Tough Decisions for California and the Nation 11-25-2009

November 25, 2009 Edition, Volume III

Inside Signature Update

- The Market –Tough Decisions for California; and the Nation
- The Economy – Unemployment and Inventory Levels
- The Takeaway – Gold, Retail, Consumer Discretionary and Healthcare


THE MARKET – Tough Decisions for California; and the Nation

Most of my extended family lives in California; in fact I’m leaving my Utah home in a few hours to join them for the Thanksgiving holiday. My oldest daughter and her family, as well as all of my siblings and virtually all of my cousins, aunts and uncles continue to live in the state I called home for more than half of my life. We were often proud of the trend-setting nature of the state’s social and economic patterns, though admittedly some of California’s populist culture has made even the most open-minded of us occasionally pause with wonder and amusement.

California now faces a dilemma of nearly unimaginable proportions as budget problems continue to mount and a multi-year drought puts pressure on the state’s agricultural and recreation/tourism industries. The state’s real estate and construction industry has been devastated and may take several more years to regain its footing. Long a favorite state for potential business expansion, California’s once rising real estate market and labor costs repelled many would-be employers and provided incentive for others already housed in the state to relocate. Now, with property values at bargain levels throughout much of the state and a motivated labor pool, one might expect California to once again be favored for corporate relocation and economic development; but the opposite is more likely the case.

The state’s budget woes and the need to either face massive tax increases or suffer dramatic cuts in spending now keeps potential employers at bay. The weight of the problem now thwarts hopes for growth among the state’s existing businesses and further depresses future revenue projections. Even CalPERS, the state’s pension and retirement plan, the nation’s largest, is facing hard choices as unfunded liabilities continue to mount.

But all is not lost. California faces the opportunity to once again be a trendsetter as the state remakes itself. The state’s problems are not all that far removed from some of the nation’s economic difficulties. The public policy decisions of California’s decision makers may either serve as an example for good governance and effective leadership in moving the state beyond crisis mode or become an example of what to avoid. The choice is taking shape as the race to replace Governor Schwarzenegger includes candidates ranging from pro-business conservative Meg Whitman (former EBay CEO and senior McCain campaign advisor) to longtime liberal activist Jerry Brown (the state’s current Attorney General and former Governor).

These two candidates could hardly represent more divergent choices. But regardless of where the race leads, one thing is certain: California is in for some tough decisions requiring strong, creative and able leadership as well as a daring electorate. Once again, California may simply be a step ahead of the curve and offering a glimpse into some of the issues facing the rest of the nation.


THE ECONOMY - Unemployment and Inventory Levels

Most might suppose that employment and inventory levels have little to do with one another, but the correlation is significant. In the 3rd quarter of 2008 as Bush administration officials and the Federal Reserve were working to fend off a debilitating credit crisis, business owners and managers found themselves more fearful than at any time in recent memory. In an effort to move the US congress to action, the rhetoric coming out of the Washington helped shift employers into depression mode; within weeks the labor markets were under extraordinary pressure.

As the Obama administration came to power there was a decidedly anti-business tone, raising concerns yet higher and resulting in today’s unemployment rate of more than 10%. Retailers and distributors moved to curb inventories, sending employment downward and creating some of the recessive pattern into which the economy continued to fall.

Now the tide has begun to turn. Inventory levels have sunk so low that even modest sales growth demands manufacturing levels return to normal. The weaker dollar has made import goods less attractive and domestic manufacturing growth is now in the earliest stages of development. Within the coming months, this will lead to noticeable employment increases.

The US consumer, battered and bloodied this past year, has once again shown signs of resiliency. Retail sales figures have begun to post gains in important areas and appear to be set to rally for the holidays. Though this is far from certain, it’s important to note that sales growth in consumer electronics and other high tech sectors is surprising even the most ardent pessimists. Microsoft’s recent revenue report reflecting a surge in Xbox sales simply punctuates the developing trend already observable in Intel and other high tech manufacturers.

By the time domestic manufacturers top off inventory levels, the Obama stimulus plan should have pumped several hundred billion more into the US economy - benefiting the labor market further and bringing sufficient discretionary income to the market, thus offering consumers the ability to take advantage of complete retail inventories and driving retail sales yet higher. Though we’re not likely to see the excessive retail sales growth of 2003 – 2007, it now appears that retailers are poised to return to more appropriate activity levels without having to cut prices and costs at every turn.

October’s real estate sales increase of 6.2%, though perhaps an anomaly with most of the growth coming from southern states, adds another facet of hope for the distressed construction industry. Real estate inventories are among the most critical as it relates to price changes and employment levels; at 6.7 months of supply at current sales rates, they’re lower than at any time in almost two years.

Even still, unemployment is likely to remain high through 2010 and may not fall below 7% until 2011. That’s tough thing to bear for those already out of work, but the trend is clearly improving and the worst may be over for the labor market.


THE TAKEAWAY – Gold, Retail, Consumer Discretionary and Healthcare

The price of gold continues to climb and appears likely to cross $1,200 an ounce in a matter of days thanks to ongoing weakness in the US dollar. The announcement earlier this week that powerful hedge funds have taken positions in gold only adds fuel to speculative concerns. Though gold may have become a very profitable trading vehicle in recent months, it lacks the fundamentals to be considered for long-term inclusion in a well-thought-out investment portfolio.

Consumer spending and personal income gains bode well for the retail sector and add to hopes for a strong holiday buying season. Consumer discretionary and retailing stocks may continue to do well in the coming months.

The Senate’s decision to send its healthcare bill to debate keeps hopes alive for passage of sweeping healthcare legislation in early 2010. While the Senate and House’s proposals are still miles apart, it now seems clear some form of healthcare reform legislation will pass; hospital groups and insurers may be poised for meaningful gains as a result.




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