GDP Beats Expectations 10-29-2009

October 23, 2009 Edition, Volume III

Inside Signature Update

• The Market – Corporate Dividends Paying Off
• The Economy – 3^rd Quarter GDP Beats Expectations
• The Takeaway – It’s Tough to be a Bear in the Midst of a Recovery

THE MARKET – Corporate Dividends Paying Off

Dividend yielding stocks have fared better in the market recovery than most others. In today’s market a stock yielding a solid dividend is representative of a solid company – and that’s gold in an uncertain market.

Not only can investors consider the dividend yield when it comes to evaluating overall investment performance, but there’s mounting evidence that dividend paying corporations are better able to secure credit capital and take advantage of growth opportunities. While many others are unable to obtain the funds needed to fund inventory, payroll, and capital expansion, corporations with strong balance sheets and good cash flow continue to enjoy the ability to leverage growth as opportunities arise.

Though today’s credit markets are more liquid than they were even three months ago, banks and capital market firms continue to exercise caution with any type of lending; only their best customers are able to secure needed capital at preferred rates. The phenomenon won’t soon disappear and the longer the disparity exists the more difficult it will be for firms with weaker balance sheets to compete.

The Economic Cycle Research Institute’s gauge of future domestic economic activity hit a 5-year high at the end of September, marking the indicator’s highest pace since 1967. Firms with access to capital will benefit by this growth while others will be less able to compete. Investors interested in benefiting from growth opportunities may find greater strength in a more risk averse environment by looking at dividend yielding equities in the coming months.

THE ECONOMY – 3^rd Quarter GDP Beats Expectations

The best news the labor market could have possibly received came Thursday morning as the US Department of Commerce announced 3^rd quarter GDP gains of 3.5%; 2/10ths higher than expectations. Pessimists are clamoring the gain is due largely to ‘cash-for-clunkers’ and inventory builds, but when autos and inventory adjustments are stripped away the gain holds at just under 2% - higher than expectations.

The Department of Labor reported total jobless claims at 5.96 million – a difficult number by any measure. With unemployment almost certain to breach 10%, how is it that today’s reports represent a meaningful inflection point for the labor market? Employment only begins to improve after growth resumes. Initial improvement comes for those already employed, finding jobs more secure than they may have been 1-2 months ago; next comes a return to full employment for those experiencing a cut back in hours; and finally, businesses begin to hire to meet growing needs.

Though today’s GDP number is meaningful, and many are citing an ‘end to the great recession’, we still have an all-important retail season to get through and 4^th quarter results to digest before we’ll see real improvement in labor markets. For most, that’s more important than any other figure or report.

THE TAKEAWAY – It’s Tough to be a Bear in the Midst of a Recovery

• The markets were under pressure this week as ‘Bears’ anticipated a lower-than-expected GDP report – even Goldman Sachs weighed in suggesting the figure wouldn’t breach 3% - they were wrong and Thursday’s markets were up sharply. It’s tough to be a Bear in the midst of a recovery.

• Even though the much needed ‘Top Line Sales Growth’ discussed in last week’s Signature Update hasn’t materialized across the board, sufficient gains have been made to keep markets near the 10,000 level on the DOW. Look for additional strength through the remainder of the year.

• The Federal Reserve has begun to draw back on overall market liquidity as the economy, credit and housing markets appear to have seen their worst. This accounts for some modest and temporary stabilization in the dollar, but it will be many months before the Fed will have the luxury of increasing market interest rates. Investors making trades against the dollar may find short-term benefit, but be careful of being caught short as monetary policies change.

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

Top Line Sales Growth Wanted 10-23-2009

October 23, 2009 Edition, Volume III

Inside Signature Update

• The Market – Top Line Sales Growth Wanted
• The Economy – Demand Driven Oil
• The Takeaway – There’s Room for Growth and Profits

THE MARKET – Top Line Sales Growth Wanted

Earnings reports continue to support the domestic equities rally with the DOW holding near the 10,000 level. Most often investors and traders focus on earnings rather than the total revenue line as equity values are often discussed as a function of earnings per share (EPS) or the price to earnings ratio (PE). In recessive times skilled business managers reduce expenses to make up for lagging revenues in an effort to 1) survive and 2) provide profitability for shareholders. Market analysts adjust their expectations accordingly, confident that margins as secure as possible.

As the post-recession market trends higher, the focus shifts to revenue growth – or top line sales figures. Sales growth represents overall market improvement and becomes the catalyst for higher profits and stock valuations. Same-store sales growth for retail outlets and industry revenue gains for technology, manufacturing, and banking are key in this part of an economic cycle.

Thus far, the figures have been encouraging enough to hold markets at impressive levels while market makers and others pour over incoming reports, but the real test will be in consumer sales as we head into the critical Christmas retail season. Management and analyst’s expectation are optimistic for year-over-year improvement, but following 2008’s disappointing results that’s not saying much. The important retailers to watch are mid-range and high-end chains such as Target, Kohl’s and Nordstrom. Wal-Mart and Costco have already benefited as consumers shifts away from higher-end retailers in search of bargains during the recession increased revenues. The test now becomes whether or not more expensive retailers can bring shoppers back without discounters losing market share.

Gains in manufacturing and distribution appear to be following suit as low inventory levels requiring replenishment and mild consumer spending increases add fuel to recovery trends. Expectations for an 11,000 – 12,000 point DOW still seem optimistic, but not as wildly so as in the latter part of the summer.

THE ECONOMY – Demand Driven Oil

We often speak the price of gold in terms of the value of the dollar, suggesting that it rises and falls as a byproduct of international exchange rates more than any other factor. And while industrial demand for gold and other precious metals does have an impact, it’s decidedly less significant. That’s not true for all commodities; including oil.

The price of a barrel of oil is once again on the rise, and only part of the increase can be accounted for relative to the value of the dollar. As the economy improves, both domestic and international, the demand for oil as an energy resource rises in direct proportion. One would think that a 2-3% increase in demand for any material would produce a similar increase in price, but not so. Demand increases, or decreases, disproportionately alter pricing when production has limits, either real or imposed; as is the case with oil. When consumer demand for gasoline decreased by 8% at the end of summer 2008, oil prices began to spiral downwards and finally rested near $35 per barrel. It appears the decline from $147 to below $60 was due to real demand destruction in the market, while the remaining decline may have been a result of fear over a declining US economic market and a crumbling of the speculator and hedge fund market. The resultant devaluation of the dollar against other currencies actually helped oil pricing to stabilize and rebound to the $50-$70 price level.

We’re now on the other side of the demand scenario. Oil has now topped $81 and with the improvement of the economy, energy demand is on the rise. At the same time, the dollar continues to weaken and oil, like gold, may once again become subject to speculative forces. Though we can point to a ‘greener’, more energy efficient domestic market, we certainly haven’t made the improvements needed to curb the US demand for refine-able crude. Watch for oil to breach $100 per barrel before the end of Winter 2010 – it will come as a good news, bad news scenario as it tells of continued improvement towards economic recovery and a further slide in the value of the dollar.

THE TAKEAWAY – There’s Room for Growth and Profits

• Expect more encouraging news from the earnings front as some of the nation’s largest corporations report next week, but short-term pressure could dampen the market if the Case-Shiller Index (real estate index due out next week) disappoints.

• The US stock market has room for further gains, especially as we move beyond October’s historically treacherous reputation.

• Though international equities also offer meaningful performance gains, continued dollar weakness threatens to offset investor benefit.

• Oil producers and refiners may offer short to mid-range gains, but gold continues to be sufficiently high to be in full speculation mode.

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

DOW 10,000? 11,000? Higher?

October 13, 2009 Edition, Volume III

Inside Signature Update

- The Market – DOW 10,000? 11,000? Higher?
- The Economy – The Money Supply and Earnings
- The Takeaway – Don’t Get Caught by a Shift in Policy


THE MARKET – DOW 10,000? 11,000? Higher?

The major market indexes (DOW, S&P 500, and NASDAQ) each flirted with near-term highs in recent trading sessions, begging the question: how far will they go and when might they pull back? The answer: keep reading!

Since late spring 2009 we’ve suggested the markets would steadily climb back towards 10,000 on the DOW before year-end. At the time, few market pundits shared the opinion, and those who did were offset by naysayers calling the market rebound nothing more than a bear-market rally. Now, few investors and traders doubt the 10,000 level will be reached and many are calling for 11,000 and beyond – possibly as soon as the end of the year. Optimistic? Certainly. Cock-eyed? Not even close!

Today’s market temperament feels remarkably similar to that of the late 1980’s. The DOW had suffered a terrible setback in October 1987 by falling over 500 points to 1,738 and was staging a rebound. The country was reeling from the effects of the Savings and Loan crisis, an uncertain real estate market, and global distress over political instability in Eastern Europe and economic distress throughout much of Asia and South America. Then Dean Witter Chief Investment Strategist, John Connolly, stepped into my New York office sporting an oversized lapel button with big, bold red letters stating “5000 by 2000”, and laid out his expectations for the market.

Connolly was one of the few market optimists at the time, certain the DOW would reach 5,000 by the year 2000. Privately, Connolly admitted that he’d have proclaimed “10,000 by 2000” were it not for his certainty that it would get him laughed at and then fired. Connolly was Witter’s cock-eyed optimist; then as the DOW surged past 2,700 at the end of 1989 and climbed through 5,000 before the end of 1995, Connolly and others became the guru’s of Wall Street. The DOW closed at 11,497 on December 31, 1999 – beating Connolly’s stated goal by almost 130% and setting the stage for the market’s wild ride through the first decade of the 2000’s.

Is Connolly’s market forecast important today? Only to represent that optimism sometimes has its rewards. And to point out that the markets find a way to thrive in the face of uncertainty over and over again.

Today’s market is looking for revenue growth more than profits as we work our way through early quarterly corporate earnings reports. The DOW closed the day down 15 points to close at 9871; while the S&P 500 and NASDAQ remained virtually unchanged. The prices of gold and oil have staged a rally reflective of the continued weakening of the US dollar to close at $1065 an ounce and $74.42 a barrel respectively.

In stark contrast to the same period only one year ago, the market has settled into a relatively stable, if not surprisingly positive, trend. Calls for calamitous weakness in September yielded to expectations of downward volatility in October – neither of which have materialized. Though some investors who benefited from the run up in the DOW from 6,500 in March to almost 10,000 today may want to take some of their profits off the table, this is no time to sit on the market sidelines with major positions.

10,000 by 2010? I’d lay money on it – in fact, I’ve already placed that bet. Any takers at 11,000? Higher?


THE ECONOMY - The Money Supply and Revenue (output)

As the markets eagerly await 3rd quarter earnings reports, investors and traders hold their breath in anticipation of a continued rally, while pessimists wait for the next shoe to drop. Most economists expect a GDP increase of at least 3% for the 3rd quarter on the back of aggressive fiscal and monetary policy intervention. They’re not likely to be disappointed as the 4th quarter is almost certain to repeat or best 3rd quarter gains. Why? With real estate and employment rates at disturbing levels, how can the economy show signs of improvement and post real gains? It’s all about the money supply and revenue.

When the Federal Reserve sets targets for interest rate levels, what they’re really doing is controlling the money supply and influencing revenue (output). In the short-term, lower interest rates equate to more money in the economy; more money equates to higher corporate and consumer expenditures; higher expenditures stimulate manufacturing and service growth leading to higher levels of employment.
Longer term, price levels, employment and interest rates moderate toward economic equilibrium; otherwise bubbles may form, inflation or stagflation may result, and calamity may follow. It’s all about balance and finding equilibrium.

An expansion of fiscal policy (increased government spending) can lead to a similar outcome, though with somewhat different dynamics. While the executive and legislative branches determine fiscal policy (federal spending and taxation) and have some influence on the Federal Reserve, the Fed’s Board of Governors set monetary policy and effectively control their member banks. Their objective is to control inflation and provide economic stability.

Milton Friedman (1912 – 2006), the nation’s leading monetarist, who’s life spanned virtually the entire 20th century, forwarded the theory that a strong federal reserve, wielding active monetary policy tools such as interest rate adjustments, open market operations (buying and selling bonds), and discount window lending could affect the economy and mitigate the sort of wild recessive and growth swings evidenced in US history through the 1930’s depression.

So, the same monetary policy (low interest rates, increasing money supply) that began to aid the nation’s credit infrastructure earlier this year is now making its way to corporate and personal consumption. Coupled with various fiscal programs for economic stimulus, output is increasing and soon, better employment rates will follow.

There may be deviations from the current course depending on any number of factors, such as tax increases, changes in the current account balance (trade deficits), federal intervention through regulation and legislation, energy price manipulation, etc., but as long as businesses are offered access to reasonably priced capital (equity and debt offerings of varying types) and consumers have incentives to spend, revenues will increase and output will rise.


THE TAKEAWAY – Don’t Get Caught by a Shift in Policy

The recent rise in gold and oil pricing reflects the ongoing commitment of the Federal Reserve to keep rates low, which has the effect of putting continued downward pressure on the dollar, increasing US exports and improving the current account balance (trade deficit). Those who expect this trend to continue and make long-term bets against the dollar in gold and oil will find themselves severely disadvantaged once policy makers choose to turn the tide, increase rates, and strengthen the dollar.

The Federal Reserve has already announced their expectation of swift monetary policy changes when the time comes. When this occurs, gold bugs and other commodities speculators will have difficulty liquidating their positions fast enough to protect profits.




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