Gross Domestic Product (GDP) is the most widely-used indicator for the health of an economy.  So, when the fourth quarter GDP number was released prior to the market open and was almost two percent better than expected, you would think that stocks would get a lift from the better-than-expected news.  Not so!  After a brief rally,the market continued the decline begun yesterday as investors began fully digesting the nuts and bolts of the economy’s quarterly progress report.

In its broadest sense, GDP is the measure of all goods and services produced in a country during the quarter, which is expressed on an annualized basis.  The basic formula is:  GDP = consumption (consumer spending) + government spending + investment (which is basically business spending) + net exports.  For the quarter, GDP fell at a 3.8% annual rate, which is the worst quarter in 26 years but was not as bad as the 5.5% drop that many had forecast.  Overall for the year, GDP is down .2% from the prior year.

Quarter after quarter, the largest component of GDP is consumer spending.  With the Conference Board’s consumer sentiment indicators reaching new lows (the index began in 1967), it is no surprise that consumer spending has slowed considerably.  Consumer’s spent 3.5% less in the final three months of 2008 than at the same time in 2007, which is actually slightly better than the 3.8% decline in fourth quarter GDP.  Consumption sank as a percentage of GDP from 71% in the third quarter to 63% in the quarter just ended.  Final sales, which is often a proxy for consumer demand fell by 5.1%.  Meanwhile, as aggregate demand faltered, inventories grew (adding 1.32% to GDP) which could spell trouble in future quarters as orders for these goods slacken.

Government spending rose in the quarter by 5.8%, which did serve to boost overall GDP, but is hardly the component that we would like to see growing.  With the Administration’s stimulus plan in the works and the possibility of TARP II or the creation of a “Bad-Bank” also looking more likely, this number will surely continue to grow in the future.

Perhaps most distressing was the falling investment component, as business curtailed spending by 19.1% in the quarter–the worst such performance in 34 years.  Businesses are clearly very hesitant to overextend themselves in this environment and keeping costs down is key as evidenced by rising unemployment.  Investment in structures fell by 1.8%, while investment in IT and software was hit very hard, dropping 27.8%.  Clearly any business-to-business sales have been hit especially hard in this downturn.

Net exports ended up yielding a small gain for overall GDP in the quarter, as trade slowed considerably.  Exports fell by 19.7% in the quarter as a stronger dollar and decreased global demand worked against U.S. producers.  Imports dropped by nearly 16% in the quarter as well.

So, even though the preliminary fourth quarter GDP number was better than most had feared it would be, a 3.8% drop offers plenty to be concerned about going forward.  One such concern is the $6.2 billion increase in inventories, which could further depress future production as businesses are forced adjust their output in the next few months.  Further compounding this problem is the 5.1% drop in aggregate demand during the quarter.  However, one potential bright spot is the fact that inflation is not a concern presently.  In the calculation of GDP, prices fell .1% during the quarter (the first decline in more than 50 years), compared to a drop in the Consumer Price Index (CPI) of 9.2% in the quarter mostly due to plunging energy prices.  One could argue that CPI is a better measure of price levels in the calculation of  GDP and that it is being under-stated in the current release.

The immensely popular TechCrunch blog features an outstanding guest column by the founder of Mint.com, Aaron Patzer.  For those unfamiliar with Mint, it is a personal finance site that tracks user’s spending on various accounts (bank, credit card, loan, anything that can be tracked online) and aggregates personal finances into one convenient source.  The site allows for the collection and organization of a ton of data, and when considering its growing user base, now 900,000 users (or close to 1% of the US households), you can get an interesting cross-section of the economy. 

The backdrop of the article is the world economic forum in Davos.  Patzer is struck by the apparent triumph of rhetoric over data in many of the presentations given on the current global recession.  An interesting point, as we hear nearly everyday that we are in the worst economy since the Great Depression.  At least at Davos, there seemed little empirical data to support these claims other than the mention of equity market losses.  The catastrophic global slump was taken on faith as “everybody knows” its that bad.  Patzer, being an engineer, was not satisfied with settling on this dour premise from which to begin the summit without some proof of the dire circumstances as related through cold, hard data.

Lucky for us, Patzer is in a unique position to shed some light on the average Mint user, and in so doing, give us a clearer picture of the economy as a whole.  His study of mint users between August 6, 2008 and December 15, 2008 yielded these results,

“Is it Great Depression bad? That’s a qualitative question I can’t answer. But what the data, the hard facts, mean for you – if you run a consumer business – is that your customers are spending $400 less each month than they were a year ago, have burned through half of their savings, and on average have taken on an additional $5k in debt.”

Perhaps most refreshing is the fact that Patzer happily leaves the numbers to tell the story.  By contrast, many market commentators look for recognition by trying to time the market better than anyone or by being the most sensational out of their peers.

Furthermore, this article highlights a new and developing trend in research in the web 2.0 world.  There is so much information available these days on the web that there will be increasingly meaningful data produced by aggregators like Mint.  You are seeing the beginning of this trend in little ways around the web with various sites listing most popular articles, products and searches.  Can you imagine the value of information stored at Google (GOOG)?  Thank goodness their motto is “Don’t be evil.”  Of course, social media sites like MySpace (NWSA) and Facebook have an incredible amount of data with their massive user base.  They just have not yet figured out a way to harness it in a way that does not offend users, who often put very personal information on display.  However, there is little more personal to an individual that your personal finance, and users are readily making tangible and meaningful data available to Mint.

As the saying goes, knowledge is power and new tools on the web are expanding people’s everyday uses for the web all the time.  As Patzer said to end his article,

“Good decisions are based on good data. And data – in itself – may be one of the most valuable by-products of any startup.”

The stock market’s string of four positive days in a row came to an abrupt halt today as continuing bad economic news coupled with disappointing earnings dragged equities down.  We did see something from Ford Motor (F) that at least demonstrates that the key tenets of capitalism are not completely forgotten by American industry.  As most are aware, the U.S. automakers received funding from the government via executive order in the final weeks of the Bush administration.  However, of the big three (General Motors, Ford, and Chrysler), one of these struggling companies took a stand against accepting government funding.  Ford rejected the government rescue dollars, but the cynic in us figured that it would not be long before Ford requested some form of government assistance, especially given the horrendous sales numbers plaguing the industry.  David Asman of Fox Business Channel put it this way:

“Ford Motor is facing the worst year in the company history facing fourth quarter losses of $6 billion, and the auto maker still doesn’t plan to seek federal loans.”

The bottom line quarterly results for Ford were worse than analysts had expected as the company lost $1.37 per share excluding one time charges.  Consensus estimates called for a loss of $1.30.  Revenue was slightly better than expectations but, compared to a year ago, sales have slumped 36%.  Interestingly, as bad as the results were, the company was able to reduce its cash burn rate which was $5.5 billion for the quarter, down from $7.7 billion in the prior quarter.  The spokesman for the company also said that Ford thinks its burn rate will continue to slow through 2009, despite sales that are predicted to slump 10%.  At the moment, the company has about $13.4 billion in cash on hand but there is an additional credit facility that adds $10.1 billion.  Interestingly, Ford CEO Alan Mulally secured $23.5 billion in financing back in 2006 and 2007 in anticipation of “rainy days” in the future.

At some point in the future, Ford will emerge from this maelstrom a stronger company.  Auto sales will pick back up again; according to the Federal Highway Administration there are 240 million cars on the road in the U.S.  The December rate of auto sales was at a stunningly low annualized rate of 10.3 million cars, which equates to an average replacement rate of 23.4 years.  Historically, the normal replacement rate is about 13 years.  As the cars on the road continue to age, look past the grim current situation and realize that sales will not stay this depressed forever.

Now, please do not take this as an endorsement of Ford stock as the company will continue to struggle for some time.  Ford’s fundamentals are awful and it carries far too much debt for a company that is losing money.  After all, 2008 was the worst year in the company’s 105 year history, and thus it has earned our infamous “yellow sticky note of doom“.  However, we do see this as evidence that Ford is the best managed of the Big Three, as it was only nine months ago that the company turned a profit because of a weak dollar and aggressive cost cutting.  Furthermore, CEO Mulally won our respect by turning down government bailout money.  Perhaps it is because Ford does not want to be subject to the strings that will likely come attached to the money, or it could be a more “old school” belief that you do not take bailouts that you don’t need.  Either way, taxpayers should applaud Ford for trying to turn around its business independently by reigning in costs and, hopefully, making cars that American’s want to buy, such as trucks and SUV’s.  The self-reliance of Ford and its management appears down-right American.

There has been a lot of talk about for-profit educators such as DeVry (DV) as unemployment continues to worsen.  The thinking goes that people who are out of work tend to go back to school in order to improve their skills in the eyes of potential employers.  We wrote a blog on this phenomenon in November (DeVry Thrives as Unemployment Spreads) when unemployment hit a 16-year high and the numbers have only gotten worse since.  Since that post, the stock ran up 22% before DeVry reported its fiscal second quarter earnings, which were in-line with estimates.  These results were actually quite good, especially the 35% increase in revenue.  However, the fact that DeVry’s operating performance continues to excel in a miserable economic environment and the market’s reaction to those results reeks of overvaluation.

DV recently reached an all-time high price, which is astounding compared to the rest of the market.  The S&P 500 is down more than 38% over the past twelve months but as of today’s open, DV was up about 10%.  We maintain our view that this stock is particularly resistant to the macroeconomic downturn but at the current price is just too expensive to recommend now.  We rate it as Overvalued from a valuation standpoint, which uses historical evidence to quantify a company’s relative appeal in the market.  For example, over the last ten years the stock has historically had a price-to-cash ratio between 6.65x and 12.14x; the current metric is way above its normal range at 25.5x.  Similarly, price-to-sales has historically ranged between .90x and 1.64x but, even after a 35% spike in revenue, this metric is currently in the low three’s.  As you can see, DV’s valuation is not very compelling at current levels even though we think the company’s earnings were very impressive.  This stock is just too far out-of-line with the market’s valuation at this point and such a rich valuation compared to DV’s historical range makes it too risky in such a treacherous market.

Based on historical valuation metrics, Ockham believes that DV is simply too hot for us to recommend purchasing right now.  Even insiders are using this opportunity to divest substantial amounts of stock.  There is no doubt that DeVry’s potential for revenue growth continues to be impressive and seemingly gets a boost with each layoff announcement.  While the company has excellent growth potential, we generally avoid recommending stocks that are trading so close to all time highs.  Although today the stock is down a good bit (about seven percent right now) after posting outstanding quarterly results and the broader market indices are all up nicely, we recommend taking profits in DV and putting them to work in another recession-resistant stock that hasn’t run-up so much over the last few months.

These were just too funny not to send along.  Personally, I think that “Please Buy” is the best, what do you think?  Feel free to come up with new ideas in the comments section.