed at helping reduce water waste, has had little overall effect. While it is unlikely that farming will disappear entirely from the region, whether it will be as productive as it was in years past remains unclear. In the San Joaquin valley agriculture accounts for 20% of the available jobs, the only other comparable source being the state prison system. And, because of the very poor level of education among the workers in the valley, opportunities would be scare if many are left without work in the fields. The demographic trend of increasing Spanish speaking workers, now reaching close to 6.8 million, who migrate to the valley add to the already pressing problem of few opportunities and increasing water costs.

Much like the problematic issues facing Sacramento and the central valley face, the city of Los Angles also has many enormous budget cuts to deal with in order to decrease its deficits of close to $212 million. Next year Wendy Gruel, the cities chief accountant, estimates that the deficit may increase to $484 million and with the power and water utilities refusing to transfer funds to the city’s general fund LA’s accounts will be overdrawn, leaving little available cash to pay its employees. On top of a state-wide housing bust and complicated property taxes, including proposition 13 which capped property taxes in 1978, the city has few viable resources for generating any necessary funds. In addition, proposition 218 was passed in 1996 requiring explicit voter approval for increasing any of the cities fees, further complicating the city’s fiscal issues. The only option the city now has is cutting the size of its services. And, in the case of the police force which was once lauded for its hard-won success against crime, chief of police Charlie Beck has cut overtime pay and will potentially limit hiring next year. As with the state, the future of Los Angles looks bleak and is due a real miracle if it is resolve its deepening fiscal issues.

Cited form the Economist Magazine, Website & Bloomberg.com

Tom Rodelli
Research Analyst
Analyze Capital LLC
trrodelli@gmail.com

Victoria Concordia Crescit

Victory! Today I had the best P&L day of the year. On July 14, I was stopped out of my NG position at $4.34. Then on June 15th I watched NG rocket up from 4.31 to 4.60. Needless to say I was upset.

On Friday July 16, I decided to get long a double-digit amount of ES (E-mini SPX) contracts at around 1070 with 1100 price target in mind. By the close my position was underwater 1%. However, I learned my lesson from the NG trade and stuck to my guns by setting a looser S/L. This increased my risk/reward ratio, however, I felt very confident my position would rally.

Last week, I monitored my position less frequently than normal, as I was in Japan conducting some business with my partner Clark. Thus, I adjusted my stops accordingly each day and was able to let my profits ride. On Friday, I thought about selling but decided to juice my trade out until the resistance levels of about 1110.

Today, I made the right decision. I locked in a 3.6% profit. Weather or not my position continues to rally is irrelevant. I am proud of my ability to macro-manage my trade with careful risk management in place. This was not only my best P&L day of the year, but also my most disciplined trade.

I owe this successful trade not just to myself but also to my family, partners, business associates, and fellow traders who helped me clarify my thoughts everyday. Thank you all.

Music Selection: If you are into Hip Hop music I suggest Rick Ross’ new album Teflon Don. Up-tempo and soulful sound mixed with hard street bangers. Maybach Music.

Related ETFs: ProShares Ultra S&P 500 (SSO:US), SPDR S&P 500 ETF Trust (SPY:US)


Patrick M. Ambrus
Analyze Capital LLC
Twitter: AnalyzeCapital

Analysis of the European Bank Stress Tests

Analysis:
Here are some headlines that I saw after the European bank stress tests were revealed:
“Euro Bears Vanish as Stress End Makes Goldman a Bull” (Bloomberg)
“Spanish, Other European Banks Rise After Stress Test Results‎” (WSJ)
“Vast majority of EU banks pass stress tests” (Yahoo)

Despite these positive-sounding headlines, the truth is that the stress tests were not tough enough. According to the results, seven banks lack adequate reserves to maintain a Tier 1 capital ratio of at least 6% in the event of a recession and sovereign-debt crisis. Among the banks, one is German, one is Greek, and five are Spanish. Furthermore, the tests concluded that the banks would only need to raise 3.5 billion euros ($4.5 billion) of capital. For many investors, these numbers sound too good to be true.

Bringing a bit of reality to the picture, Morgan Stanley’s head of European credit strategy claims that had the Tier 1 threshold been 7%, 24 of the banks would have failed. Another criticism coming from investors is that the tests ignore the majority of sovereign debt that banks hold. The bank exams only took a look at the trading books and ignored the banking books. In other words, the evaluations took into account potential losses only on government bonds that the banks trade, rather than those they are holding until maturity. This is a major problem because, according to a survey by Morgan Stanley, lenders hold about 90% of their Greek government bonds in their banking book and 10% in their trading book. Also, the tests assumed a loss of 23.1% on Greek debt, 14% on Portuguese debt, 12.3% on Spanish debt, 4.7% on German debt, 10% on UK debt, and 5.9% on French debt.

On the other hand, some argue that the very existence of the stress tests is a good sign. This is because it forces European national bank regulators to work with each other and keep a closer eye on troubled banks. Additionally, some say that the tests make it more likely that the government will bail out banks if needed. The argument is that government is more inclined to make good on its claim with a bailout if a so-called “safe” bank is about to fail.

Conclusion:
In my opinion, the stress tests do little to bring about certainty to the eurozone. In light of the tests, I am not convinced that the euro will break through 1.30 in the next few weeks. However, with that being said, the euro may continue to defy the odds and finish this month up strong.

Information obtained from Bloomberg and other news sources.

Daniel A.
Summer Analyst
Analyze Capital LLC
analyzecapital@gmail.com

The Golden State- Part 1

There are many reasons to compare the State of California with the small European nation of Greece besides their warm Mediterranean climates. Like Greece, the Golden State has become a symbol of fiscal irresponsibility, in effect spending what it cannot pay for through taxes. And, although there is no serious need to worry about the state defaulting on its debt; rating agencies consider that risk in California to be greater than all the other 49 states.

Even after a decade of passing measures to cut spending, the state is once again considering a new budget, proportionally smaller to what is was a decade ago after taking into account population growth and inflation. And, even then the state still faces a $17.9 budget hole in the current and coming fiscal years. To produce more cash, without raising taxes, California will be forced to cut whole programs including welfare-to-work, subsidized child care, and the cash assistance to poor families with children. Reducing overgenerous state employee pensions costing the state over $6 billion a year remains a priority, as well as initiating an alternative budgetary system proposed by bi-partisan leadership last year that introduces a new value-added tax, simplifies income taxes, and scraps more from corporate and sales taxes. Part of the state’s problematic tax issues revolves around the ineffective proposition 13 of 1978 which fails to raise enough money from property taxes for local municipalities. On top of that, Proposition 98 of 1988 was meant to find new ways of generating funds, but it’s horrendously complex mathematical systems and funding formulas have never produced positive results.

California faces a more general problem as the political structure ensures spending will always outpace revenues. While simple majorities in Sacramento are required to lower taxes, super majorities must agree to increase them. The recent primary elections for the governor’s seat in California have highlighted new ideas on spending reductions in various sectors of the government, however statistics in 2008 indicated that California had 108 state employees for every 10,000 residents, a ratio which remains one of the lowest in the United States, only Florida and Illinois have fewer. Where the incumbent governor can realistically cut jobs remains unclear. Recently, Governor Schwarzenegger has initiated measures to cut the state’s employee pay to minimum wage. Although this may help ease the state’s economic problems it seems rather controversial that a few must suffer the irresponsibility’s of an entire society. There will come a time when the taxes will have to be increased, and presently it seems we are once again prolonging the inevitable for immediate political safety.

Tom Rodelli
Research Analyst
Analyze Capital LLC
trrodelli@gmail.com

Thoughts on Transition

Last week was a week of transition; global Equity prices resumed their rally, “Helicopter Ben” and his contrarian co-pilots hinted at more Quantitative Easing, and The Financial Times unleashed a scrumptious morsel of protein packed debates on austerity vs. stimulus from bloodthirsty alpha-economists. What else is new?

Circumstances and situations change fast:

1. BP Gulf Oil Spill- Tony Hayward gone
2. Goldman Sachs – mediocre earnings
3. Euro Stress Tests- unleashed

Who cares, right!? The aforementioned circumstances defiantly dominated the financial, economic, business, and global-political headlines for the better part of the second quarter all while instilling fear, scandal, and panic into the hearts’ of ubiquitous market participants. Which stories will produce future catalysts that influence future irrational behavior of financial markets? Rather, what’s next?

I cannot say for sure or even offer a robust prediction. My lone thought; politicians will scrutinize the U.S. economic recovery. Midterm elections draw near. It is almost time for another round of Obamanomics. Here are a few things to be mindful of while trading this week:

• Consumer Confidence (Tuesday)

• Durable Goods Orders (Wednesday)

• C + I + G + X (Friday)


Globalization creates interlocking fragility, while reducing volatility and giving the appearance of stability. In other words it creates devastating Black Swans. We have never lived before under the threat of a global collapse.

--N.N. Taleb


Patrick M. Ambrus
Analyze Capital LLC
Twitter: AnalyzeCapital