8/27/2010
By Carlos Guillen, Semiconductor Analyst

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Sentiment and GDP Shakes Market

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Before the stock market kicked into first gear on Friday August 27, investors seemed to be holing on tight in anticipations of the latest GDP result for the second quarter. Investors in general have been running scared lately as macroeconomic data seems to be all over the place with some positive and some negative indications. Today the market did not know what to expect. Second quarter GDP growth consensus estimates were conveying that GDP would grow less than previously stated, yet investors feared that the actual result would still be lower than the consensus estimate, which would certainly put the market nicely in the red. However, no one expected there would be so much volatility today as news hit from all directions.

The first bit of news came from the Bureau of Economic Analysis, announcing that real GDP growth during 2Q10 was now revised to 1.6 percent, lower than the prior estimate of 2.4 percent posted a month ago, but higher than the Street's estimate of 1.4 percent.

While the revision was significantly lower than originally calculated, it was better than the consensus estimate, and this was received with open arms by the market, as reflected in the Dow's sharp move to the upside right at the opening bell. Clearly GDP is growing at a decreasing rate, and while this is not really good news, the fact that investors were so fearful that the result would land below economists' expectations allowed them to get a sigh of relief. This was similar to fist fighting Tyson and walking away with just a black eye.

A bit less than thirty minutes into the trading session, the market took a turn for the worse after the University of Michigan Consumer Sentiment was released. The August final result landed a bit worse than expected, decreasing to 68.9 from the 69.6 preliminary figure and landing below the Street's expectation of 70.0. The index of consumer expectations for six months from now, which more closely projects the direction of consumer spending, also decreased to 62.9 from the prior estimate of 64.1. This news took the DOW below the psychologically important 10,000 mark, as investors' fears quickly returned. This index is considered a leading indicator, and landing below expectations may be indicating that consumers are now more likely to pull back in spending during the next couple of quarters. Consumer spending, which is 70 percent of total GDP, is more vulnerable now as the unemployment rate continues at an elevated level and as government stimuli are running out of steam.

Almost concurrently with the consumer sentiment result, Intel came out and said that revenues were running softer than expected. As a result, the company lowered its prior revenue guidance to $11.0 billion, plus or minus $200 million, from the previous expectation of $11.6 billion, plus or minus $400 million. According to Intel, revenue is being affected by weaker than expected demand for consumer PCs in mature markets; however, inventories across the supply chain appear to be in-line with the company's revised expectations. Moreover, gross margin was lowered and tightened to 66 percent, plus or minus a point, from the previous expectation of 67 percent, plus or minus a couple of points. On a positive note, despite the lower demand, average selling prices slightly increased, though not enough to cancel out the effect of lower volumes. This news took the Dow to the bottom for the day at 9,937.

Luckily, within minutes of the Intel news, Bernanke provided a safety net for the market, saving it from a steeper drop. Bernanke saved the day by saying that the Fed will do all it can to boost the economy, which includes providing additional monetary accommodation through unconventional measures if it proves necessary. In essence, Bernanke reiterated its August 10 decision to start buying Treasuries again and pledged to do more, if necessary, to boost the economy. This brought the market back to life, allowing it to finish the trading session 133 points above the 10,000 mark, making this Friday a "crazy day."

Carlos Guillen
Wall Street Strategies