December 2009 Market and Economic Updates

The U.S. and most of the world is in the early stage of an economic recovery from the worst recession since the 1930s Depression. However the recovery with the unemployment and lack of credit in the U.S. is at a slow pace. The first quarter of recoveries since the post-WWII era, have averaged about 7.3% (median 6.3%) vs. 2.8% in the latest GDP estimate for 3^rd quarter 2009 – David Rosenberg, Gluskin, Sheff & Associates 11/26/09

Corporate Profits Rebound from Historic Decline – Chart as of 11/20/09 since 1935

Manufacturing Signs
11-30-09 The Midwest Manufacturing Index rose 0.5%, its fourth consecutive advance - with business activity rising to its highest level since August 2008.

Consumer Spending
12-1-09 Cyber Monday sales rose 14% and more was spend online than on Black Friday. 11-25-09 – Spending by Americans bounced back in October as their incomes rose slightly more than expected and inflation remained low, boding well for economic growth. 11/30 Although only small sales gains on “Black Friday” retail outlook shows signs of slow improvement.

Commerce Department data showed spending rose in October 0.7% compared with a September decline of 0.6%, while personal income rose by 0.2% for the second straight month.

U.S. Borrowing - Record Low Rates
11-24-09 Interest rates on the six-month Treasury auction hit their lowest level on record (.04%) with demand far exceeding supply. Interest on short term Treasury debt briefly fell below zero last week.

Consumer Confidence
11-19-09 The index of leading economic indicators rose for the seventh consecutive month in October, signaling the U.S. recovery is in place.

Earnings – Most “Beats” in 15 yrs
80% of S&P500¹companies beat profit estimates in 3rd quarter – the most beats in 15 years per Thomson Reuters. The average beat was by a huge 14.9%, the largest since records began. Further, 58% beat revenue estimates. Ashwani Kaul, global head of research on Marketwatch.com, says that most important is the positive outlook many companies are reporting including top line (revenue) growth which we haven't seen for a long time.

Stock Valuations
Stock prices - even with the large gains since March 2009 - look attractive to many analysts. CNBC pointed out that 30 percentage points of the rebound was because the March low was in anticipation of a possible Depression that did not occur.

Morningstar analyst John Coumarianos says, “Large-cap growth stocks appear as cheap as they have in years."

Jobs Growth Next Catalyst for Market early 2010? - 11/17/09 CNBC Closing Bell – Market is still concerned about a “double dip” recession but less so which is why strong gains. Now the sentiment is that in early 2010 job growth will begin which could be the next catalyst for more strong market gains. Consensus is that the market is not yet priced for a recovery but being held back by the double-dip concerns.

In every recession since 1950 unemployment peaked AFTER the recession ended. In the case of the previous two recessions the unemployment peaked several quarters later following an improvement in real GDP. Asha Bangalore (Northern Trust) said: “A similar case is projected for the current recovery. Our forecast is for the unemployment rate to peak in mid-2010. At the same time, real GDP should continue to advance during the final months of 2009 and all of 2010.”

Manufacturing Jobs
Manufacturing activity around the world surged in October, signaling a global rebound in economic growth. A barometer of manufacturing in New York State’s six-month outlook advanced to a level not seen since October 2004. Across the whole U.S., the Institute for Supply Management's manufacturing index had the third straight month of growth and the highest level since April 2006. The ISM's employment index rose for the first time in 15 months as manufacturers sought to recall workers or enlist temporary help, offering further hope that the overall labor market may be stabilizing.

The theory is that employment was cut too much last year as companies anticipated a depression. Models of behavior suggest that employment should have only been cut by 3.5%, and instead almost 6% of jobs were cut away. This is why productivity and earnings gains have been so amazing.

Ultimately, and perhaps as soon as right now, companies will start hiring again to reverse their “throw everything overboard” mentality of last year. That will have the effect of moderating earnings gains, but it will also put money back into workers’ pockets and in turn, help boost revenue.

Modest US recovery best recipe for stocks
For equity investors, and not just in the West, a distinctly modest US economic recovery could be the best recipe for further stock market gains. Equities often do well in a slow growth environment because monetary policy remains accommodative, enabling efficient companies to prosper. Conversely, strong growth forewarns of tighter monetary conditions which eventually choke-off bull markets. Source: David Fuller, Fullermoney, November 2, 2009.

Global Rebound
The Global Economy is recovering sharply with only the UK and Spain of major economies still in recession and the UK is expecting to return to growth soon. The Bank of England expects the UK to power its way back to rapid growth during the next two years - The Financial Times 11/12/09.

Pullbacks
While nothing is for sure, this seems like a good time to take advantage of potential continuing recovery gains. There will be pullbacks which are normal and healthy for long-term market gains. Since the market low on 3/09/09, the S&P 500 stock index has had 5 different pullbacks of at least 5% These have occurred over as few as 2 and as many as 9 days. The sell-off from June 15 to July 10th took the S&P500 Index down 7.1% before buyers swarmed in again and the S&P500 Index reached new 2009 highs.

A Year after the Crisis, the Global Economy is Firing on All Cylinders
11/2/09 Moneymorning.com update - What a difference 12 months can make. Just one year after every national economy on earth was in deep trouble, a powerful global rebound is underway. In fact, the global upswing is a lot stronger than most investors realize. ²

So don’t let a few days’ decline here and there cause you to lose sight of one of the most important investing trends investors will find today. According to ISI Group researchers, the transformation has been a dramatic one. A year ago, every national economy on earth was declining at the same time – some dramatically. Today, however, every economy is now improving – though at different paces.

ISI points out that China’s third-quarter GDP is rising at 12% and Korea’s economy at around 8.2%. China retail sales are up 24% annualized in the past nine months. And China industrial production is up 21% in the last 10 months. Across the China Sea, export orders and industrial production in Taiwan are up at around a 51% annualized pace.

Disclosures
¹Investors cannot directly invest in indices.
²Additional risks are associated with international investing, such as currency fluctuations, political and economic stability, and differences in accounting standards

Past performance does not assure future results.

The views and opinions expressed by Dave Hutchison, CFP are as of the date of the report, and are subject to change at any time based upon market or other conditions. The material contained herein is for informational purposes only and should not be construed as investment advice, since recommendations will vary based on a client’s goals and objectives. Information is believed to be from reliable sources; however, no representation is made as to its accuracy. All economic and performance information is historical and not indicative of future results.

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