Monday, January 25, 2010

2009 Economic and Market Review

2009 ECONOMIC and MARKET REVIEW: Food for thought if you have a healthy appetite

S&P 500 rose 26.5% for the year. Dow rose 22.7%. From the peak of the market, (10/09/2007), the S&P is still off 24.9%.
Our Opinion: It’s run hard and fast (probably needs a break), but potentially has more room to run, just to get back to March 2000 or October 2007 levels.

Highest performing sector of the S&P for 2009 was Technology (up 61.7%), followed by Materials (up 48.6%). Worst sectors were Telecom (up 8.9%) and Energy (13.8%).
Our Opinion: Energy sector is still the fuel that drives the world into economic recovery.

Flows into mutual funds shifted in 2009. In ’08, massive inflows into money market funds, while in ’09 over a half a trillion left the money funds. Bond fund inflows were at an all time high. Equity funds still experienced a net outflow.
Our Opinion: Show me the money (flows). Equity funds have experienced three years of outflows. As people get tired of 0.15% returns on their money markets, they will start to seek returns again.

seem high:
  • March 24, 2000, S&P 1,527, P/E (tr) 29.6
  • October 9, 2002, S&P 777, P/E (tr) 17.6
  • October 9, 2007, S&P 1,565, P/E (tr) 17.5
  • March 9, 2009, S&P 677, P/E (tr) 13.7
  • December 31, 2009 S&P 1,115, P/E (tr) 28.2 (fw 14.8)
Our Opinion: Market by PE standards looks overpriced. However, an earnings boost from underemployment and higher productivity (coupled with an economic gain), could bring PEs back in line.

Relative PEs
are cheap in some styles: LG is at 78.1% of 20-year historical, MG (82.2%) and SG (88.8%).
Our Opinion: The small cap space has led the markets out of most of the prior recessions. Growth has been battered.

, if typical, will reduce gradually (could take 5 years to reach full employment). Prior recessions, market continued to rise as unemployment dropped in 8 of 9 cases. Productivity is up to 4%, well over the 20 year average of 2.2%.
Our Opinion: Unemployment is a lagging indicator and tells what DID happen and not will happen. Unemployment should trickle down and that’s a sign of recovery in progress.

Bull over?
Still need a 42.9% gain to reach the 2007 peak. Average bull run is 176%, 68 months. This one is 10 months and 65%. Would be shortest bull in modern history.
Our Opinion: If this was an ‘average’ bull, S&P would run to about 1900, higher than the previous peak.

On the horizon for sure, but probably not in the near term (12-18 months). Current Core CPI is 1.7%, well under the 50 year average of 4.1%. Too much unemployment, no consumer inflation threat, and low real estate. M2 has grown at a modest 5.1% (lower than the 80s and 2001-2002.
Our Opinion: No question in my mind that we will have inflation, it’s just when will we have it? Use TIPs for early protection.

Real GDP
decline of this recession makes it the worst since the Great Depression; however the bullet was apparently averted: the Great Depression had a 26.7% decline in real GDP. The 08-09 debacle was -3.6% (but still worse than any other retraction since 1933).
Our Opinion: Bad is good. Hard times make people more disciplined, harder workers, better savers, and less prone to take on excessive debt. All ingredients of success.

: Light Vehicle sales are at 10.9 million units, well off the 30 year average of 14.6 million (actually at 1983 rates).
Our Opinion: The US population is 31% higher than in 1983, with car sales at about the same level. If you didn’t notice, cars don’t last forever, so eventually, the sales rate will migrate back to, and probably above 14.6 million units. The question is which cars will be sold?

: Housing starts are down 75% from peak, and 60% lower than the 35 year average, and the lowest absolute number in measurable history from 1975. The number of homes for sale from April of 2008 has declined dramatically (1.1M units). Affordability of the average new home is 14%, the lowest percentage of household income in 35 years.
Our Opinion: Houses are cheap and affordable. Want some ingredients for economic growth? Try no inflation, low interest rates, big supply of available workers and cheap real estate. The US population is still growing and people still need a place to live.

Is the US broke?
Lots of overstatement about how everyone is broke and all consumers are insolvent. Total Consumer assets = $67T, Total Consumer Debt = $14T. Personal Savings rate is now 4.8%, highest in 11 years. Household debt service ratio is now down to 12.9% (from 13.9% at the peak of the market). Consumers are borrowing less and saving more.
Our Opinion: Same as my previous point: consumers have sobered up and are saving money and paying down debt. This is way better than it was 3 years ago when people were borrowing from Peter to pay Paul.

Govt. budget
: Projected 2010 deficit is $1,502,000,000,000 (I included all the zeroes so you can see the magnitude of the number). Relative deficit (to GDP) is higher than any time since post-WWII.
Our Opinion: This is ugly, very ugly. Some deficit spending is necessary in an economic crisis, but some parts of these deficits are not temporary ‘fix the economy’ fixes, but are structural deficits.

: Sitting around $79-80 a barrel. Global consumption is up; U.S. imports are at 1.9% of GDP, down significantly from 3.8% in the 3Q of 2008.
Our Opinion: Oil seems to have stability at about an $80 level. Geopolitical chaos (like Iran) could change this. So could a marked change in US driving behavior. Let me mull over that in my Ford F-150 Truck (not to aggravate the President, but I drive a truck)

: Bond spreads have narrowed greatly. High yield bonds have a 6.6% spread (much lower than the 17% spread in March). AAA corporate bonds have a 0.6% spread, lower than the 1.2% ten year average. Even BBB bonds have a low spread (1.8 versus 2.2). Only significant spread still out is municipal bonds, which is only about 16% higher than the historical spread (it was as high as 200%). Michigan municipals are still selling at about a 35 bps yield premium to other states. Emerging market bond spreads are similarly way down.
Our Opinion: It sure looks like we’re in a Treasury ‘bubble’, and the flee to safety has virtually no return right now. I think it’s entirely possible money may move from bonds into other asset classes.

: Brazil, Russia, India and China are all very high performers (Brazil up 128.6% in 2009). Japan is a definite laggard (6.4%). Pacific ex-Japan is a good sector (we’ve expanded it throughout 2009) at 73%.
Our Opinion: The rest of the world is back on track to recovery. There are too many people that want a better life to stop it.

Account Deficit and the Dollar
: Account deficit is -3% of GDP, significantly down from -6.5% in 4Q 2005. Dollar is at 73.8, close to bottom (03/08: 70.3). Dollar closely tracks interest rates. Interest rates rise (relative), the dollar rises. Treasury clearly has a weak dollar policy.
Our Opinion: Think about Canadian dollars: when they’re cheap, we go over there to buy stuff, when our dollars are cheap, the Canadians come over here. Our dollar is cheap: it attracts money from elsewhere. Cheap is good, too cheap is not good

“Cash on the Sidelines”
: From March ’07 to March ’09, $2.286T went into money funds. Right now close to $10T is sitting in the money supply.
Our Opinion: It’s like the Red Sea in the movie ‘The Ten Commandments’: It’s sitting there and it has to go someplace.

: Gold is at around $1,100/oz and the gold bugs are spending millions trying to get you to buy it. On a CPI-adjusted price level, gold is 33% lower than it was in January of 1980. By the way, in 1980, it then dropped over 60%.
Our Opinion: Gold went up $15 from the year zero through 1950, and failed to keep up with inflation in any relevant time frame I can measure. My other question is: if gold is such a great investment, how come these guys are spending millions of dollars on advertising to sell it to us? Why don’t they take the money and buy more gold?

Other stuff
: Hedge funds aren’t the darlings as much (with a few very notable exceptions) CSFB/Tremont hedge fund index is up 3.2%. US Venture Capital funds are down 17.1%. The private equity index is down 20.6%.
Our Opinion: Alternate investments can have a place in a portfolio, if you understand the investment and why you own it. But nothing always outperforms the other asset classes: everybody gets their turn in the sun.

Big Issues for 2010
: ROTH Conversions, Small Caps, Global Investing, Tax Changes and Prospective Inflation.

Thanks to JP Morgan Asset Management for a variety of the statistics I used in this blog. We utilize some of their institutional funds.

Leon C. LaBrecque JD, CPA, CFP® CFA is the CEO and Chief Strategist at the independent advisory firm of LJPR, LLC. LJPR reduces uncertainly for their clients and their families by applying creative wealth management solutions in tax, financial planning, retirement planning and estate planning. To contact us for a consultation or to discuss your financial situation, email or call at 248-641-7400. Also visit our blog and website http:

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