A Politically Correct Alternative to Bankruptcy For GM?

April 28, 2009 Edition, Volume III

Inside Signature Update

- 1st Quarter 2009 GDP Results
- A Politically Correct Alternative to Bankruptcy for GM?


1st Quarter 2009 GDP Results

Gross Domestic Product (GDP) results are in for the 1st Quarter of the year reflecting a lower than expected level of -6.1% to a domestic output rate of $14.01 trillion. Accompanying the decline was a decline in manufacturing and retail inventory levels of $103.7 billion - accounting for 2.8% of the 6.1% slippage in GDP. Economist projections had expected a decline of 4.7% – 5%, but had not expected to see inventory levels dip to such low levels. The lower inventory levels suggest that future quarter GDP levels may actual beat expectations as manufacturing will need to increase output at a higher than expected level to keep up with consumer demand in the face of low inventories. Likewise, as manufacturing increases, the labor markets improve and may slow the pace of unemployment for the 2nd Quarter to better-than-expected levels.

The 1st Quarter GDP decrease marks the first time since 1975 that the US economy has had three consecutive quarters of declining output; it also marks the worst two back-to-back declines in fifty years. For the four quarters ending March 31, 2009, US domestic output decreased by a total of 2.6%.

On a more positive note, consumer spending rose for the quarter by 2.2% after having dipped by 4% in the 4th Quarter 2008; consumer and business spending are both expected to show meaningful increases for April and the 2nd Quarter. The household savings rate increased to 4.2% after years of negative savings rates. The combination of these data sets suggest that our consumer economy has successfully made the shift from net consumption to net savings and that normative consumer spending is likely to resume, albeit to levels below those seen in 2005-2007.

What continues to surprise many is how slight changes in national economic figures can provide such substantial changes at the household and individual business levels. For all of the negativity expressed by consumers, businesses, government officials, and the media over the last six to nine months, many have supposed that the US economy has taken a hit from which we may never recover. When we stop to rationally consider that a dip of 6% in GDP or 8% in employment still represents that the economy is operating at 94% or 92% of prior levels, respectively, it takes on an entirely different outlook. It then becomes a much easier thing to see how we can go from 94% GDP back to 100%, and then upward to 104%, as would be reflective of two or three years of moderate GDP gains.

For the vast majority of households, incomes haven’t changed and spending has only been altered out of a sense of fiscal prudence. Though this may have exaggerated the national economic malaise as consumer spending slowed, it will ultimately bring the longer-term benefit of lower levels of debt. As employment levels improve and consumer spending returns to appropriate levels, confidence will return to the economy and markets – the benefits of which will be seen as debt is moderated and equity markets regain value previously lost.

We have seen these cycles before and though it may be terribly difficult to forecast exactly what will happen when, it rarely becomes a question of if. The markets attest to this on days like today when in mid-day trading, the DOW and S&P are up sharply, extending gains in the face of what some might consider as simply more bad news.


A Politically Correct Alternative to Bankruptcy for GM?

In a traditional bankruptcy, a company may be ‘restructured’ as shareholder equity is dissolved and debts are either eliminated or negotiated down to a level acceptable to the business owner, secured debt holders and creditors and in some cases unsecured creditors, thus allowing the company to continue to operate. Absent the presence of a labor union, in most cases employees are prepared to continue working as though nothing had changed unless they had to give up substantial benefits in the negotiation process which may motivate them to seek employment elsewhere. In today’s economy, with unemployment in excess of 8.5%, most employees are grateful to have a job to go to, even if it means losing some ground.

Now comes the case of General Motors. Having been bolstered by $15.4 billion in federal loans since the beginning of the year, GM may have worked out a non-bankruptcy reorganization wherein the UAW (United Auto Workers) will offer some concessions in exchange for an equity stake in the company of close to 40%, and the government will exchange $10 billion in debt for a 50% share of common stock This is predicated on the company being able to get at least 90% of the bondholders to convert their holdings for 10% of the company’s common shares – which may be a difficult feat.

This non-bankruptcy restructuring would then allow the company to retain some minimal value for current shareholders while disbursing additional shares of stock to the UAW and federal government. But an examination of the relative fairness of the plan discloses interesting inequalities – and perhaps political agendas as well.

For example, the holders of $27 billion in GM bonds will receive a 10% stake in the company while the federal government would exchange $10 billion dollars for 50% of the company. The UAW, which represents the company’s hourly workers and retirees, has agreed to exchange approximately $10 billion in benefits, or 50% of the outstanding retiree healthcare fund, for what is expected to be no more than 39% of the company’s common stock.

In this restructuring, the UAW’s $10 billion equates to 39%, the federal government’s $10 billion equates to 50%, the bond holders $27 billion equates to 10% and the current shareholders are left with 1%. At Monday’s market close the outstanding shareholder value of 610.5 million shares was approximately $1.25 billion ($2.04 per share). Now, I’m not a mathematician, but I just can’t find the algebraic calculation that equates $27 billion to 10% and $10 billion to 50%.

So who comes out ahead in this transaction? Let’s see:

· The current shareholders? No, but if the alternative is bankruptcy and the total elimination of shareholder equity, then this may be a better solution – one can argue that the shareholders have knowingly born the risk associated with stock ownership and concerns over share value have already been realized with the stock price down by some 96% over the last five years.

· The bondholders? Not at all. Their value is proportionately similar to that of the shareholders even though bondholders typically are considered to have a more secure position in the debt and equity structure of a company. Though GM has yet to default on its payments to bondholders, the company has announced that it will do so when the next $1 billion payment is due on June 1st.

· The federal government and taxpayer? Yes, but then we’ve not only pumped billions into GM; and in all fairness, the government has agreed to extend an additional $11.6 billion in loans on top of the $5.6 billion not being converted to common stock. Without these loans, even a scaled down GM wouldn’t have enough capital to operate; and in the capital markets, it is common for those extending loans to a struggling company to do so in exchange for a healthy equity stake in the company.

· The UAW (and its nearly 400,000 members, including retirees)? Certainly! They are expected to be offered four times the proportional value expecting to be received by current holders of GM’s common stock and bonds. Additionally, they’re the same workers, current and retired, who profited from the onerous union contracts – including pension, healthcare, and ‘jobs bank’ benefits well beyond what the market can reasonably bear.

So why does the bulk of the economic advantage go to the UAW and the federal government? A good question with a politically expedient, if not correct, answer.

The April 27th issue of New Yorker Magazine includes a well-written article regarding Nissan’s Smyrna, Tennessee plant - the first Japanese auto manufacturing plant in the US, and offers an excellent portrayal of what ails the domestic automobile industry - bloated labor contracts. The New Yorker isn’t exactly a conservative apologist; in fact, more often than not, the magazine’s contributing journalists and editors reflect a decidedly liberal point of view.

Nissan’s story, similar to that of Toyota and Honda, represent that an automobile manufacturer can remain profitable and competitive as long as labor costs are kept within reason. Though non-union Nissan workers are paid less than those represented by the UAW, they continue to earn wage and benefits sufficient to support a labor supply well in excess of demand. Additionally, the worker vs. management dynamic of the unionized auto manufacturers has long been one of distrust and resentment as opposed to the cooperative relationship observed by their non-union counterparts.

Few would argue that the leverage exercised by the labor unions hasn’t created many of the problems present at the ‘Big Three’ domestic automobile manufacturers and this as the union has sat on the opposite side of the bargaining table from management and shareholders. What will the dynamic yield when the union takes both side of the table – as both 39% plus equity holders and employee representatives? It’s difficult to stick it to the man when you are the man; and can you imagine what might be included on the placards of future picketers?

According to Reuters UK Online (Details of GM's Accelerated Restructuring Plan – April 27, 2009), GM plans to reduce its hourly workforce to 38,000 by 2011 from the 2008 level of 61,000. Not a bad outcome for the UAW and its members compared to risking the loss of the UAW’s control of all 61,000 jobs and benefits afforded to literally hundreds of thousands of retired workers and their dependents in the event of a bankruptcy - especially when the bulk of those jobs will be lost to retirement and attrition. Otherwise, why wait for an additional two years to solve an expense problem choking GM today?

In this labor market, the UAW has little real bargaining power aside from political influence, of course. Were GM to file bankruptcy, thus rendering its labor contracts null and void, GM’s workers would almost certainly be grateful to resume employment for the newly restructured company or at least 38,000 of them would, rather than be forced to seek employment elsewhere.

Without the encumbrance of UAW contracts, the restructured company would be free to compete and innovate. But just how innovative can we expect a GM owned by a labor union and the federal government to be? Innovative isn’t exactly the word that comes to mind when talking about bureaucracies and union officials.

If one were to ask former GM CEO Rick Wagoner, who resigned his position at the request of the Obama administration after a lengthy battle to protect shareholder value (exactly what a CEO is responsible for doing), to express his opinion of the influence being wielded by big labor and the presidential administration, he might choose to defer rather than risk further pressure from Washington. GM’s newly appointed CEO Fritz Henderson had a seat at the bargaining table wherein the problematic labor contracts were structured - while responsible for GM’s ongoing operations rather than having a fiduciary responsibility to protect shareholders, and helped lead the company down the path on which it has ended up today. Is innovation and competitiveness Henderson’s first priority? Normally, one would think so as the CEO is responsible to the shareholders; but when those shareholders are represented by labor union officials and members of the US House and Senate, one can only imagine what the shareholder agenda might include.

We’ll have to wait to hear what the UAW and Congress have to say, but one thing is certain if this proposed restructuring is successful. Those who have invested the most, current bond and equity stake holders, will have the least to say and those who have profited the most, hourly workers and the UAW, bolstered by elected officials long beholding to both, will be heard loud and clear.





Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management and CEO of Signature Management, LLC

Surviving Corporate Earnings Reports... thus far

April 23, 2009 Edition, Volume III

Inside Signature Update
- The Dow and S&P500 Survive Corporate Earnings Reports – thus far
- Pressure from the Treasury and Federal Reserve?
- The Next Chapter in Detroit’s Woes
- Energy Policy Concerns


The Dow and S&P500 Survive Corporate Earnings Reports – thus far

The US equities market has maintained much of the strength it gained during the March and early April rally in spite of low 1st Quarter earnings reports. Currently, the DOW hovers just under the 8,000 point mark, while the S&P flirts with 850. Though both of these levels are simply shadows of the late 2007 highs for both indexes, they are important in that they reflect the market’s expectations for the US economy in the 3rd and 4th Quarters of this year.

There have been pockets of volatility in the last week or two, most notably the banking sector, but the broader market has successfully fought off downward pressure and has held solid. Many analysts had expected a market retrenchment towards 7,000 on the DOW and 750 on the S&P as earnings reports were released, but to date the trend has been more one of stability than not. While there are still those calling for further weakness in banking, which could weaken the markets as a whole, there is mounting evidence that banks and other financials have found pathways to profitability as interest rates remain at record lows and the increase in unemployment has slowed dramatically.

March’s lower than expected retail sales figures are expected to be overcome by gains in April as consumers opened their wallets for Easter. Retail and manufacturing inventories remain low and are setting the stage for improved labor markets at the point that banks begin to release credit capital into the markets, thus allowing employers to hire with relatively low-cost funding. The current increase in mortgage refinancing, with residential interest rates lower than at anytime in recent memory, combined with a net savings rate approaching healthy levels, may set the stage for consumer spending to increase sufficiently to make a meaningful difference in the labor markets, with or without capitulation from the capital markets.

With low inventory levels, increases in spending will force employers to find a way to put employees back to work to keep up with demand and to replenish inventories. The sagging US auto industry is banking on this in spite of plans to shut down certain manufacturing plants for up to nine weeks this summer.

What continues to provide widespread frustration and risks turning the markets to the negative is the federal government’s continued involvement in the banking and automotive sectors. Though it may be reasonable to expect the current administration and legislature to exert influence in the face of having pumped billions into these industries, it is just as reasonable to expect that shareholders and executives are concerned and may be holding off on executing important operating plans until they see just how involved the government may become in their businesses.

Unwittingly, federal policy makers are creating some of the problems over which they appear to be most concerned; specifically bank lending levels. As banks are lining up to repay TARP resources, a move expected to decrease federal involvement, they risk decreasing capital available for lending as well; they are clearly signaling that this would be preferable to unwelcomed federal intervention. As profitability among major banks has increased dramatically in recent months, owing to lending inexpensive funds at relatively high interest rates, many banks are willing to forgo possible profits in exchange for decreased government involvement in their board rooms and management structures. Some have suggested that these banks may actually prefer having to deal with toxic assets rather than a toxic government.


Pressure from the Treasury and Federal Reserve?

New York Attorney General Andrew Cuomo’s announcement early Thursday that then Treasury Secretary Hank Paulson exerted significant pressure on Bank of America CEO Ken Lewis in order to get Lewis’s agreement to acquire Merrill Lynch may add details to what was an unexpected pairing of financial giants, but comes as a surprise to virtually no one. Most familiar with the extraordinary differences in the corporate cultures, balance sheets, and operating systems of the two companies have been certain that the marriage came at the end of a shotgun. What is interesting though, and should give pause to many, is how desperate the Federal Reserve and Treasury were to get this deal done rapidly. The mounting systemic risk to the financial system at the time would almost certainly have spelled disaster had Paulson and Bernanke not acted as they did. We may never know just how close we were to an outright depression had it not been for the determination of these leaders and their senior staffs.

Interestingly, the actions taken by the Federal Reserve and US Treasury in the interim read as a play-by-play recitation of Bernanke and Council of Economic Advisors Chairperson Christina Romer’s conclusions on how the US might have avoided the 1930’s depression. It should be comforting to know that policy makers actually have a plan from which they’re operating; many have suspected just the opposite.


The Next Chapter in Detroit’s Woes

General Motors announcement earlier this week that it will likely miss a one billion dollar debt payment to bondholders on June 1st sets a timeline for the company to either file bankruptcy or allow for possible nationalization. Thank goodness – allowing the situation to drag on only hampers the company’s ability to get beyond their problems, weakens the markets, and further erodes consumer confidence.

Amazingly, GM shares continue to trade, albeit at depressed values. This in the face of continued announcements that GM is preparing for bankruptcy (in which case shareholder value is wiped out) or conversion of federal loans into equity shares (in which case current shareholder value is diluted to a point of triviality).

Chrysler is reportedly making plans for a bankruptcy filing as early as May 1st and has obtained the approval of the UAW (United Auto Workers), one of the last remaining stumbling blocks in a move to save the company, if not shareholder value. Chrysler is privately held by Cerberus Capital and has become an afterthought in the capital markets.

Ford Motor Company, which may become the last remaining US automotive manufacturing stronghold, is gearing up to take advantage of the continued weakening of its domestic competition. Though the company has problems of its own, the current situation appears to have revealed Ford’s relative strength among weakened competitors. While all three brands may survive, it is certain that Detroit has lost its economic muscle at a time when the US economy needs all of the manufacturing jobs we can get.

All of this is interesting, but may mean little as the impact of additional auto manufacturing layoffs may have already been worked into the markets as the investment value of the auto manufacturer’s debt and equity shares has been discounted to a point where it is almost irrelevant in the global markets. This only leaves the impact to the consumer, which appears to be less of an issue every day as the company’s products are in some cases growing increasingly difficult to distinguish one from another; aside from the Corvette of course! The brightest stars still held by Detroit’s big three are also the most maligned by an energy sensitive marketplace: American muscle, SUV’s and the light-truck market.


Energy Policy Concerns

Last summer, as oil prices reached record high’s, consumers, public policy makers, and the markets clamored for efficient energy development across all ranges of the natural resources markets. Predictably, officials proclaimed the need to reduce the nation’s dependence on foreign oil just as they have in virtually every decade since the 1950’s. But just as predictably, as the price of oil declined below $40 per barrel and has now settled into an intermediate range of $45 - $55, the clamor has become more of a murmur and the stage is being set for another national energy crisis. At the very time that the Obama administration should be aggressively seeking alternative sources for clean, renewable energy they are slowly curtailing the range of possibilities.

According to administration officials and the President himself, oil and gas drilling and exploration, and nuclear energy development are once again virtually off limits, while energy demands continue to climb. The administration is supporting ‘cap and trade’ policies – ripe for fraud and abuse - in an effort to reduce carbon emissions and ignoring the ‘tax’ such policies will have on the consumer. Some estimates place the cost of meeting increasingly aggressive emissions standards at as much as $4,000 per taxpayer per year, not to mention the ‘taxing’ effect higher energy prices have on the economy. So much for middle class tax breaks!

With relatively low energy prices, and in the midst of a national financial overhaul, the administration has the near-perfect opportunity to open up efficient exploration, bring back the utility of proven, technologically sound, and clean nuclear energy production, and at the same time create what some energy industry experts expect to be as much as 300,000 jobs.

What on earth are we waiting for… another energy crisis?



Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management and CEO of Signature Management, LLC

The Money Supply and Tea Parties Across the Country

April 15, 2009 Edition, Volume III

Inside Signature Update
- Leading Economic Trends
- A Lesson in Money Supply – M1 and M2
- A Quick Review… Who’s to Blame?
- Tea Parties Across the Country


Leading Economic Trends

This week’s report of a 1.1% decline in March retail sales was a solid reminder that the US economy is not yet out of the woods. Following retails sales increases in both January and February, the retail markets were expected to post a small increase of .2%. The figures reported do not simply represent that consumers purchased less; they also represent that what consumers purchased cost less. March CPI (consumer price index) results were lower by .4%, reflecting an ongoing, though modest, deflationary cycle. The retail sales decline, when adjusted for the CPI decrease, reflects an actual consumer sales activity decrease of .7% - still lower than expected.

Additional deflationary pressures can be seen in the Industrial Production figures released Wednesday morning. Industrial production was down by 1.5% in March reflecting an ongoing decrease in inventory levels and supporting continued unemployment trends. Since December 2007, industrial production has decreased 13.3% while unemployment has increased by approximately 4% to the 8.5% level.

March’s .4% decline in CPI marked the first 12-month decline in CPI since 1955 and was lead by an energy price reduction of some 3%. The ‘Food Price at Home’ index was off by .4% while the prices of some other goods and services actually posted slight price increases.

While these shifts represent additional deflationary pressure in the markets, most economists are not overly concerned about long-term deflation. The increasing money supply, as supported by enormous amounts of government spending will likely curb deflationary pressures as the labor market improves. Most economists are more concerned about inflationary pressures brought on my higher employment levels and increased currency in our economy.

As the stock markets have rallied these last weeks we are reminded that the markets forecast economic activity more than mirror it. Most of the current economic news continues to trend negative while the markets have obviously been on an upward path. This doesn’t represent a disconnect between the markets and the economy, rather it continues a trend that can be seen for the last one hundred plus years of markets leading economic growth and activity.


A Lesson in Money Supply – M1 and M2

The domestic money supply is often reported in terms of M1 and M2, but few people understand what these represent and moreover, what the import is to society.

The money supply is an important aspect of our economy. When the supply tightens, credit is more expensive to get, businesses have a more difficult time expanding, and the economy typically weakens. When the money supply increases, just the opposite effects can be observed. When events threaten the domestic economy, the Federal Reserve and Treasury will most often react by adding to the money supply. This is typically often accomplished by lowering interest rates, altering hypothecation standards (lending ratios), increasing government spending, or simply printing money. While there may be other, yet more complex ways of altering the money supply, these are those that can most immediately provide an impact.

The money supply is measured using various inputs and titled M0, M1, M2, and M3.

- M0 is cash; Federal Reserve notes, and coins (currency in circulation).

- M1 is currency in circulation plus checkable deposits and traveler’s checks. In other words, anything you can use to make payments or purchases without including debt.

- M2 is the M1 supply plus savings deposits, time deposits less than $100,000, and money market deposit accounts for individuals. M2 is most often considered to be the best measurement of money in our economy and is tracked most closely to determine inflationary considerations.

- M3 is the broadest categorization of the monetary supply and consists of M2 plus large time deposits, institutional money-market funds, short-term repurchase agreements, and other larger liquid assets. M3 is no longer published or revealed to the public by the Federal Reserve.

In the last 12 months the M2 money supply has increased by more than 10% and is expected to post increases of another 15-20% in the coming year as the various stimulus plans are put in place and provide an economic boost to our economy. As the US Central Bank no longer publishes M3 data and given that M3 may be the arena that suffers the greatest expansion due to recent Federal Reserve and Treasury efforts, it represents the foundation for economist’s concerns regarding future inflationary trends.


A Quick Review… Who’s to Blame?

As one reviews the sequence of events beginning with the credit market meltdown of September 2008 and the Bush administration’s calls for urgent action, it becomes a simple matter to chart the resulting economic slowdown. There is an entire cause and effect lesson to be viewed here.

Though our economy may have begun to slow modestly we were far from the calamitous events we now survived. As business owners and managers became concerned, their businesses reacted and began to lay off workers and decrease production in anticipation of lower spending; which in turn brought about decreased spending at both the consumer and corporate level; which put yet greater pressure on the labor markets. As the credit markets worsened, the real estate markets, already suffering from overbuilding, began to release inventory through home sales and foreclosures to the point that residential real estate inventory levels became disastrous in many parts of the country. This led to worsening financial ratios for banks, lower valuations for collateralized assets, massive write-downs by banks and other financial institutions, higher unemployment, lower manufacturing and some of the worst domestic consumer confidence levels ever recorded. The slowdown, which may never have reached the level of ‘recession’, quickly escalated and for a time economists feared an outright depression.

Though it isn’t realistic to place the entirety of the blame for our current economic woes on the Bush administration, or those at the helm of the Federal Reserve, it is an interesting study of how quickly problems can get out of hand when fueled by the twin fires of politics and media.

The blame for our current scenario can be floated across at least three presidential administrations and is quickly being owned by yet another. The Obama administration, though having the least direct responsibility in creating the recession is carrying out many of the same measures that got us where we are, primarily excessive spending. Though not an ideological fan of Bill Clinton, I did respect his tone and intent as he addressed the American people and explained that increased taxes and decreased spending would be necessary to balance the federal budget. Today, there is little credible talk of a balanced budget, but there are massive spending plans being pursued. While an increase in spending may stimulate the economy (the Keynesian Theory), wasteful programs and excessive earmarking can undermine even the best efforts; and ultimately, increased taxes follow.


Tea Parties Across the Country

No Presidential administration, House and Senate has never before needed the fiscal backbone those bodies need right now. There is a grass-roots move afoot to bolster those who have the needed strength, alter the mindsets of those who exhibit some measure of promise, or oust those committed to ‘pork’ and excess. Ironically, the Obama administration took to the media on April 15th to defend their position on taxation and discount the credibility of those hosting or attending ‘Tea Parties’ planned across the country. They’ve missed the point entirely.

President Obama and his spokespersons, in an attempt to minimize conservative activists, are speaking to a different issue than that presented by the grass-roots ‘Tea Party’ activists. Rather than address current and future spending, inflation and levels of taxation, they are focused solely on the current tax plans and their proposed benefits to the middle class. Though it may be true that the vast majority of American’s, by some measure as many as 95%, will either see federal income tax reductions or experience no tax increase under the current plan, it is another thing altogether to address the effect of the massive budget deficits being created and the need to deal with them in future years. Most Americans aren’t as bothered by current and proposed tax rates as they are building up a debt that demands payment soon.

Many have commented that we mustn’t waste a good crisis to effect needed changes – very true. But while we’re changing, let’s make sure we look at tightening our belts at home, in business, and in government; and maybe… just maybe we won’t have to hand such enormous problems to the coming generations.





Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management and CEO of Signature Management, LLC

Trends and Valuations 4-13-2009

April 13, 2009 Edition, Volume III

Inside Signature Update
- Leading Economic Trends
- Unemployment Demographics
- Market Valuations
- Education Leads the Way


Leading Economic Trends

Consistent with statements from Federal Reserve Chairman Bernanke, President Obama and others, a recent Wall Street Journal survey of the nation’s top economists presented findings of greater optimism than in past quarters. The following summarizes the reasoning behind the improved outlook:

There is a growing expectation that the economy will post positive growth figures in the 3rd or 4th Quarters 2009, with a consensus suggesting that September will mark the end of the recession. While it may seem bold to try to peg a turnaround to a particular month, much of the data supports the conclusion.

4th Quarter 2008 GDP declined by 6.3% and likely will have represented the deep water mark of the current recession. 1st and 2nd Quarter 2009 GDP reports are expected to come in with GDP declines of 5.0% and 1.8% respectively.

Unemployment, which always lags economic growth or decline, is expected to peak in the first half of 2009 at 9.0 - 9.5%, up from the 8.3% level most recently measured. In the last 12 months, the domestic economy lost 4.8 million jobs; but the rate of job loss appears to be slowing and is expected to come in with losses of 2.6 million over the next 12 months.

From the point at which unemployment peaks, it would take five consecutive years of annual GDP gains of 4% to return our economy’s employment status to the pre-recession unemployment rate of less than 5%. While some would expect early GDP gains to be robust, it is more likely that there will be a gradual increase in the 4-5% range after the recession’s end.

Absent still is a much needed increase in consumer confidence. Though consumer spending posted back-to-back gains in recent months the CCI (consumer confidence index) remains low and likely will until the real estate and labor markets show signs of improvement.

Tempering both consumer confidence and the equities markets is GM’s ongoing debate over a potential bankruptcy filing. Former GM CEO Rick Wagoner was excused by the Obama administration recently as he continued to back shareholders and argue against bankruptcy. A GM bankruptcy would dissolve any remaining shareholder value, the stock would be eliminated, and both the economy and GM would be able to move forward without the impending threat. Last fall we addressed GM’s situation in General Motors and the three ‘C’s: Corvette, Cadillac, and Camaro and remain convinced a GM bankruptcy would help us move on from this difficult situation in US manufacturing; only the labor unions and GM shareholders now stand in the way of what is, in all reality, a foregone conclusion.

1st Quarter corporate earnings reports, already beginning to trickle in, are reflecting unexpected improvements for banking and transportation (ex-auto manufacturing). The strength, or weakness, of these reports as compared to expectations already priced into the markets, may allow for a pullback of some 10% in equity values and set the stage for a bull market recovery.


Unemployment Demographics

Jeff Thredgold of Thredgold Economic Advisors published an article this last week suggesting that ‘no gender, race, or education level’ has been spared by the recent decline in the labor market.

His research also pointed out some interesting trends in terms of where unemployment has cut most deeply citing that the jobless rate for adult males spiked to 8.8% in March while female unemployment lagged at 7%.

Additionally, the jobless rates for caucasians increased to 7.9% while the rates for the Hispanic population increased to 11.4%. Interestingly, the jobless rate for African-Americans actually decreased slightly from 13.4% to the 13.3% - unacceptably high by any standard.

The unemployment rate increased for all levels of education. Adults with at least a bachelor’s degree fared the best with a jobless rate of only 4.3%; contrasted by a 13.3% jobless rate for those without a high school diploma.


Market Valuations

The stocks comprising the S&P 500 and DOW Industrial Average, now up some 25% from recent lows, continue to offer strong values based on various technical analysis points. The PE ratios (price to earnings) of listed companies in the mainstream equities markets typically average a ratio of 15 on current earnings. Today’s equities values continue to lag with an average price to earnings ratio of 9. Likewise, price to sales (gross revenues) ratios are currently some 30% below historic ranges. Both indicators support continued improvement of stock values that could possibly gain another 20% plus before year-end 2009. Such an increase, coupled with the per-share price movement of the recent rally, would place stock values at some 45% above their lows; high for the first year of a market recovery, but not without precedence.

Many market insiders place the fundamental and technical lows of the DOW and S&P 500 at 7,150 and 725 respectively even though the indexes actually bottomed out at approximately 6,500 and 660. The difference is being discounted as ‘emotional volatility’ brought about by the heightened awareness of the economy, markets, and politics as our society is experiencing a saturation of 24/7 news reporting. Or as recently cited, ‘Never before have we had so much information and so little knowledge.’ With this as a back drop, year-end gains of another 20% may not be unrealistic.


Education Leads the Way

Among the positive trends seen in the last several months has been a resurgence of adults applying for higher education enrollment. Such an increase in education has traditionally been followed by a period of expanded technological, business and social innovation – exactly what out economy needs as we retool for the next period of economic expansion. If we are in the midst of an economic reset, as suggested in the March 29th Edition of Signature Update – ‘When Markets Reset’, then our economy will need an educational and experiential ‘boost’ to sustain the innovation required to transition and maintain our position as the global economic leader.

Colleges and universities across the country have seen record enrollment figures as well as record tuition revenues. However, the fiscal difficulties experienced throughout most states have brought budget cuts that now threaten higher education. Tuitions are increasing and services are being cut at exactly the wrong time to support the educational retooling our economy needs. The Obama administration’s stimulus package addresses a small part of this and the US House and Senate, along with their counterparts in the various state legislatures need to address the rest.

What is certain is that the domestic economy needs more ideas and must be stimulated by an educational and business climate that supports innovation like never before.





Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management and CEO of Signature Management, LLC

When the Government Makes The Market 4-1-2009

April 2, 2009 Edition, Volume III

Inside Signature Update

- The Rally’s Dependence on Earnings Reports & Employment Figures
- Can Free Markets Exist When the Government Makes the Market?
- Congressmen and Senators as the worst kind of shareholders
- Mark-to-Market Accounting Changes at the FASB


The Rally’s Dependence on Earnings Reports and Employment Figures

The recent rally in the equity markets continued this week in the face of relatively disappointing news regarding housing, auto sales, consumer confidence and the labor markets. The market’s response to Friday’s unemployment data could be critical as we head into 1st Quarter earnings reports next week. Market strength or resiliency in the face of less than positive economic reporting is often present in markets that have gone through the sort of bottoming process the US market appears to have recently passed through, and is another indicator that economic recovery is in sight.

The Case-Shiller Home Price Index reflected continued weakness in housing prices, though the number of units sold is improving, and auto sales reports confirmed the dire condition of the domestic auto industry. The Consumer Confidence Index, which had been expected to post a slight increase on the back of January and February retail sales increases, came in unchanged at 26. The ADP report, which acts as a relatively accurate indicator of the Department of Labor’s Jobs Report due out Friday, represented an increase of some 12,000 new unemployment claims and may represent an increase in March unemployment to 8.8%.

Next week marks the beginning of the 1st Quarter earnings reporting season and the market’s reaction to them is key. Early reports from a number of banks and technology companies have been positive, but that’s to be expected, otherwise they might not have been released prematurely. We already know that auto manufacturing and supply, and construction reports will come in low, but where will they post in relation to early guidance and expectation?

If corporate earnings reports come in above expectations, even for a small portion of each industry or market segment, it may support an extension to the current rally. However, without positive results it is most likely that the rally will stall and we may retest the 7,000 or 6,500 point level for the DOW. With that said, we continue to see the current level of the major markets as grossly undervalued and note that the markets have priced in significantly greater economic weakness than has been seen to date or that we are likely to see. The prospects for measurable economic recovery by the end of 2009 become more likely each month and have gained greater focus in just the last 2-3 weeks.


Can Free Markets Exist When the Government Makes the Market?

Since before World War I our nation’s position as the leader in global economics has been unquestionable, and over the years we’ve built an extraordinary agricultural, industrial, and technological marketplace on a foundation of free market capitalism, the rule of law, and a free democracy. We’ve accepted the value of a reasonable level of regulation in the financial markets and have considered the federal government’s role in our economy as one of influence more than one of capital market maker.

In recent months we’ve seen the US Treasury and Federal Reserve take unprecedented steps toward strengthening our economy. Trillions of dollars have been pumped into the financial markets to increase bank capitalization, restore credit facilities, and shore up an ailing automobile industry. Federal ‘stimulus’ packages have been passed in an effort to restore public confidence and to seed economic growth. As a result, the Federal Reserve’s balance sheet has swelled, the Treasury has made capital investments that would have previously been unfathomable, and the federal budget has ballooned to represent a larger portion of gross domestic product (GDP) than at any time since World War II. Our economy has changed.

So what happens when the government begins to exert capital influence on the markets and our elected representatives begin to act as though they’ve become directors or shareholders in our publically held corporations? The answer lies in whether or not we have the public will to allow such intrusions to be long term, or if we are prepared to hold our political leader’s to their word.

We’ve come to expect our federal policy makers to influence the markets through monetary policy, taxation, and various economic initiatives, but we now see a new role developing as the Federal Reserve and Treasury have become major players in the capital markets. President Obama and Treasury Secretary Geithner have clearly stated that they do not want to nationalize our banks or have the government run major corporations. However, in recent weeks we’ve seen equity positions of up to 80% taken in certain financial institutions, congressional leaders act out as though they’ve become the shareholders or members of the board, the Obama administration openly participate in effecting leadership changes at GM by ousting CEO Rick Wagoner, and the Treasury announcing plans to insert personnel in businesses in receipt of federal funds.

Some months ago I coined the term ‘free market nationalism’ and supposed I was exaggerating a point; now I’m not so sure. If the management of our capital markets becomes the purview of our elected representatives, then we’ll need to assess how ‘free’ our markets have become and question whether or not we’re holding onto an ideal that may possibly have slipped away.


Congressmen and senators as the worst kind of shareholders – a bully pulpit, populist pandering, and standing

I’ve never been a fan of politics. I’ve recognized it’s import in our society and I’ve even lent a helping hand at times, but in truth, I’ve found myself increasingly disappointed the closer I’ve observed politics and politicians, regardless of their party affiliation.

From the ‘bully pulpit’ of the US Capital, we’ve recently been forced to endure pitiful displays of populist pandering as the US House and Senate have sought to shape corporate compensation plans, travel policies, and executive ‘perks’. As the ‘big three’ auto makers came hat in hand to their government for help we witnessed a shameful display of congressional ignorance and lack of courtesy. And yet worse has been a blatant abuse of authority as lawmakers have attempted to break contracts or use the tax code in the event that they fail. Had most of the rest of us attempted to act in such a manner our mothers would have stepped in and shaped the discussion, if not our bottoms.

Oversight of our economy, or the ability to control the federal purse, ought not to afford our elected representatives the license to use their standing in such egregious ways – it serves us all very poorly. Admittedly, much of this is a result of the failure of corporate leadership to adopt and adequately maintain policies to strengthen the position of shareholders and employees, but in the end two wrongs do not make a right.


Mark to Market Changes at the FASB

The Financial Accounting Standards Board (FASB) has now voted to approve greater flexibility in ‘mark-to-market’ accounting practices in an attempt to shore up earnings reports of major financial institutions, just in time for 1st Quarter earnings releases next week. The move, though greeted by stock market gains, does little to address the problems of how to value ill-liquid assets, but may provide some relief to bank capitalization efforts. It may also be a step in the wrong direction regarding transparency.

We recently suggested a two-pronged approach to changing ‘mark-to-market’ rules to allow appropriate mark downs on troubled assets to impact income statements, and thereby stock values, but not to use those same figures to affect capital ratios as they form a bank’s ability to lend. It’s one thing to accurately represent the value of a company in the market and yet another to interrupt the critical lending systems so important to our economic recovery. As the FASB continues to monitor ‘mark-to-market’ policies and as well as other accounting standards that impact our economy we hope they continue the recent trend towards transparency without stifling prospects for growth.



Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management