weekly economic commentary 10-10-11

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LPL F INANCIAL RESEARCH

Weekly Economic Commentary

The light calendar or U.S. economic data this week will allow market

participants to ocus on corporate data (the unocial start o the third

quarter earnings reporting season or S&P 500 companies is this week),

Chinese economic data, and monetary policy here and abroad (please see

this week’s Weekly Market Commentary or a ull preview o the earnings

season). However, the scramble to shore up the European banking systemby European ocials remains the market’s utmost concern. As we have

noted in several o our recent commentaries, markets are still calling out or

bold, coordinated policy actions here and abroad, and markets in the past

week or so have become increasingly condent that such actions will be

taken — although the devil is in the details.

The market-moving economic data reports released in the United States this

week are: the September retail sales report, weekly readings on retail sales,

mortgage applications, and initial claims or unemployment insurance. In

addition, the ull slate o Chinese economic data or September is set to be

released this week: money supply, new loans, imports, exports and, most

importantly, the producer and consumer price data. Market participants

continue to try to gauge the impact o the global economic slowdown onboth the Chinese economy and Chinese infation. The next policy move

by the Chinese central bank, the People’s Bank o China (PBOC), could

very well be more important or markets than the next move by either

the Federal Reserve (Fed) or the European Central Bank (ECB). I the

September infation readings in China continue to show that infation peaked

in July 2011, it may clear the way or a rate cut by the PBOC. On the other

hand, a reacceleration o infation in September might push the PBOC to

tighten. Clearly, the market would preer the ormer outcome rather than the

latter. We continue to expect the next move by the PBOC will be to signal

that it is nished raising rates or this cycle, but any rate cut may not occur

until late in the year.

Outside o China, there are several key ECB and Fed ocials slated tomake public appearances this week. Notably, outgoing ECB President

Jean Claude Trichet is scheduled to make three public appearances this

week, while the man who is set to replace Trichet as ECB President at the

end o the month (Italy’s Mario Draghi) is also on the docket. This week’s

contingent o Fed speakers is clearly skewed to the “hawkish” (more

concerned about infation than growth) side o the Fed, so we would not

be surprised to see several headlines in the popular press this week citing

The Next Two Million Jobs: An Update

October 10, 2011

John Canally, CFA

Economist

LPL Financial

Highlights � The ocus this week is likely to be on

corporate and Chinese data, rather than

U.S. economic data.

� The economy is tracking to our bear case

or creating the next two million jobs.

Tuesday, October 11

NFIB Small BusinessOptimism Index

Wednesday, October 12

MBA MortgageApplications Indexwk 10/07

FOMC Minutes

Thursday, October 13

Initial Claimswk 10/08

Trade BalanceAug

Treasury StatementSep

Friday, October 14

Retail SalesSep

Import Price indexSep

U o Mich ConsumerSentimentOct

Business InventoriesAug

Economic Calendar



LPL Financial Member FINRA/SIPC o 5

WEEKLY ECONOMIC COMM ENTARY

Fed ocials worried about too much monetary policy stimulus in the United

States. Our view here remains that Fed Chairman Bernanke, Vice Chair

Janet Yellen and New York Fed President Bill Dudley orm the center o

gravity at the Fed, and any move by these three to signal less stimulus romthe Fed would be signicant.

The Next Two Million Jobs: An Update

The private sector economy added 137,000 jobs in September, beating

expectations (+90,000) and accelerating rom the 42,000 jobs added

in August. The report was all the more encouraging given the simply

horrendous policy and sentiment backdrop during the month o September

here in the United States and overseas. Some o the bounce in jobs in

September can be attributed to the return o 45,000 Verizon workers who

went on strike in August. Looking at the past three months to smooth out

the Verizon impact, the economy added around 120,000 jobs per month.

Year-to-date, private payrolls have grown an average o 149,000 per month.

While not a booming number, it is not a recessionary number either, and

conrms our view that while employers are not doing much hiring, they are

not laying o workers as they did in 2007, 2008, and 2009.

The monthly job count culled rom a survey o 440,000 businesses across

the nation, was not spectacular in September, but was solid and the details

were modestly encouraging.

� First, the prior two months' employment readings were revised up by a

total o 99,000.

� Second, Hurricane Irene and severe fooding as a result o the remnants

o Hurricane Lee likely held the job count down by around 25,000 in

September. These jobs are likely to return in October.

� Finally, the September report noted the third consecutive increase

in temporary help employment. This category is a very good leading

indicator o uture job gains.

On the downside, there was yet another loss (33,000) in state and local

government jobs in September, the tenth time in the past 12 months that

state and local governments shed jobs. Since August 2008, state and local

governments have shed 615,000 jobs, as states and municipalities continue

to struggle to align costs with revenues.

The nation's unemployment rate, culled rom a survey o 60,000 households

ound that the unemployment rate remained at 9.1% in September. The

unemployment rate is dened as the number o unemployed persons

(totaling about 14 million) as a percentage o the labor orce (totaling about

154 million). In order or the unemployment rate to all steadily, the economy

must grow above its long-term potential growth rate o around 2.5%.

Currently, the economy is growing, but only by around 2.0% or so.

The July 5, 2011 edition o the Weekly Economic Commentary was entitled:

“The Next Two Million Jobs.” In that report, we noted that the economy

had created over two million private sector jobs in the 14 months between363024181260

6%

5%

4%

3%

2%

1%

0%

2010

2003

1991

2 Job Creation in This Recovery Is Running In Line

With the Prior Two Economic Recoveries

Source: LPL Financial, Bloomberg Data 09/14/11

01 070605040302 0908 10 11

80

40

0

-40

-80

-120

Change in Temporary Help Services EmploymentSeasonally Adjusted, Thousands

1 Temporary Help Jobs Are Increasing Again, a GoodSign or Future Job Growth

Source: Bureau o Labor Statistics, Haver Analytics 10/10/11

(Shaded areas indicate recession)

Our view here remains that Fed

Chairman Bernanke, Vice Chair Janet

Yellen and New York Fed President Bill

Dudley orm the center o gravity at the

Fed, and any move by these three to

signal less stimulus rom the Fed would

be signicant.





February 2010 and April 2011, and outlined a bull, base and bear case or

how long the economy would take to create the next two million jobs.

Since then, o course, the U.S. economy has hit another sot patch amid a

torrent o bad news at home that included:

� The lingering impact o the Japanese earthquake on the global supply chain.

� The debt ceiling debate in July and early August.

� The downgrade o the United States’ AAA-credit rating in early August.

� The eects o Hurricane Irene.

� Further declines in both consumer and business condence.

� The near 20% decline in the equity market, as measured by the S&P

500, between late July and early October.

Abroad, conditions also deteriorated with yet another fare-up o the European

sovereign debt crisis that has dominated the landscape since mid-July.During this period (May – September 2011), the private sector economy

created another 526,000 jobs, or an average o just over 100,000 per month

While, the September employment report (released last Friday, October 7)

was a relie to nancial market participants who were expecting another

dour report on the nation’s labor market, the September jobs report (and

the revisions to prior months’ data) leave the nation’s job creation engine

tracking much closer to our bear case than to our base case or creating the

next two million jobs.

Various Outcomes or Job Creation

Jobs

Created

Per

Month

Date By

Which“Next

Two

Million

Jobs” Are

Created

MonthsTo Create

“The

Next Two

Million

Jobs”

How Many

MoreYears To

Recoup All

Jobs Lost

in Great

Recession

Date By

Which AllJobs Lost

During

Recession

Would Be

Recouped

Economic

Outlook

Under This

Scenario

Fed

Outlook

Under Th

Scenario

Base

Case

225,000 Early 2012 12 2 Years, 4Months

Early 2014 Modest GDPGrowth Near3.0%

On holduntil mid-2012

Bull Case 325,000 Early 2012 10 1 Year, 8Months

Mid 2013 Robust GDPGrowth near4.0%

Stimulusstartsto beremoved inlate 2011

BearCase 125,000 Late 2012 17 4 Years, 3Months Late 2015 Very SluggishGDP growthbelow 2.0%

Morestimulusrom theFed

Current

Pace

105,000 Late 2012 19 5 Years Late 2016 Very

Sluggish

GDP growth

below 2.0%

More

stimulus

from the

Fed

Source: LPL Financial Research 10/10/11





Setting aside the robust employment recoveries rom the recessions in

the mid-1970s and the early-1980s, we can compare how quickly the next

two million jobs were created in the so-called “jobless recoveries” in the

early 1990s and early 2000s. Ater the private sector economy created two

million jobs in the atermath o the 1990-91 recession, it took the private

sector economy only another eight months to create the next two million

jobs. Over this eight-month period (mid-1993 through early 1994), the

economy created around 250,000 jobs per month as the Fed remained on

hold and the economy reacted to an increase in tax rates in mid-1993.

Ater the private sector created roughly two million jobs in the atermath

o the mild 2001 recession, it took another ten months to create the next

two million jobs. Over this ten-month period in 2005, the economy created

around 200,000 jobs per month as the Federal Reserve raised interest rates

by 175 basis points, the housing market boomed and scal policy in the

United States tightened somewhat.

Using the prior two recoveries as a baseline, a goal o creating the next twomillion jobs in the ensuing eight to 12 months is consistent with monthly

job growth o between 200,000 and 250,000 jobs per month, which has

been our orecast since the beginning o 2011. At this pace o job growth,

it would take another two and a hal years (early 2014) or the economy

to recoup all the jobs lost in the Great Recession. Under this scenario, the

unemployment rate would likely decline modestly, the Fed would remain

on hold until mid-2013, and the overall economy would probably grow at

around 3.0%, just slightly above its long-term average.

A aster pace o job growth (around 300,000 to 350,000 per month) would

create the next two million jobs by early 2012, and that outcome would

certainly push down the unemployment rate, speed up the Fed’s exit rom

quantitative easing, and ease concerns about the durability o the recovery.At this pace, it would take around two years (mid-2013) to recoup all the

jobs lost during the Great Recession. The economy would grow at around

3.5 to 4.0% under this scenario.

Unortunately or the still nearly 14 million unemployed workers, neither

our bull case nor our base case or “the next two million jobs” is unolding

so ar. As noted in the "Various Outcomes" table (See page 3), the private

sector economy is creating around 100,000 jobs per month over the past

three months. At this pace, it would take until late 2012 or the economy to

create the next two million jobs, and would leave the unemployment rate

about where it is now (9.1%). At this pace o private sector job creation, it

would take ve more years (late 2016) beore the economy recoups all the

private jobs lost in the Great Recession. Under this scenario, the economy

would continue to struggle to grow at around 2.0% per year.

This outcome has already prompted the Fed to enact more stimulative

monetary policy (committing in August 2011 to keep rates low until mid-

2013 and embarking on “Operation Twist” in September 2011) and could

prompt more monetary stimulus rom the Fed i the slow pace o job

creation persists. The slow pace o job growth has already led to continuous

Using the prior two recoveries as a

baseline, a goal o creating the next two

million jobs in the ensuing eight to 12

months is consistent with monthly job

growth o between 200,000 and 250,000

jobs per month, which has been our

orecast since the beginning o 2011.




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Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

This research material has been prepared by LPL Financial.

The LPL Financial amily o afliated companies includes LPL Financial and UVEST Financial Services Group, Inc., each o which is a member o FINRA/SIPC.

To the extent you are receiving investment advice rom a separately registered independent investment advisor, please note that LPL Financial is not

an afliate o and makes no representation with respect to such entity.

IMPORTANT DISCLOSURES

The opinions voiced in this material are or general inormation only and are not intended to provide specicadvice or recommendations or any individual. To determine which investment(s) may be appropriate or you,

consult your nancial advisor prior to investing. All perormance reerence is historical and is no guarantee o

uture results. All indices are unmanaged and cannot be invested into directly.

Stock investing involves risk including loss o principal.

The Federal Open Market Committee action known as Operation Twist began in 1961. The intent was to

fatten the yield curve in order to promote capital infows and strengthen the dollar. The Fed utilized openmarket operations to shorten the maturity o public debt in the open market. The action has subsequently

been reexamined in isolation and ound to have been more eective than originally thought. As a result o thisreappraisal, similar action has been suggested as an alternative to quantitative easing by central banks.

The Standard & Poor’s 500 Index is a capitalization-weighted index o 500 stocks designed to measure

perormance o the broad domestic economy through changes in the aggregate market value o 500 stocks

representing all major industries.

Credit rating is an assessment o the credit worthiness o individuals and corporations. It is based upon the

history o borrowing and repayment, as well as the availability o assets and extent o liabilities.

An obligation rated 'AAA' has the highest rating assigned by Standard & Poor's. The obligor's capacity to meet

its nancial commitment on the obligation is extremely strong.

International investing involves special risks, such as currency fuctuation and political instability, and may notbe suitable or all investors.

talk about a “double-dip” recession, and that talk is likely to persist until the

pace o job creation picks up.

While we expect the pace o job creation to reaccelerate back toward our

base case (200,000 to 250,000 jobs per month) in the coming months and

quarters as the actors restraining hiring ade, we continue to expect that the

labor market will remain relatively subdued by historical standards, but grow

just enough to promote near trend-like GDP growth in the quarters ahead.



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Jeffrey Kleintop, CFAChief Market Strategist

LPL Financial

LPL F INANCIAL RESEARCH

Weekly Market CommentaryOctober 10, 2011

Earnings Season: What to Watch

Highlights

While macroeconomic actors are likely toremain key drivers o the market this week,

microeconomics will also garner investors’

attention as companies begin to release their

third quarter earnings reports.

Market participants have priced declines

in earnings into stock market valuations.

Yet, analysts have high, double-digit growth

expectations or earnings as prots reach a

new record high or the rst time since the

Great Recession.

During this earnings season we are paying

special attention to sales growth, exposure

to Europe, and how companies are puttingcash to work (or not) and the impact on the

outlook or coming quarters.

U.S. stocks rose last week by 2.1%, as measured by the S&P 500 Index,

once again rebounding o the low end o the range rom about 1100 to 1200

that has constrained the Index or the past couple o months. The rebound

was driven by a combination o solid and better-than-expected economic

data, ew negative earnings pre-announcements, supportive actions by

oreign central banks, and talk among European policymakers o injectingcapital into Europe’s banks to insulate them rom a potential Greek deault

and recession.

While macroeconomic actors are likely to remain key drivers o the

market this week, microeconomics will also garner investors’ attention

as companies begin to release their third-quarter earnings reports. Four

times a year investors ocus on the most undamental driver o investment

perormance: earnings. As you can see in Chart 1, the perormance o the

S&P 500 and analysts’ revisions to their earnings per share (EPS) estimates

are closely linked.

Market participants have priced declines in earnings into stock market

valuations, as we detailed in the Weekly Market Commentary rom

September 9 entitled Recession Obsession. Yet, analysts have highexpectations or earnings. The consensus o analysts expects double-

digit, 13% prot growth (compared to the third quarter o 2010) in the third

quarter o 2011, as prots reach a new record high or the rst time since

the Great Recession, and 15% year-over-year growth or the ourth quarter

or S&P 500 companies.

Who is right? The truth is likely to be in the middle as earnings expectations

are revised modestly lower and markets price in a less dire outlook or

prots as results are reported and guidance on coming quarters is provided

by corporate leaders. In recent weeks, third-quarter earnings estimates

have been alling. O the 127 companies that pre-announced third quarter

earnings guidance in recent weeks, the ratio o negative-to-positive news

was 2.6, worse than the average ratio o 2.3 since 1995. For S&P 500

companies that have reported third-quarter earnings so ar, 21 o 29 (72%)

have exceeded estimates, while six have missed estimates.

The third-quarter earnings season runs about our to six weeks starting

around two weeks ater the close o the quarter. During this earnings

season we are paying special attention to sales growth, exposure to Europe

80%

60%

40%

20%

0%

-20%

-40%

-60%

2.50

2.00

1.50

1.00

0.50

0.00

Revision Ratio (Up/Down) (Left Axis)

S&P 500 Year Over Year (Right Axis)

S&P 5 00 Year-Over-Year Performance and Number ofUpward EPS Revisions Divided by Downward RevisionsOver Past Month for S&P 500 Companies (Three-MonthMoving Average)

1109 100807060504030200 01

1 S&P 500 Perormance and Earnings OutlookClosely Linked

Source: LPL Financial, Factset 10/07/11

The S&P 500 is an unmanaged index, which cannot be invested into

directly. Past perormance is no guarantee o uture results.



WEEKLY MARKET COMMENTARY

LPL Financial Member FINRA/SIPC Page 2 o 3

and how companies are putting cash to work (or not) and the impact on the

outlook or coming quarters.

� Sales Growth –We will be putting more emphasis this season on top-line

rather than bottom-line growth. Sales growth is expected by analysts tocome in around a strong 10%. One headwind companies ace is sluggish

economic growth around the world, although they were able to post

strong growth in the rst hal o 2011 despite sluggish economic growth.

Another headwind is the movement in the value o the dollar. During the

third quarter, the dollar was down about 10%, on average, rom a year

earlier boosting the translation value o oreign-sourced prots. However,

entering the ourth quarter the dollar is fat compared to a year ago,

eliminating a positive or prots.

� European Exposure –Economic growth may likely continue, albeit below

average, in the United States over the next year and emerging markets are

expected to continue to grow. However, developed oreign economies,

particularly in Europe, may enter a recession in the next 12 months. S&P

500 companies’ revenues are composed regionally; about 46% o prots

come rom oreign markets with about 29% o oreign prots derived rom

Europe. However, that varies widely by sector and industry.

� Putting Cash to Use –Pressure is building or higher dividends as U.S.

companies sit on record cash stockpiles and payouts remain at all-time

lows. S&P 500 companies paid out 26% o earnings in the orm o

dividends over the past year, down rom 30% or much o the 2000s

and below the 30-year average o 40%. Company cash and equivalents

have soared to record highs even as companies have paid down debt in a

dramatic deleveraging over the past ew years. A return to higher dividend

payouts would help attract investors seeking income in an environment o

very low bond yields. The S&P 500’s dividend yield stands at 2.2%, above

the yield on the 10-year Treasury or one o the ew times in history. Also,

share repurchases are a way o putting cash to work.

This week, just ten S&P 500 companies are due to report earnings. It is

important to keep in mind that the companies that report early in the season

are most oten not the bellwethers they are commonly thought to be. We

may not really know how overall corporate results or the third quarter o

2011 are shaping up until just ater the end o the month o October, when

about hal o the S&P 500 companies will have reported.

200219971992198719821977 2007

70%

60%

50%

40%

30%

20%10%

0%

S&P 50 0 Dividend Payout Ratio

2 S&P 500 Dividend Payout Ratio Lowest in History

Source: LPL Financial, Standard and Poor’s, Thomson Financial 10/07/11

It is important to keep in mind that the

companies that report early in the season

are most oten not the bellwethers they

are commonly thought to be.



WEEKLY MARKET COMMENTARY

Member FINRA/SIPC

Page 3 o 3RES 3347 101

Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

This research material has been prepared by LPL Financial.

The LPL Financial amily o afliated companies includes LPL Financial and UVEST Financial Services Group, Inc., each o which is a member o FINRA/SIPC.

To the extent you are receiving investment advice rom a separately registered independent investment advisor, please note that LPL Financial is not

an afliate o and makes no representation with respect to such entity.

IMPORTANT DISCLOSURES

The opinions voiced in this material are or general inormation only and are not intended to provide specicadvice or recommendations or any individual. To determine which investment(s) may be appropriate or you,

consult your nancial advisor prior to investing. All perormance reerence is historical and is no guarantee o

uture results. All indices are unmanaged and cannot be invested into directly.

The economic orecasts set orth in the presentation may not develop as predicted and there can be noguarantee that strategies promoted will be successul.

Bonds are subject to market and interest rate risk i sold prior to maturity. Bond values and yields will decline as

interest rates rise and bonds are subject to availability and change in price.

Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment oprincipal and interest and, i held to maturity, oer a xed rate o return and xed principal value. However, the

value o a und shares is not guaranteed and will fuctuate.

Earnings per share (EPS) is the portion o a company’s prot allocated to each outstanding share o common

stock. EPS serves as an indicator o a company’s protability. Earnings per share is generally considered to bethe single most important variable in determining a share’s price. It is also a major component used to calculate

the price-to-earnings valuation ratio.

The Standard & Poor’s 500 Index is a capitalization-weighted index o 500 stocks designed to measure

perormance o the broad domestic economy through changes in the aggregate market value o 500 stocksrepresenting all major industries.

Stock investing may involve risk including loss o principal.

weekly economic commentary 10-10-11

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