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OCTOBER 29, 2009

US GDP EXPANDS AT 3.5% FOR Q3 2009

Figures released this morning by the Commerce Department showed the world’s largest economy expanded at a 3.5 percent pace for the third quarter of 2009(July through September). This number exceeded the median estimate of economists after shrinking the previous four quarters. The number included a big increase by US households as those purchases climbed 3.4 percent, the most in more than two years. The release indicates the U.S. economy grew in the third quarter for the first time in more than a year, propelled by stimulus-driven gains in consumer spending and home building. The government will now focus on whether the recovery, supported by federal assistance to the housing and auto industries, can be sustained into 2010 and generate jobs.

We still believe it’s going to be challenging for the consumer this quarter as the jobless rate remains high and business has yet to start hiring at any great pace. If you exclude auto sales from the GDP number the rate of growth drops to about 1.9%. This is still fairly strong growth given the recent economic weakness in the US and world economy. Today’s release validates the PVCS forecast originally published in early 2009 for a return to positive GDP in Q3 2009. While many economists, including PVCS, estimate the recession has ended, an official pronouncement may take many months to materialize. According to Bloomberg: “The National Bureau of Economic Research, based in Cambridge, Massachusetts, is responsible for determining when contractions begin and end. Robert Hall, head of the committee charged with making the call, said in August it may take more than a year for the group to reach a conclusion.”

October 12, 2009

Recovery

The outlook continues to brighten for the economy and the markets. The markets have continued to march forward as the economy shows more signs of a recovery and improved overall conditions in the financial markets. The Treasury has successfully funded record amounts of debt at very low interest rates while business has cut expenses and shown signs of some life on top line revenue growth. The Dollar remains weak but this weakness has not yet translated into a major negative impact on Oil prices. Oil prices are key as we saw in the summer of 2008 when Oil above 120 drove created a tipping point for financial markets. Gold continues to march higher against a weakened Dollar but the policy to let the Dollar weaken has had a positive effect on equities. Economic strength in Q3 continued to build on the stronger economic and business activity that started in Q2. All indications point toward a continuation of this trend as we enter the last few months of 2009. Last year(Q3/2008) we forecast a return to positive GDP in late Q3 or early Q4 of 2009. We believe that the economy will show positive GDP growth in the Q3 GDP release on 10/29. The GDP trend will show a slow but steady growth as the economy recovers at a slow, yet positive growth rate of between 2% and 4% in 2010. Unemployment and housing will continue to drag on the economy and will provide ample reason for the Fed to maintain a low interest environment. The continued unemployment and housing issues will keep a lid on consumer spending keeping prices in check and holding growth in the overall economy growing at a slow but steady positive pace for the next several quarters.
Our macro forecast for the economy paints a picture of a strengthening environment for the financial markets and a good opportunity for the broad based stock indices to maintain their upward momentum for the balance of 2009. Our models have closely monitored earnings forecasts and guidance from the S&P 500 companies and we are convinced that Q3 earnings will be in-line to positive as releases start this week. Corporate balance sheets have been strengthened over the last year as expenses have been slashed and inventories have been depleted. Companies have had a stable price environment and corporate credit is loosening up. Labor costs have been steady or lower as business has the upper hand in wages as available labor has grown. All of this adds up to a stable environment for business that will translate into a good quarter for corporate earnings. Many analysts will continue to focus on revenue growth and we agree that top line revenue growth is important. However, more scrutiny should be and will be placed on the commentary on forward earnings that goes with earnings releases. The real impact of earnings for Q3 will be in the guidance commentary and as always on any big surprises in top line revenue growth. We see the potential for more upside surprise than downside releases.
Our view: we continue to stay confident that we will have more positive momentum in equity prices that will lead us to new 52 week highs on the major equity index’s by the end of the year. Confidence continues to return to the markets, banking system and investors. Many equities are becoming more fairly valued but positive momentum in earnings should continue to lead markets higher. We foresee more M&A activity especially in the tech and bio sectors with large sums of capital available to many corporations, PE and VC companies. There is a pent up demand for acquisition and will see more activity as companies turn to buyouts and mergers to grow revenue. We see increased M&A activity within the blue chips, tech's and bio's. Slow growth, a stable price and rate environment, accommodating policies and M&A activity will all help lead the equity markets higher through the end of the year.

August 25, 2009
Those Hazy Lazy Trading Days of Summer…

As we close out the last few weeks of summer, the market continues to chug along hitting 9600 intra-day today and continues to maintain an upside bias. Many analysts have been calling for a pullback on the broad averages after a rally that has produced a 40%+ technical retrace from the March lows. While we look to have hit a technical resistance level, the market refuses to top out and continues to focus on positive news; discount negatives and continues to shrug-off any pullbacks that would otherwise look to be the start of a correction.

The economic news continues to prove the economy is at the worst stabilized and at best, growing-even if at a very slow pace. Interest rates continue to stay low as the Treasury auctions record debt. The housing market has shown some signs of life as the release of the Q2 Case Schiller index show an increase in home prices in Q2 of 2009. Meanwhile, credit markets continue to be tight and lending is still at levels that will not allow for any strong capital expansion in the economy. Retail sales continue to drag as the unemployment situation continues to be a drag on any strong return of consumer spending.

On the earnings front: A review of Q2 earnings clearly shows top line revenue growth continues to be an issue. Cuts to the expense side of the balance sheet provided the catalyst for better than expected corporate earnings in Q2. Cost controls will continue but this creates a lack of opportunity for expansion and top line revenue growth. Business in general has been cutting inventories, enjoying stabilization in prices and working hard to control overhead. These controls will help to keep earnings in line over the next few quarters. We feel that continued cost control will create support earnings in Q3 and Q4 ‘09. On the upside, any sign that consumer spending is increasing will create the opportunity for top line revenue growth and could result in earnings upside surprises and would propel the market higher as we move through the balance of 2009.

The Government intervention and stimulus programs have formed a safety net under the overall economy and have provided the financials with infusions that have helped stem a complete financial meltdown. The cash for clunkers program has been a success providing a way for the auto industry to reduce inventories and creating lending opportunities. Chairman Bernanke’s reappointment should add to market confidence. The Chairman alluded to the beginnings of an economic recovery during his visit to Jackson Hole last week. His positive comments have also helped maintain confidence in the equity market. He will be getting additional airtime as he goes through the reconfirmation process and this will provide an opportunity for more up to date information on the economic situation that could also help move stocks higher. Politics aside, the markets approve of the current economic policy and voiced this approval in the form of the recent market rally.

Our forecast since the fall of 2008 has been calling for a return to positive GDP in late Q3 or early Q4 ’09 and we continue to stand pat on this forecast. We continue to look at the technology sector as a favorite for intermediate and longer term returns while still maintaining a cautious view of financials, commodity related issues and consumer stocks (with some exception for the large discount retailers). The health care sector is another area we favor.

On the currency front we have been wrong on our Dollar forecast. The ongoing weakness in the Dollar has been a surprise. However, a positive effect of the weaker Dollar is the help to US exports and the multi-national stocks, which has helped the US equity markets. We continue to see Interest rates stay stable through the balance of 2009 with a slow rise in rates that will be in-line with any economic recovery. There has been a very strong demand for US debt even with record refunding and deficits. This demand has been well diversified both foreign and domestic. We believe US debt will continue to be in demand as the Treasury continues to auction off record debt.

We see OIL trading in a fairly broad range with big swings based on any changes to economic conditions. This said our target for OIL continues to place trading between $60 and $80 per barrel. Overall we believe that equities still offer good value. We are maintaining our focus on technologies as we see this sector leading the markets higher. Financials continue to perform well in this run-up and have been leaders in the move. We will remain neutral on financials and look for value in other areas such as health care and tech. We still maintain our view that there will be continued problems with loans and real estate and this will contribute to more write-offs that will create a drag on earnings in the financial sector. We still suggest a defensive side to any portfolio. Look for managers that provide the opportunity to take advantage of downside action without the cost of losing upside potential. We will look for pullbacks to consolidate positions and to dollar cost average into favorites.

Be ready for anything: We enter September with some trepidation given the recent run-up in equities and the historically poor performance of the major indexes in September. Our friends at US Global produced this chart which speaks for itself:

July 26, 2009

The Equity markets continue to climb as second quarter earnings have propelled the DOW to it's best two weeks since 2000. The economic news continues to support the equity rally as releases seem to be signaling that an economic recovery may already be underway. We have had a flurry of stronger than expected earnings as over 75% of the S&P 500 companies reporting to date have exceeded expectations. If the reports continue to beat estimates, it would be the highest rate for better than expected earnings since Bloomberg started tracking this in 1993. Overall companies have grown the bottom line by cost cutting and tighter expense control while top line revenue growth has been slow to grow in most cases. However, economic indicators have confirmed the recession has bottomed and a pick up in the economy in Q3 and Q4 should help move top line revenue growth in a positive direction while firms maintain tight control on expense. This should lead to a pick up in earnings as we move into the second half of 2009. If this scenario hold true, we will see continued strength in the equity markets and more upside for stocks.

We continue to predict a return to growth for GDP late Q3/early Q4 2009. In addition, we see moderating commodity prices and low interest rates maintaining a positive effect on the equity markets and the economy as a whole. On the currency front we like the US Dollar and feel confident that the Dollar will stabilize and show strength against the Euro and Pound while the Yen keeps pace with the Dollar. We expect a choppy currency market as continued jawboning by the Chinese will have an ongoing effect on the price of US Treasuries and the Greenback. But overall, we are confident that the Dollar will stabilize and Interest rates will will run in a fairly narrow range with the 10yr Treasury yield between 3 1/2 and 4 percent over the next several months. Large supplies of US debt will push rates higher but demand for this debt is still very strong. On the employment front we expect the unemployment numbers to continue to move higher but at a slower pace. There are signs of some moderation in these numbers and we should see a topping out of the numbers by late Q3. Overall we believe that equities still offer good value. We are maintaining our focus on technologies as we see this sector leading the markets higher. Financials have performed well in this run-up and have been leaders in the move. We are still neutral on financials as we see continued problems with loans and real estate and this will contribute to more write-offs that will create a drag on earnings in this sector.

July 9, 2009

We continue to be mildly positive on the overall economic outlook for the US economy as we enter Q2 earnings season this week. The recent sluggish equity markets suggest consolidation after last quarter run-up and better than expected Q1 earnings. Economic signals continue to be mixed with unemployment numbers continuing to drag on any additional major upward move in equities. The double digit unemployment figures have surprised some analysts but we have been predicting 10% or slightly higher numbers for some time. We believe the third quarter will see these unemployment numbers start to improve but putting the mass numbers of displaced workers back to work in a lazy economy will be a challenge for some time to come. Interest rates had been seen by many to take a sharp rise as the Treasury funds the mass US debt.

However, rates have moved down over the last few weeks as demand has outpaced the huge supply with the 10year treasury now showing a 3.4% yield coming off of 4% in the late spring. We do not see any major upward move in rates in the "short" run. However, it is obvious that higher rates will abound when the economy starts showing stronger signs ofrecovery. Commodities have pulled back from the recent spike up and OIL is now trading around the $60 per barrel level - within our target range of $55-$72 per barrel. We feel confident that the Dollar will maintain it's place as the world's currency of choice and efforts by the Chinese and others to jawbone the value down will be met with minimal change.

Our view of Q2 earnings is for stronger than expected results in tech, healthcare and commodity related issues. The financials and retails should come in with little surprise upside or downside. We see continued channel trading with the S&P between 850 and 920 in the near term. However, we see stronger than expected earnings producing a positive spin on the tech heavy NASDAQ. We continue to like many of the larger and mid-size tech names. Most of these companies are cash rich, have cut costs and have minimal inventories to carry. We see strong potential for M&A activity in the techs especially as the economy improves. We continue to look for opportunities to add to core positions on pullbacks, dollar cost averaging into new positions and consolidating portfolios to be proactive in any market scenario.

June 12, 2009

Our overall economic view remains unchanged as we see a return to positive economic growth in terms of GDP late Q3 early Q4 2009. The current advance in the market is a reaction to the early signs of an economic recovery and the positive effects of lower commodity prices(although we have seen these prices increase) and cuts in expense taken by corporate America. Although we believe there is still some minimal downside risk in the equity markets, this risk has been diminished with the better than expected reports from the financials. Positive earnings from many of the S&P 500 for Q1 '09 has helped sustain the move off of the March lows. More positive news on the economy will lead to increased investor confidence. This will support a longer term positive trend for equities. The results of the bank stress tests and the repayment in TARP loans has had a positive effect on the economy. However, a turn in the housing market is still fundamental to any long term recovery. In addition, continued better than expected earnings reports will play an important role in any additional equity moves. We are still muddling through the housing crisis but the overall financial crisis is abaiting. The swift and strong action by the Treasury and FED have restored confidence in the credit markets as we see some signs of bottoming in housing and credit. We project a slight upward move in the US economy and better environment for equities over the summer months with some possibility of profit taking in a market that looks to be in a fairly narrow trading range. We continue to look for opportunities to add to core positions on pullbacks, dollar cost average into new positions and consolidate overall holdings.