A sluggish U.S. economy that grows at 3.3% in Q2? What's going on here?

The U.S. Commerce Department Thursday revised its Q2 GDP growth estimate to 3.3% from the previously-estimated 1.9%, but economist David H. Wang remains a skeptic regarding the appearance of an economic recovery.

"Don't write home or e-mail home that we have 'blue skies' ahead regarding the U.S economy because the skies remain uncertain and stormy looking. If you take away the export gains, the economy is still pretty weak," Wang said. "Also, one quarter does not a recovery make, and we'll get final data on Q2 GDP in September [September 26]."

Economists surveyed by Bloomberg News had expected the preliminary Q2 GDP statistic to total 2.7%. The U.S. economy grew at a 0.9% annualized pace in Q1 and contracted 0.2% in Q4 2007.

Q2 GDP data fleeting?

Wang said an improvement in exports and inventory accumulation strengthened GDP in Q2, but other factors suggest "it will be difficult, if not impossible to match that GDP growth rate in Q3 and Q4."

Toll Brothers (NYSE: TOL - option chain) shares are soaring higher today after weekly mortgage data came out this morning that showed applications rose last week. This after yesterday's mixed numbers for new home sales caused at least one celebrity stock analyst to call a bottom in housing. If you think that the stock won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on TOL.

TOL opened this morning at $22.42. So far today the stock has hit a low of $22.33 and a high of $23.43. As of 12:15, TOL is trading at $23.43, up $1.10 (4.5%). The chart for TOL looks bullish and S&P gives TOL a positive 4 STARS (out of 5) buy ranking.

For a bullish hedged play on this stock, I would consider an October bull-put credit spread below the $17.50 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make an 8.7% return in just seven weeks as long as TOL is above $17.50 at October expiration. Toll would have to fall by more than 25% before we would start to lose money. Learn more about this type of trade here.

"Home prices are becoming affordable again, so the decline in prices is likely more than half over," say Dr. Marvin Appel and Gerald Appel of Systems & Forecasts.

Meanwhile, the technical experts believe that long-term investors can now look to get back into the real estate investment market and recommend two ETFs that are based on rental REITs.

"Many analysts do not expect the financial markets to improve significantly until home prices stop falling. The pace of existing home sales remains low, and available inventory relatively high, both indicating that buyers are not yet able to step into the market at current prices.

"However, that could change within a year. Home prices are becoming affordable again, so the decline in prices is likely more than half over.

"The median home price is now more affordable to the median household than at any time since the start of 2004. My analysis suggests that housing prices will have to fall a bit more, but the housing market is not far from being reasonably valued for the first time in five years.

Today's housing news on new home sales in July sounds eerily similar to the post I wrote yesterday about July existing home sales. In both cases, we are given a quick headline that sounds like good news, but once you dig into the details a little deeper you realize that the news is just not as pretty as it first sounds.

Let's first take a look at the positive headline: New home sales rise in July. Great, this is exactly the sort of news that the market needs to hear. After all, weakness in the housing market has been a major catalyst to the current economic slowdown, so any good news is like a breath of fresh air. During July the market saw a jump of 2.4%. Not too shabby.

But what does this really mean?

In the current housing market, it has been hard to find any sort of silver lining, but we do see a little positive news today, as existing home sales in July jumped more than expected, mainly due to lower home prices.

During July, sales of existing homes rose by 3.1%. This was well above the 1.6% that Wall Street was hoping to see, but analysts caution against assuming that this is a sign that the market has finally bottomed out. Despite beating Wall Street estimates, we still have to consider the fact that home sales were over 13% lower than the same period a year ago.

While we can view the July sales figures as promising, we must also take a minute to look at home inventories, and here the picture is not so rosy. Here we see that the number of unsold single family homes is running at all time highs. Currently the market is trying to deal with a total of 4.67 million unsold homes. This is the highest level that we have seen since 1968 when the National Association of Realtors started monitoring the data.

There are signs that banks and others are expecting another round of credit write-offs. Banks are becoming more hesitant to lend on speculation credit losses will increase as the global economic slowdown deepens, Bloomberg News reported Monday.

For borrowing, banks are charging each other a 77-basis-point premium above what traders predict the U.S Federal Reserve's daily, effective Federal Funds rate will average over the next three months, up from 24 basis points in January, Bloomberg News reported.

Banks concerned about potential write-offs, global slowdown

Economist Peter Dawson said Monday two factors are driving the widening short-term lending spread.

"Rightly or mistakenly, there's a suspicion that selected banks will announce another round of write-offs," Dawson said. "Second, banks are coming to grips with the reality of the global slowdown. The slowdown suggests reduced revenue for banks, which would further hurt already strained balance sheets, and make banks more-reluctant to lend."

In August 2007, banks began to hoard cash and pare-back lending after subprime mortgage defaults forced two Bear Stearns hedge funds to seek bankruptcy protection. A series of regional, mortgage asset-related write-offs followed, as the housing boom ended, first in the United States, then in the United Kingdom. Mortgage-related credit losses now total more than $500 billion worldwide, Dawson said.

It would seem to be stating the obvious, but the habits of home buyers will probably hold the key to whether the economy will go into its deepest recession in decades. That is the prevailing wisdom, but is it right?

According to Reuters, "a sharper housing bust would leave deep scars in consumer sentiment, which would likely lead to a deep recession." Some economists and real estate experts see home prices falling another 15% to 20% from current levels.

Real estate may be a critical part of an economic recovery, but it is not the only one. Oil and commodities recently had their sharpest correction in years. If oil moves below $100 and the price of agricultural products moves down substantially, the implied cost of living for most Americans will get much better. Under those circumstances, homeowners have more money to pay mortgages.

Wages could also rise. Recent pressure on consumer prices makes it more likely that unions and employees will press for higher compensation. In many cases, they will be turned away. But, worker demands for higher pay spread across the entire economy should yield some improvements in how much people take home.

Housing prices are important, but they are not the only game in town.

Douglas A. McIntyre is an editor at 247wallst.com.

The United Kingdom's economy was unchanged in Q2, weighed-down by the contracting housing sector and a pull-back in consumer spending, the U.K.'s Office for National Statistics announced Friday.

Economists surveyed by Bloomberg News had expected the U.K.'s economy to grow 0.1% in Q2.

For the last 12 months, the U.K. grew at a 1.4% pace, the ONS said.

Further, the lack of growth in Q2 ended Britain's longest expansion in more than a century, London-based economist Mark Chandler told BloggingStocks Friday. The U.K.'s last recession occurred in 1991.

U.K. mirrors U.S. slowdown?

Further, as in the U.S., Chandler said concern is growing in the U.K. that declining housing sales and median home prices will serve as a drag on the U.K.'s economy through 2009, perhaps longer.

"Estimates vary in the United States, but I put housing's contraction effect at about 0.7-1.0% of GDP in the U.S., and perhaps a little lower in the U.K.," Chandler said. "Home equity loans were not as common during the housing boom as in the U.S., and that's why I don't think the slump will hurt as much here as in the U.S., but we're still seeing at least two quarters of negative growth, which will slow regional growth, as well."

The Philadelphia Fed Survey of Manufacturing in the tri-state area came in at -12.7. This was an improvement from the prior month's reading of -16.3, and slightly ahead of expectations. Initial unemployment claims were 432,000, which was also an improvement from the prior week's reading of 445,000, and better than expected.

Despite these improvements, these numbers are still quite negative. We may be in the process of forming a short-term bottom. Much of this will depend upon what happens to oil prices. If oil prices stabilize or continue to drop in the near future, this will offer some much needed relief to our consumer-driven economy. However, if the recent drop in oil is only a minor correction, the economic news will get worse.

• Even if oil stabilizes and if the economy starts to form a bottom, I do not believe that we will experience a substantial rebound. There are too many economic pressures which will not be resolved overnight:
  The housing crisis is very similar to the one experienced in the late 1980s and early 1990s. This took a decade to resolve.
• The current banking and credit crisis also resembles the Savings and Loan debacle of that earlier era. This eventually required massive intervention by the Federal government in the form of the Resolution Trust Corporation (RTC) to repair the financial system.

Those people expecting a quick recovery like 1998 will be sorely disappointed.

Doug Roberts is the Founder and Chief Investment Strategist for ChannelCapitalResearch.com, and is the author of Follow the Fed® to Investment Success: The Effortless Strategy for Beating Wall Street. He previously held executive positions at Morgan Stanley Group and Sanford C. Bernstein & Co.

Few would deny that the new U.S. president, Democrat or Republican, will face a plethora of concerns and problems after reciting the oath of office in January 2009.

One issue that sort of presents the 'problems panorama' in a snapshot has, curiously, received light news coverage lately -- is the U.S. budget deficit.

Time was, just a short decade ago, the federal budget was in surplus. However, in 2001 a federal tax cut occurred. That fact, combined with required spending for the war on terror / Iraq War, and the absence of a tax increase to pay for that increased spending, has primarily led to a projected $553 billion deficit for fiscal 2008, which ends September 30, 2008, and a $403 billion deficit for fiscal 2009, which begins October 1, 2008, according to Congressional Budget Office research (pdf).

Three factors that could balloon the deficit

In the view of many, the existing deficit is large -- but still manageable -- in the context of a $2.9-3.0 trillion federal budget. However, three factors could markedly increase the budget deficit in the immediate years ahead, and in doing so add to the new president's woes, economist Richard Felson told BloggingStocks.

First, there's the U.S. economy. If it falls into a recession (if it hasn't already), federal receipts (such as corporate and individual income taxes) will decline from current projected levels, and social program costs will increase, "adding $20-$50 billion to the deficit," Felson said.

As the housing market continues to struggle, there is further evidence today that things have yet to turn around as mortgage applications last week fell to lows not seen in nearly eight years.

Today's data came from the Mortgage Bankers Association, which showed that its application index dropped down to 419.3 last week, its lowest level since all the way back to December 2000. Just since this past February the index is down by 61%.

For those of us who are anxiously awaiting any positive signs for the housing market, this week has proven to be anything but hopeful. Today's news comes on the heels of data yesterday that showed new home construction during July was at its lowest levels in over the past 17 years.

Picture this: a U.S. neighborhood where no homes are being constructed, for miles.

In the current economic climate, the above could be a snapshot in any region of the country (or, sadly, in every region of the country).

U.S. housing starts fell to a seasonally-adjusted annual rate of 965,000 in July, the U.S. Commerce Department announced Tuesday (pdf). It was the lowest level for housing starts in 17 years.

Economists surveyed by Bloomberg News had expected July U.S. housing starts to total 950,000.

Further, housing starts have declined 29.6% in the past 12 months. Economist Glen Langan told BloggingStocks Tuesday he knows why.

"It doesn't take a Harvard mathematician to deduce this one. Builders are competing for sales with the large supply of foreclosed homes, as well as with home owners in good standing with banks, who are trying to sell their homes," Langan said. "So the great U.S. homebuilder pullback continues."

The U.S. economy is growing at a minuscule rate or is already in recession. Job growth, save a few sectors, is non-existent. Bank mortgage qualifying requirements are at their most rigorous levels in a decade. Investors / readers ask, 'where are the buyers going to come from to spark a rebound in the housing sector?'

Donald Trump, the Clown Prince of Capitalism and Chairman of Trump Entertainment Resorts (NASDAQ: TRMP), is back in the news. The Associated Press reports that he'll be bailing out Ed McMahon, the former Johnny Carson sidekick who defaulted on $4.8 million in loans on his Beverly Hills home.

Trump told The Los Angeles Times that he didn't know McMahon personally and is motivated by "compassion. . . When I was at the Wharton School of Business I'd watch him every night. How could this happen?"

Holy cow! When I read this story, I thought "Finally! I'll have a chance to do a nice piece on Donald Trump." Wrong. I am actually going to make history here and bash someone for helping an old man keep his house. First, why Ed McMahon? There are hundreds of thousands of people facing problems with their homes and, rather than quietly helping average Joe's with mortgage payments, Trump goes and spends millions of dollars to help one old rich guy keep his palace -- and then calls The Los Angeles Times to brag about it. Oh, and he had to remind everyone that he went to Wharton.

This act of charity, like everything Donald does, seems to be motivated by narcissism, grandiosity, and a thirst for publicity.

I'm caving into his desire to have his name all over the place, but I'm also calling BS on this billionaire bailout.

I've been told that companies that are poised for long-term success operate based on a respect for the intelligence of their customers. In an interview on CNBC, Robert Toll, the CEO of leading homebuilder Toll Brothers (NYSE: TOL) demonstrated his lack of respect for consumers: "When we hold specials, which are not really specials, but just some reconfigured incentives to make it look as though something special is being given away . . ."

That's right, the CEO of a leading homebuilder went on CNBC and announced that the company's heavily-marketed sales promotions are essentially total bull crap -- just "reconfigured incentives designed to make it look as though something special is being given away . . ." Why would he say that? With that one statement, Mr. Toll has told anyone who might have dealings with his company -- either as home buyers or as investors -- that the company's tactics aren't exactly straightforward and honest.

Just as a point of reference, this is the same guy who, back in November, essentially blamed the housing downturn on the pessimistic media. Oh, and by the way, this is the company that couldn't even get the chairman's daughter to close on a deal she'd agreed to.

So, if you're intrigued by an ad for a good deal on Toll Brothers homes, remember: it's just reconfigured incentives designed to make it look as though something special is being given away. The pounding that the market has given the stock over the past few years may be something similar.

Alan Greenspan loves talking to the press, perhaps more than he liked being the Federal Reserve chief. He recently did a long essay for the FT, and made similar comments about the financial system and housing to The Wall Street Journal. In his chat with the Journal, the old man said "Home prices in the U.S. are likely to start to stabilize or touch bottom sometime in the first half of 2009."

Greenspan's comments may help sell books, but there is little evidence that he is right.

Foreclosures are accelerating now, and with mortgage resets, it appears that prime mortgages are joining sub-prime mortgages as a source of defaults. Banks, which have taken hundreds of billions of dollars from the Fed, are not using that money to make new loans; they are using it to improve their own reserves against more mortgage-backed securities losses. Lending money for home loans comes with the risk that the value of those homes will keep dropping. Because of this more people find the price they can get for their houses is less than the balance of their mortgages.

In most recessions, unemployment trails the economic slowdown. Meaning that if this recession looks like the one in the early 1980s, unemployment could hit 8% or 9% of the work-force by the end of the year.

Under all of these circumstances, it would be almost impossible for the drop in home prices to be arrested within the next nine months.

Talking to the press may help Greenspan sell books whether what he says makes sense or not.

Douglas A. McIntyre is an editor at 247wallst.com.