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Monthly Archives: April 2009

Q1 2009 GDP Report Due Out This Week; Swine Flu Pandemic a Threat to Recovery

The economic data released last week, including reports on home sales, business capital spending in March, and the weekly jobless claims for mid-April, further enforced our view that the U.S. economy, while still in recession, probably stopped getting worse as the first quarter of 2009 ended and the second quarter began. This is consistent with our base case for 2009 as laid out in our 2009 Outlook publication. This week, markets will digest the long awaited Q1 report on Gross Domestic Product (GDP), the broadest measure of U.S. economic activity. While the weak report is likely to garner a ton of media attention, financial markets are likely to be focused on the data for April on manufacturing and vehicle sales, as well as the weekly reading on chain store sales and jobless claims. The outbreak of Swine Flu and its potential impact on the global economy and markets will also be front and center this week.

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Potential Pandemic

Over the weekend, the U.S. Centers for Disease Control and Prevention (CDC) announced that the Swine Flu that spread from its apparent origin in Mexico to the United States cannot be contained. The World Health Organization (WHO) indicated this new strain of flu has potential to become a pandemic. The Obama Administration has declared a public health emergency. The situation is developing rapidly. Markets may begin to react to this news and the potential shock it may pose to the fragile global economy.

Our base case for 2009 is for growth to return to the U.S. economy by yearend and for modest gains in the stock and bond markets. We believe the conditions related to the financial crisis that resulted in the deep recession and bear market, are getting better – as demonstrated by the improvement in the LPL Financial Crisis Conditions Index . . . .

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Climate Proof Your Portfolio? Not so Fast!

Actions by policy makers in Washington have been important drivers of the market over the past year. Will the momentum behind the formulation of policy to address greenhouse gas emissions become an important factor shaping market performance? We doubt it – at least for 2009.

Earth Day, April 22, marks the 39th anniversary of the birth of the modern environmental movement. In 1970, President Nixon created the Environmental Protection Agency with a mission to protect the environment and public health and Congress amended the Clean Air Act to set national air quality, auto emission, and anti-pollution standards. The regulatory changes of the environmental movement had material impacts on businesses. Costs rose as businesses were forced to clean up wastewater, scrub their emissions, and adopt more sustainable operating procedures. Many companies embraced the changes and invested in community projects intended to restore natural environments, this helped shape corporate image. The movement also led to the development of new energy efficient products and technologies and gave birth to the alternative energy companies.

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Pace of Decline in the Economy Slowing as Q1 Ended and Q2 Began

The economic data took a backseat to the Q1 corporate earnings season last week, but for the most part, the data provided a friendly backdrop for what became the sixth consecutive winning week for the S&P 500. This is the longest since May 2007, which was five months before the equity bear market began in October of 2007 and seven months before the onset of the recessionin December of 2007.

This week, the economic data will once again play second fiddle to another deluge of corporate earnings reports for Q1. However, key reports on durable good orders for March, and intitial jobless claims for the week ending April 18 have the potential to be market moving.

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Dividends Season

Last week delivered a fifth straight week of gains for stocks. The S&P 500 now stands 27% above its low on March 9. Stocks have moved higher as real-time indicators of economic and market conditions have improved. The LPL Financial Crisis Conditions Index has risen in each of the past five weeks. The index has rebounded to just below where it started the year and is aligned with our base case for the economy and forecast for modest gains in stocks and bonds this year.

Last week marked the start of the first quarter earnings season. Earnings related news this year. . .

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Real GDP on Track to be “Less Awful” in Q1, But Economy Remains Weak

Despite news of somewhat disappointing March sales at the nation’s retailers, and some sobering comments from the minutes of the March 17-18 Federal Open Market Committee (FOMC) meeting, financial markets generally found comfort in last week’s batch of economic data. Looking ahead to this week, financial markets will digest data on retail sales, consumer prices, producer prices, industrial production, and housing starts for March, as well as the usual array of more timely weekly data on the economy that are part of our Crisis Conditions Index (CCI). On balance, the economic data is likely to take a backseat to the flood of Q1 2009 earnings reports (and more importantly guidance on earnings and dividends for Q2 2009 and beyond) due out this week from S & P 500 companies.

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Real Time Rally

Last week’s three percent rise in the S & P 500 brings the gain in the stock market from the low point of March 9 to 25%. This powerful rally has come in the face of bearish investor sentiment and continued negative headline news. We believe the market is focusing on real time indicators of market and economic conditions that have increasingly turned positive in recent weeks.

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Labor Markets Remains a Mess, but Economy Still Tracking to Our Base Case for 2009.

The economic news released last week confirmed that the U.S. economy appears to have "stopped getting worse" in the first quarter of 2009 (Q1) and is tracking to our base case outlined in our 2009 Outlook, however, the labor market remains mired in a deep slump and is tracking to our 2009 bear case. Last week’s data also continued to suggest that the front end of the U.S. economy, consumer spending – which accounts for two-thirds of real gross domestic product (GDP) – will grow in Q1 2009 relative to Q4 2008, but that the "back-end" of the economy, mainly business spending on capital equipment and inventories, is still decelerating to the downside.  

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Are Recovery Efforts Showing Results?

The Obama administration and the Federal Reserve (the Fed) have been very busy in the first quarter, moving ahead quickly with policy actions aimed at countering the recession.  In addition to accommodative monetary policies, the government’s large stimulus spending initiatives will begin to work its way through the economy and at least part of it will be helpful.  As with most previous anti-recession spending programs, the recession will likely be over before a large part of the programs has been executed. If so, I expect that at least part of the “stimulus package” will end up being reduced as forward years’ budgets are formulated in more normal economic conditions.


Time to Buy TIPS?

Since the Federal Reserve (Fed) expanded its "quantitative easing" (QE) campaign at the conclusion of the March 18 FOMC meeting, a variety of investment vehicles that might benefit from higher inflation, including Treasury Inflation Protected Securities (TIPS), have come under renewed focus. Quantitative easing is non-conventional policy response backed by the Federal Reserve that includes the repurchase of agency, mortgage-backed, and now Treasury bonds in an attempt to lower interest rates and stimulate the economy. The printing of money to facilitate QE raises the risk inflation. While we certainly prefer TIPS to conventional Treasuries, we remain neutral on the sector and would not rush to buy. Here’s why:

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