(Source: Business Wire)
Annaly Capital Management, Inc. (NYSE: NLY) released its monthly commentary for July. Annaly expresses its thoughts and opinions on issues and events in the financial markets through its commentary set forth below and through its blog, Annaly Salvos on the Markets and the Economy (Annaly Salvos). Please visit the Resource Center of our website (www.annaly.com), to see the complete commentary with charts and graphs and to visit our blog.
The Economy
"I was not going to be the Federal Reserve Chairman who presided over the second Great Depression." ”Ben Bernanke, at the Town Hall meeting in Kansas City, July 26, 2009
To judge by stocks in July, equity investors think Chairman Bernanke has succeeded. The S&P 500 finished the month more than 7% to the plus side, up about 45% from the lows of early March. That's an annualized 155% gain which, while formidable (and unsustainable), is eclipsed by the Hang Seng's 76% gain over the same period (over 300% annualized!). Recent gains in the Leading Indicators Index (positive for three months in a row for the first time since 2004) have been mostly driven by these ripping stock market returns and a steeper yield curve, neither of which we would classify as indicators of economic activity.
Last Friday's GDP release, however, while better than expected, had weak underpinnings. We won't go into details about the prior quarters' negative revisions, except to say that they took away 5.1 percentage points of GDP growth since the first quarter of 2008. That's fairly significant; nearly three quarters of a trillion dollars that was never there. The third quarter of 2008, during which Lehman Brothers collapsed, AIG was "rescued" and Fannie Mae and Freddie Mac were taken into federal custody, saw GDP revised from -0.5% to -2.7%. As for the second quarter of 2009, the -1.0% headline was helped by the GDP Price Index. This measure deflates nominal GDP to make it "real," and it came in at a scant 0.2% for the quarter versus expectations of 1.0%. If the price index came in at the expected 1.0%, the headline GDP result would have been -1.8%, worse than the expected -1.5%. Next, personal consumption expenditures (PCE) dropped 1.2% in the quarter, reversing the first quarter's positive print. Despite this drop, PCE as a percentage of GDP reached a new record of 70.6%. Looks like for now we are still depending on a frail consumer to drive the economy, but that won't be for the government's lack of trying. Not shockingly, government consumption and investment is ramping up. It added 1.12% to GDP, one of only two major components that contributed positively to GDP. The other is net exports, which was up only because exports were down less than imports.
Of course, GDP is backwards looking, but forward looking worriers like us are troubled with the continued shrinking of gross private domestic investment. Please view our online version for an illustration of gross private domestic investment in absolute terms and as percentage of GDP. The chart shows that the drop-off has been precipitous, and the percentage of GDP has never been lower. Investment is defined as an outlay of capital with the expectation of future return, so what this means for the future is money not being put to work today will not generate GDP in the future.
