December 2010

Recovery Gathers Steam
The weak recovery we have seen in recent months has led to doubts about its continued strength, however, a number of economic indicators are showing real improvement. Figures from payroll data, retail sales, and manufacturing are showing a pick-up. The recovery has moved beyond governmental stimulus spending and other such temporary factors to growth based on real demand for goods and services. Even some analysts who have been more cautious about the strength of the recovery are now revising expectations upward. Of particular note, Goldman Sachs has just released predictions of a greater than 20% rise in the S&P 500 for 2011, increasing S&P 500 earnings per share through 2012¹, and GDP to grow by 2.7% in 2011 rather than the 2.0% they had estimated previously². This is a significant change from a group of analysts that had more modest expectations for the U.S. economy.

The various Federal Reserve regional agencies each release reports regarding the economies in the regions they are responsible for monitoring. These reports are collectively known as the “beige book”. The recent release of the beige book shows an economy that is continuing to improve in Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, San Francisco, and their expansive surrounding regions.³ While some regions do show areas of weakness, each is gaining ground as a whole. “Activity has been mixed” is the worst summary of any particular region.

Manufacturing
The Institute for Supply Management’s (ISMs) release of November figures notes an expanding sector.⁴ The figures released note expansion in areas such as exports, new orders, production, employment, inventories, prices, and more. This is the 16th consecutive month we have seen an expanding manufacturing sector! Again, another solid trend upwards. Granted, the expansion is not at a fast rate, but it is expansion nonetheless. Of the 18 manufacturing industries the group tracks, 10 show November growth and 2 reported neither growth nor contraction. Some of the sectors still showing contraction are tied to the housing market, with furniture products being one example of this.

U.S. Dollar
I have heard from some clients concerned over the weaker U.S. dollar. In fact, the weaker dollar has been helping our multinational corporations as it has made exports cheaper for foreign buyers. The government allowing the dollar to stay weak continues to help these companies. In reality, the dollar is still the main international currency. Look at the alternatives—the Euro has taken a hit with the debt problems of Greece, Ireland, Spain, and Portugal. The Yen does not appeal to investors for a number of reasons. Thus, investors are still buying U.S. dollars. The low interest rates on Treasuries show just how creditworthy investors have deemed U.S. issuances. On balance, a weaker dollar is helping grow our exports.

Retail Sales
There are a number of other interesting data points that show an economy on the mend. Active credit card users dropped from 70 million to 62 million when compared to the third quarter of 2009.⁵ The combination of consumers using less credit and banks dropping subprime consumers from their active credit rolls is a healthy trend.

November retail sales show gains not only from discounters like Costco and Kohl’s, but also from more specialized and luxury retailers like Nordstrom.⁹ These were not modest year-over-year changes, but rather significant sales changes from the 2009 holiday season. Retail sales are up across the board, as seen from the selections noted below.

* Compares November 2009 to November 2010.

Sourced from each company’s news wire release.

Auto Industry
General Motors has just announced plans to hire 1,000 engineers and researchers over the next 2 years.⁶ These would be high-paying jobs focusing on expansion of their electric vehicle lines and show an ability to plan for long-term growth within the company. Along with their recent stock release, this shows quite a change from where GM was even just a year ago!

Auto sales are increasing. Moody’s recently released a report predicting U.S. auto sales of 11.5 million for this year.⁷ This is an increase over 2009’s total sales of 10.6 million.⁸ They also noted that about 12.5 million cars are scrapped each year, meaning buying is below replacement levels and will need to increase further. The below graph notes U.S. auto sales over the past decade.

SOURCE: http://wardsauto.com/keydata/historical/UsaSa01summary/

While we are still below the decade long trend of about 17 million cars sold each year, we are seeing an increase in sales without any government incentives affecting purchasing. Most major car companies are showing significant year-over -year sales increases. The chart below compares November 2009 figures to November 2010. Ford has seen the greatest gains of U.S. car makers and even luxury brands like BMW and Porsche are seeing increased purchasing activity. I would note that Toyota’s recent recall problems account for much of their poor showing. Overall, we are seeing a much healthier auto industry that is likely to see continued growth.

SOURCE: http://www.autonews.com/section/ussales

Summary
There are certainly sectors of the economy still struggling. Housing is not likely to turn around anytime soon. European debt problems are going to be around for awhile, but are being addressed. Unemployment is still high. The overall picture is one of an economy on the mend though. Assessing the health of an economy as large as ours requires knowledge of movement in many sectors. Relying on whatever snapshot figure has been released today, or the misfortunes of a friend or neighbor do not provide enough information to gauge national trends. Our economy is still not as robust as I would like to see, but it has come a long way over the past 18 months. I do expect to see continued growth along this path of measured recovery.

I would note that the biggest single driver of stock market prices is profits growth. Factors such as interest rates, government actions/policies, and other such data points have a secondary affect as they do affect corporate profits, but corporate profit growth is the main area to look at when predicting stock market performance. While it is still a bit early to see much in the way of fourth quarter profit estimate revisions, the third quarter final numbers have been quite good. The New York Times recently noted:

American businesses earned profits at an annual rate of $1.659 trillion in the third quarter, according to a Commerce Department report released Tuesday. That is the highest figure recorded since the government began keeping track over 60 years ago, at least in nominal or noninflation-adjusted term.⁹

Consumer spending does make up about 70% of the U.S. economy. Initial news regarding the holiday shopping season has been positive. Although unemployment remains stubbornly high, the 85% of Americans who have jobs are more willing to spend. The retail and auto sales figures noted above reflect this change. The Wall Street Journal has even coined the phrase “frugality fatigue” to note this change in mindset amongst much of the population. While it will be a few weeks before we can judge the strength of the season as a whole, early indicators are for another quarter of increased corporate profits.

This is the last newsletter of the year. My clients have done well for 2010 and we hope you are pleased with your portfolio’s performance. We wish everyone a happy holiday season and a pleasant new year.

1) http://www.bloomberg.com/news/2010-12-02/goldman-sachs-sees-s-p-500-rising-to-1-450-through-december-2011.html

2) http://www.thestreet.com/story/10935489/1/stock-market-story-dec-1.html

3) http://abcnews.go.com/Business/wireStory?id=12289513

4) http://www.ism.ws/ismreport/mfgrob.cfm

5) Associated Press, 11/29/2010, More than 8 million drop out of credit card use

6) http://www.detnews.com/article/20101201/AUTO01/12010354/1001/GM–Chrysler-to-fill-2-000-engineer-spots

7) http://www.npr.org/blogs/thetwo-way/2010/12/01/131731512/november-u-s-car-sales-show-big-gains

8) http://wardsauto.com/keydata/historical/UsaSa01summary/

9) http://www.nytimes.com/2010/11/24/business/economy/24econ.html?partner=rss&emc=rss

The information contained in this newsletter is for general use, and while we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different. The information provided is not written or intended as tax or legal advice and may not be relied upon for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a solicitation of the purchase or sale of any securities.