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