The headlines this morning about GDP growth at 1.7% during the second quarter is a positive sign that the economy is growing.    However, as we mentioned in an update a few weeks back, the Federal Reserve forecasted much higher growth than this:  

Now don’t get us wrong as we would rather see a growing economy rather than a declining economy.  During past recoveries though, the economy was growing at a rate greater than 3% at this time. 

The Federal Reserve also revised down the first quarter annualized GDP growth rate from 1.8% to 1.1%.  In other words, our growth rate is anemic at best.  This growth is showing up in company earnings as earnings are up 0.8% for the second quarter for S&P 500 companies that have reported earnings.  Forty-three companies have issued negative guidance compared to eleven with positive guidance.  The real disconnect here though is expectations of future growth.  For the 3^rd quarter, analysts predict revenue will grow by 2.8% and earnings by just over 6%.  For the 4^th quarter, revenue is expected to grow by 0.7% while earnings are expected to grow by almost 12%.  With corporate profit margins at historical highs already, companies will have to expand those margins further to produce these earnings as revenue stagnates.  As the graph below demonstrates, productivity rose in 2009 and remained high for 18 months thereafter as companies downsized and remaining workers expanded their job responsibilities.  This caused profit margins to expand to their highest level in 65 years.  As companies have now started to hire, productivity has fallen which usually translates into lower margins, not expanding margins.  We believe year-end earnings estimates are too high and will be revised downward in the near future.

          Some clients have asked for a copy of the stock market analysis we included with the 2^nd quarter reports.  We have placed that analysis on our website.   http://www.thorinvestment.com/thors-2nd-quarter-2013-stock-market-analysis-4/  Please feel free to forward this information on to others that are interested in understanding the risk in the current market place. 

Sincerely,

Your THOR Team