Good Morning. In case the prior ten days didn't give you a clue, Monday's action made it clear (as in A Few Good Men "crystal" clear) that traders are playing a waiting game in front of this week's big, bad events. But to be fair, with the stock market having run up nearly 6 percent in the prior three weeks, I guess no one can really be blamed for wanting to take a wait-and-see stance in front of the GDP report (Wednesday before the open), the FOMC meeting and Bernanke press conference (mid-day Wednesday), and the always influential monthly jobs report scheduled for release on Friday morning.

To be sure, each of these events has the potential to be a market mover and you can rest assured that the algos will be armed and ready within milliseconds of each release. For starters, the GDP report could make or break the Fed's case with regard to the question of tapering. Although the FOMC's stated metric for its decision making on monetary policy is the unemployment rate, a weak GDP report could help support the idea that tapering needn't start in the near-term, while a GDP number that is north of expectations would likely cement September as the start date for the much ballyhooed tapering operation.

For those keeping score at home, the consensus expectation for the GDP growth rate in Q2 is 1.1 percent. This would be down from the 1.8 percent rate seen in Q1, which was an improvement from the +0.1% rate seen at the end of last year. Normally, the GDP number isn't a big deal because everyone knows the formula used in the calculation. As such, analysts usually wind up arguing over a tenth of a percent or so here and there. However, this time around, there is a bit of funny business going on with the numbers and I thought you might want to know about it.

The bears argue that the Q2 GDP number could miss badly (but even I'm bored by the mathematical rationale here, so I'll just skip it). And some of the most ardent bears suggest that the Q2 number could even have a minus sign in front of it. But before you despair, there is word that the Bureau of Economic Analysis has been messing with the numbers, which could be a game changer.

Here's the deal. According to Steve Landefeld, the director of the Bureau of Economic Analysis (the unit of the Commerce Department that measures G.D.P), the current GDP calculation doesn't adequately capture the fact that we live in an increasingly knowledge-based economy. In a NY Times article, Mr. Landefeld said that until now (as in, right now), the government hasn't handled this situation properly. So apparently, the Bureau has chosen this week to make a change.

“We’ve been trying to understand the sources of growth in the G.D.P.,” Landefeld told the Times. “One of the longstanding gaps in the numbers has been the contributions of intangibles — creations in the arts and entertainment, research and development, things like that — and what they contribute to G.D.P.”

And to quote the NYT, "This week, the bureau is doing something about it. It plans to give a greater economic weighting to the creation of many types of intellectual property — from books to movies to music to biotech drugs. The economy won’t change overnight, but the numbers will. Going all the way back to 1929, the G.D.P. will look bigger."

Hmmm... so at a time when the state of the economy remains a big, fat question mark, the guys running the numbers appear to have decided to change the rules of the game. And just what are they adding back into the GDP equation? Oh that's right, the almost impossible to define area of intellectual property. This would be bad enough if we were talking solely about the IP involved with the development of technology, medical devices and/or biotechnology. But believe it or not, the government has decided to also include "entertainment, literary and other artistic originals." For heaven's sake, does anybody else's mind instantly jump to the punch line of the famous joke involving "three kinds of lies?"

The Bureau of Economic Analysis says this is no big deal because it usually does revaluations every five years or so. However, this revision might be a doozie. Again quoting the Times article, "Recalculating the treatment of all “artistic originals” that fit the bureau’s definitions would have increased the economy in 2007 by about $70 billion, or 0.5 percent. And R&D, particularly in the field of biotechnology, would have added more than $200 billion. Combined, these two changes would have swelled G.D.P. by almost 3 percent."

The point is that if, come Wednesday morning at 8:30 am eastern, the GDP numbers look a little strange to you, don't be surprised. And remember, it's not the news but how the market reacts to the news that matters - even if the news doesn't appear to make any sense at all.

Turning to this morning... A rebound in China and Japan is being credited for the improved mood on Wall Street in the early going. Economic data that was below consensus spurred hopes for continued QE in Japan as well as a decline in the yen (which, according to traders, is the real story). In addition, the PBoC injected liquidity into the country's financial system for the first time in six months, which is also producing hopes of more stimulus in the future. Futures in the U.S. are up modestly in front of a plethora of earnings and economic reports including Consumer Confidence and and the Case-Shiller Home Price Index. Note also that the Federal reserve begins its two-day meeting today.

Positions in stocks mentioned: none

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