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2011 4th Qtr Economic ReviewEconomic SummaryFed PolicyBus InvestmentOther Economic IndicatorsEmployment AnalyticsFalling Knife -1- Employment vs SkilsFalling Knife -2- The Great In-equality of WagesThought ExperimentMarket Forecast Picks

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  • 1. An Economic Overview &Analysis2011 4th Qtr Economic ReviewEconomic SummaryFed PolicyBus InvestmentOther Economic IndicatorsEmployment Analytics Falling Knife -1- Employment vs SkilsFalling Knife -2- The Great In-equality of Wages Thought Experiment Market Forecast Prepared by: Picks Gary Crosbie

2. Economic Summary:Overview:In general, economic conditions have shownsluggish growth through the year in adownward sloping trading range in just aboutevery economic category. Job growth hasshown some improvement but not at levelsnecessary to yield the kind of economicgrowth normally seen 31 months into arecovery. The most obvious example of thisis reflected in GDP. The peak in GDP sincethe inception of this recession was 4% 4th Qtr2009. The trend has been flat to down (seechart to right) since than dropping on averageGDP increased in2.3% to an avg of 1.7% for the year 2011. 2011but still downfrom 2009/2010..Normally , at the end of a recession, defined bythe Fed as June of 2009 ..the following 5-8 Qtrswould normally reflect an average of 5-8% GDPgrowth . The good news is the current recoverysees the growth of GDP increasing in 2011, thebad news is the AVG GDP growth of 1.7% isproblematic on its own merit but more troublingdecreasing from 2010 . 3. Economic Summary: The current anemic recovery is bestunderstood when evaluated relative toprevious recessions and is perfectly en-capsulated in the chart to the right whichcompares this recovery to everyrecessionary recovery post WW2. The mainmessage in this graphic re-emphasizes notjust the severity of the down turn but the By Far the worstpersistence of the problem and while there isrecovery of 19 posta recovery it is anemic in both duration and WW2 Recessions..magnitude compared to other recoveriessince WW2.. The second chart is even more revealingcomparing this recovery with the 19 postWW2 recoveries segmented into threecategories Mildest, median and Harshestreflecting this recovery significantly worseCompare the Median of all recoveries to thethan the harshest.currentThe slope of the median is Positive thecurrent slope is negative.. It is correct to observe some improvementas we have through Jan of this year. It is justas important to put that improvement intocontext with other recessions and toconclude the comparative differences aresignificant to the point that this could beappropriately summarized as a jobless andgrowth less recovery. The average recoverywould reflect a $4000 higher per capitaGDP and a 5-6% unemployment rate. 4. Economic Summary: The ultimate consequence of the law of diminishing returns of a huge trillion dollar (includinginterest) fiscal stimulus program and targeted cash subsidy programs that provided someshort term relief but left unresolved budgetary debt, capital flow, taxes and regulatory issuesthat yielded risk and uncertainty impeding capital investment and formation which is the keyto improved business growth, Thus average GDP growth for 2011 came in underexpectations of 3-3.5% to aprox 1.7% . For 2012 according to the CBO less than 2% GDPand unemployment at 8.9% %.The increased business risk defined above in concert with high productivity yieldedsignificant improvements in the balance sheets of business. Cash balances approached 2-2.5 trillion dollars with The majority of corporate cash utilization currently allocated to M&A ,stock buy backs and debt refinancing. This just continues to re-enforce balance sheets andM& A which results in corporate consolidations resulting in fewer jobs and puts moredownward pressure on unemployment. Further as will be discussed later, in selective sectors currently but more significantly in thefuture there will significant skill gap problems. The majority of the layoffs are skilled laborwho took early retirement. The problem is when expansion does occur and employers areback in the market placethe skills will not be available to meet the skill gap or those thatare skilled will not be able to re-locate due to housing issues ..e.g. underwater mortgages. 5. Economic Summary: New capital formation and investment by business entities is occuring but themajority occurs in emerging markets(BRIC) where taxes and regulations arelower and more transparent and thus less of an impediment to capital formation,business growth and shareholder wealth. Further , in addition to lower taxes and less regulation double taxation impedesbusiness from re-patriating there earnings back from foreign investmententerprises to the U.S for new investment in capital and labor. This is why 40-45% of earnings in large Cap multi-nationals come frominternational investments. Elimination of the double taxation on foreign earnings could result in approx 1-1.5trillion dollars of new investment in US capital formation and labor growth(newjobs) So..with microscopic growth of less than 2% and a 8.3 % unemployment rate it iseconomic incompetence to continue the double taxation on Mult-nationals . You will not realize any new tax revenue because business will continue to keep 1-1.5 trillion dollars worth of potential capital formation and new jobs overseas rather than in the U.S the negative incentive encourages NEW capital formation and growth outside the US 6. Economic Summary:Overview: The bottom line is unlike previous recessions that haveV shape recoveries at 6-8% this is likely to be a longslow slog of 2.- 2.5.%- growth thru 2012 and for sometime.Employment growth while seeing some minorimprovement is sluggish at best with an average of 137Kper month over the 2011 period. While Dec employmentcame in at 200K and Jan at 243k the employment rateneeds to average 250-300k per month to impact theunemployment rate of 8.3 -8.5% to levels of 5.5- 6.5%63.5%..At thisnormal for a recovery this Long in the Tooth.participationThe Dec number is artificially inflated due to the factRate the realthat more than 315000 individuals dropped out of theunemploymentrate is 16-20%labor force totally. The Bureau of labor and statisticsdoes not measure these people so the realUnemployment rate is really 16-20%.Gallop currentlycalculated the rate at 19.2%. This is due to a low participation rate in the labormarket. These are people who have run out ofunemployment insurance or who just given up. TheBureau of Labor and Statistics DOESNOT count theseindividuals and they thus are lost in the smoke of thetotal unemployed. 7. Economic Summary: Market Volume has been light for a prolonged period of time indicating thatthe retail investor has been sitting on the side line for a lot of the samereasons business is not spending. Uncertainty, risk aversion and fear hasdriven any significant in flows of investment away from equities to treasuries, commodities and the bond market. 2008 is still strong memory to theaverage retail trader. The result is the market is more volatile driven by theprofessional trader , & computer generated trading strategies In total the economy is at stall speed and significant improvement is notexpected untill things change politically. Right now existing policies are notconducive to growth due to uncertainty on taxes, regulations , healthcareand Demand. Personal Consumption Expenditures (PCE) was -.1% in Decwhich was a huge disappointment given holiday expectations. For the foreseeable future businesses are keeping inventories andemployment tight due to uncertainty.The uncertainty of the Euopean fiscal crisis, Policy and regulation out of Washington to include healthcare, thebond market , demand and supply issues. 8. Economic Summary: So the question is Where are the Animal Spirits that fuel the economicengine? Entrapanuear new starts, IPOs and small businessgrowth.The answer is.due to the above there is a large amount ofrisk aversion and the Risk OFF business strategy is in place. Further QE-2 has ended which means the money stimulus has endedbut the Fed has substituted QE2 for Operation Twist to improve theRisk on trade for investors and the banking community . More about thatunder Fed. Corp earnings were up in the 4th Qtr but not as much as in 2010. Neverthe less the S&P valuations came in at around 12-13 times earnings(Versus an average of 15-17 times ) making equities in any analysis theinvestment of choice vs cash or fixed income. Thus markets are undervalued for 2012 and in addition with taxes dueto rise significantly in 2013 will likely act as a positive stimulus for highervaluations at least through the first 6 months of the year. Further fear ofhigher taxes in 2013 will cause some investors to move Investmentdecisions forward to 2012. 9. Overview: Economic Summary: The bond market is projecting sluggish economic10 Year Bond Rategrowth. 4 th Qtr GDP was 2.8 % but the avg GDPgrowth for the year was 1.7%. The CBO is projecting Effect on the yieldcurve of QE1,QE2,growth for 2012 in the 2-2.5% range significantly Operation Twistbelow what is necessary to grow employment. The objective of Fed Monetary Stimulus QE1,QE2 and Current Operation Twist was three fold;1. Improve Large Cap Investment:Put downward pressure on the 10 year (see chart)through more and more liquitity which provide a more favorable environment for both equity & corp 30 Year Bond Rate bond investment.Effect of Operation2. Improve Small Business Hurdle points for new Twist has flattened the growth investments; Lower yield curve ratesterm structure of provide lower cost of capital for new business interest rates yield investment:curve to historicallevels between the 103. Housing: Support a faltering housing marketand 30 year bond to and thus keep mortgage interest rates low .100 basis points. Results: Equity markets have responded with highvolitility ..up 5-6% first half ..down 7-8% second half..Small Business demand for new capital is stilllacking given all the uncertainty and while mortgagerates are low-(3.5-4%) housing starts and prices arestill decreasing and threaten a housing double dip. 10. Economic