Bread & Circuses
           February 2010

Investment Management & Trust Services
        Tower Private Advisors
Bread & Circuses
•Roman poet Juvenal around 100 AD
•Roman politicians devised a plan to win the votes of the poor by
givin...
Tim Frey
        Vice President
      Portfolio Manager
Investment Management & Trust Services
        Tower Private Advis...
Market Outlook 2010
• Economy is recovering
   – Global economies are healing
   – Strength of recovery varies, by country...
Recent clouds over markets to abate
• China slowing lending and increasing reserve requirements
• Sovereign debt crisis – ...
Other Negatives
• Banks aren’t lending or we aren’t borrowing- banks have $1 trillion in
  excess reserves (15x normal)
• ...
What does all this mean in a secular bear market?
                                                                        ...
Cyclical Bulls - Secular Bear Markets (1900-2009)

• 18 cases historically with an average 64% gain over a
  mean length o...
GDP- Can we get to and sustain 3-4% growth?
                                                                              ...
Inflation is in check for now
                                                                                            ...
We are rebuilding inventories
                                                                                            ...
There is plenty of room to grow
                                                                                          ...
Consumer sentiment has improved
                                                                                          ...
Consumer has retrenched
                                                                                                  ...
Need to create jobs! Unemployment is too high!
                                                                           ...
Did you know?
• During previous expansion from 2001-2007 we created about
  100,000 jobs/month to keep unemployment rate u...
Global recovery is still accelerating
•   Australia leading index up for a 7th straight month
•   Germany’s Purchase Manag...
Domestic valuations were getting stretched!
                                                                              ...
February 2010 Economic/Market Outlook Seminar
February 2010 Economic/Market Outlook Seminar
February 2010 Economic/Market Outlook Seminar
February 2010 Economic/Market Outlook Seminar
February 2010 Economic/Market Outlook Seminar
February 2010 Economic/Market Outlook Seminar
February 2010 Economic/Market Outlook Seminar
February 2010 Economic/Market Outlook Seminar
February 2010 Economic/Market Outlook Seminar
February 2010 Economic/Market Outlook Seminar
February 2010 Economic/Market Outlook Seminar
February 2010 Economic/Market Outlook Seminar
February 2010 Economic/Market Outlook Seminar
February 2010 Economic/Market Outlook Seminar
February 2010 Economic/Market Outlook Seminar
February 2010 Economic/Market Outlook Seminar
February 2010 Economic/Market Outlook Seminar
February 2010 Economic/Market Outlook Seminar
February 2010 Economic/Market Outlook Seminar
February 2010 Economic/Market Outlook Seminar
February 2010 Economic/Market Outlook Seminar
February 2010 Economic/Market Outlook Seminar
February 2010 Economic/Market Outlook Seminar
February 2010 Economic/Market Outlook Seminar
February 2010 Economic/Market Outlook Seminar
February 2010 Economic/Market Outlook Seminar
February 2010 Economic/Market Outlook Seminar
February 2010 Economic/Market Outlook Seminar
February 2010 Economic/Market Outlook Seminar
February 2010 Economic/Market Outlook Seminar
February 2010 Economic/Market Outlook Seminar
February 2010 Economic/Market Outlook Seminar
February 2010 Economic/Market Outlook Seminar
February 2010 Economic/Market Outlook Seminar
February 2010 Economic/Market Outlook Seminar
February 2010 Economic/Market Outlook Seminar
February 2010 Economic/Market Outlook Seminar
February 2010 Economic/Market Outlook Seminar
February 2010 Economic/Market Outlook Seminar
February 2010 Economic/Market Outlook Seminar
February 2010 Economic/Market Outlook Seminar
February 2010 Economic/Market Outlook Seminar
February 2010 Economic/Market Outlook Seminar
February 2010 Economic/Market Outlook Seminar
February 2010 Economic/Market Outlook Seminar
February 2010 Economic/Market Outlook Seminar
February 2010 Economic/Market Outlook Seminar
February 2010 Economic/Market Outlook Seminar
February 2010 Economic/Market Outlook Seminar
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February 2010 Economic/Market Outlook Seminar

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February 2010 Economic/Market Outlook Seminar

  1. 1. Bread & Circuses February 2010 Investment Management & Trust Services Tower Private Advisors
  2. 2. Bread & Circuses •Roman poet Juvenal around 100 AD •Roman politicians devised a plan to win the votes of the poor by giving out cheap food and entertainment. •Politicians decided that this policy “bread and circuses” would be the most effective way to rise to power. •To many it connotes the decadence and hedonism that defined the Roman Empire prior to its decline. •Spanish intellectuals between the 19th and 20th centuries complained about similar “bread and bullfights”.
  3. 3. Tim Frey Vice President Portfolio Manager Investment Management & Trust Services Tower Private Advisors
  4. 4. Market Outlook 2010 • Economy is recovering – Global economies are healing – Strength of recovery varies, by country and industry sector – Rally has been technical in nature - coming off lows in march-and Gov’t stimulated – Focus now will be more on fundamentals - forward earnings • Key question is sustainability – Normally (historically) need about 5 preconditions for a sustained recovery – Massive monetary & fiscal policy response, inventory replacement, financial stability, stabilization and improvement in consumer sentiment, and job growth
  5. 5. Recent clouds over markets to abate • China slowing lending and increasing reserve requirements • Sovereign debt crisis – PIGS • Eurozone vs Dollar The real problem is staring us in the face (USA) • Vast majority of states running deficits • 40% are being fed currently by stimulus $$$ • Unfunded pension liabilities - $2 trillion • Another $1 trillion shortfall for health / retirement / plan assets • The elections in 2010 won’t focus much on this – 37 governor seats up for grabs! • More tax increases will be coming!
  6. 6. Other Negatives • Banks aren’t lending or we aren’t borrowing- banks have $1 trillion in excess reserves (15x normal) • Mortgages will be a problem for at least 10-12 months. Applications at a 12 yr low - housing starts are flat • Foreclosures may rise (as many as 3 million) as resets and loan modification programs fail Positives • Earnings picking up, companies more productive • Industrial production was stronger in Jan, inventories slowly rising • Capital spending is on the rise (3.5% in 2010-mostly on IT) • Hiring should pick up in 2010 – 62% of S&P 500 say yes! • More stimulus coming
  7. 7. What does all this mean in a secular bear market? Daily Data 1/14/2000 - 2/12/2010 (Log Scale) Cyclical Bull and Bear Markets within current Secular Bear Market Cyclical Bull Markets 29.1% 94.4% 54.3% 14399 14399 14063 Dow Jones Industrial Average 14063 13735 13735 13415 13415 13102 13102 12797 12797 12498 12498 12207 12207 11922 11922 11644 11644 11373 11373 11108 11108 10849 10849 10596 10596 10348 10348 10107 10107 9872 9872 9641 9641 9417 9417 9197 9197 8982 8982 8773 8568 You can still make money 8773 8568 8369 8369 8174 in a sideway market! 8174 7983 7983 7797 7797 7615 7615 7437 7437 7264 7264 7095 7095 6929 6929 6768 6768 6610 Total Change Over Secular Bear: -13.9% 6610 6456 Detailed Statistics for each Cyclical Market 6456 -29.7% -31.5% -53.8% Cyclical Bear Markets (Shaded) M J S D M J S D M J S D M J S D M J S D M J S D M J S D M J S D M J S D M J S D (S0203D) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 ©Copyright 2010 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html . For data vendor disclaimers refer to www.ndr.com/vendorinfo/ .
  8. 8. Cyclical Bulls - Secular Bear Markets (1900-2009) • 18 cases historically with an average 64% gain over a mean length of 508 days • Current cyclical rally since March 09-up 49% and has lasted 350 days • There may be more left in 2010! Note: Secular Bear - flat or declining stock prices over a long time --- have averaged about 15 years from 1900 - 1999 Cyclical Bull - 30% rise in 50 days or 13% after 155 days
  9. 9. GDP- Can we get to and sustain 3-4% growth? Quarterly Data 3/31/1960 - 12/31/2009 (Log Scale) Standard & Poor's 500 Quarterly Close 1397 S&P 500 Gain/Annum When: 1397 1172 (3/31/1960 - 12/31/2009) 1172 984 984 Y/Y Change of Gain/ % 826 Real GDP Is: Annum of Time 826 693 693 Above 6 -4. 6 10. 5 581 581 Between 0.5 and 6 7. 1 76. 4 488 488 * 0.5 and Below 10. 1 13. 1 409 409 344 344 288 288 242 242 203 203 170 170 143 143 120 101 3Qtr GDP 2.2% 120 101 85 71 4Qtr GDP 5.7% 85 71 60 60 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 9 9 12/31/2009 = 0.1% 8 8 7 7 Very Strong Economic Growth 6 6 5 5 4 4 3 3 2 2 1 1 0 0 Very Weak Economic Growth -1 -1 -2 -2 -3 -3 (S687) Year-to-Year Change of Real GDP ©Copyright 2010 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html . For data vendor disclaimers refer to www.ndr.com/vendorinfo/ .
  10. 10. Inflation is in check for now Monthly Data 1/31/1950 - 12/31/2009 CPI vs CPI Less Food & Energy Inflation 14.5 14.5 14.0 14.0 13.5 13.5 13.0 Year-to-Year Changes 13.0 12.5 12.5 12.0 12.0 11.5 11.5 11.0 CPI Less Food & Energy Index 11.0 10.5 (Core Inflation) 10.5 12/31/2009 = 1.8% 10.0 ( ) 10.0 9.5 9.5 9.0 9.0 8.5 CPI Index 8.5 8.0 12/31/2009 = 2.7% 8.0 7.5 ( ) 7.5 7.0 7.0 6.5 6.5 6.0 Don’t worry – yet! 6.0 5.5 5.5 5.0 5.0 4.5 4.5 4.0 4.0 3.5 3.5 3.0 3.0 2.5 2.5 2.0 2.0 1.5 1.5 1.0 1.0 0.5 0.5 0.0 0.0 -0.5 Shaded areas represent -0.5 -1.0 National Bureau of -1.0 Economic Research recessions. -1.5 -1.5 (E706) 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 ©Copyright 2010 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html . For data vendor disclaimers refer to www.ndr.com/vendorinfo/ .
  11. 11. We are rebuilding inventories Monthly Data 1/31/1948 - 1/31/2010 ISM Manufacturing Index (PMI) 78 78 77 77 76 76 75 74 Need to get above 50 Shaded areas represent 75 74 73 National Bureau of 73 72 72 Economic Research recessions 71 71 70 70 69 69 68 67 Need to keep momentum going 68 67 66 66 65 65 64 64 63 63 62 62 61 61 60 60 59 59 58 58 57 57 56 56 55 55 54 54 53 53 52 52 51 51 50 50 49 49 48 48 47 47 46 46 45 45 44 44 43 43 42 42 41 41 40 40 39 39 38 38 37 37 36 36 35 35 34 34 33 33 32 32 31 1/31/2010 = 58.4 31 30 Source: Institute for Supply Management, ISM Report on Business Excerpt from E0225A 30 (TNT0908H) 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 ©Copyright 2010 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html . For data vendor disclaimers refer to www.ndr.com/vendorinfo/ .
  12. 12. There is plenty of room to grow Monthly Data 6/30/1961 - 12/31/2009 (Log Scale) The Economy (The Index of Coincident Economic Indicators) 109 109 Correct Signals: 77% 100 Expansion Mode GPA: 2.7% 100 91 Contraction Mode GPA: -1.4% 91 Buy-Hold Gain/Annum: 1.9% 84 84 Signal Dates: 1/31/1970 - 11/30/2009 77 77 71 71 65 65 60 60 55 55 Latest data point repeated for signal purposes 50 50 46 46 42 42 39 39 Signals Generated When Capacity Utilization: 36 36 Rises by 2.1% = Expansion 33 Source: The Conference Board Falls by 4.8% = Contraction 33 1965 1970 1975 1980 1985 1990 1995 2000 2005 93 12/31/2009 = 72.0% 93 92 92 91 91 90 Falling = Economy Slowing Full Capacity 90 89 89 88 87 86 Need to get above 80 again Overbought 88 87 86 85 85 84 84 83 83 82 82 81 81 80 80 79 79 78 78.7 78 77.9 77.8 77 77 76 76 75 75 74 Surplus Capacity 74 74.1 Rising = 73 73.5 73 72 Economy Accelerating Oversold 72 71 Shaded areas represent 71 70.9 National Bureau of 70 70 69 Economic Research recessions. 69 68.3 (E230) Capacity Utilization ©Copyright 2010 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html . For data vendor disclaimers refer to www.ndr.com/vendorinfo/ .
  13. 13. Consumer sentiment has improved Monthly Data 12/31/1953 - 7/31/2010 Real GDP vs Consumer Sentiment (Smoothed Year-to-Year Changes) 46 9.6 44 Latest Consumer Sentiment Reading 9.2 42 Corresponds to 5.9% Real GDP Growth 8.8 40 38 Real GDP 8.4 36 Scale Right 8.0 34 ( ) 7.6 32 7.2 30 Correlation Coefficient = 0.54 6.8 28 6.4 26 24 6.0 22 5.6 20 5.2 18 4.8 16 4.4 14 12 4.0 10 3.6 8 3.2 6 2.8 4 2.4 2 0 2.0 -2 1.6 -4 1.2 -6 0.8 -8 0.4 -10 -12 0.0 -14 -0.4 -16 -0.8 -18 -1.2 -20 -1.6 -22 -24 -2.0 -26 -2.4 Reuters/University of Michigan -28 Consumer Sentiment Index -2.8 -30 (Moved Ahead Five Months) -3.2 -32 Scale Left Reuters/University of Michigan Source: -3.6 -34 ( ) Surveys of Consumers (E0815) 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 ©Copyright 2010 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html . For data vendor disclaimers refer to www.ndr.com/vendorinfo/ .
  14. 14. Consumer has retrenched Quarterly Data 3/31/1980 - 9/30/2009 Household Debt Service and Financial Obligations Ratios 18.9 18.86 18.9 18.6 Financial Obligations Ratio 18.6 18.3 9/30/2009 = 17.76% 18.3 17.98 18.0 18.0 17.7 17.7 17.4 17.4 17.1 17.1 16.8 16.8 16.5 Includes vehicle leases, rent, 16.5 16.2 insurance, property taxes 16.2 15.9 16.05 15.9 15.6 15.6 15.45 Renter Financial Obligations Ratio Homeowner Financial Obligations Ratio 30 17 9/30/2009 = 24.50% 9/30/2009 = 16.36% 29 Scale Left Scale Right ( ) ( ) 28 16 27 26 15 25 24 14 23 13.91 13.8 13.8 13.5 Debt Service Ratio Minimum Debt Service Payment 13.5 13.2 9/30/2009 = 12.85% on Mortgage Debt and Consumer Credit 13.2 12.9 as a % of Disposable Personal Income 12.9 12.6 12.6 12.38 12.3 Mean = 12.07% 12.3 12.0 12.0 11.7 11.7 11.4 11.1 Would like below 12 % 11.4 11.1 10.8 10.8 10.73 10.60 (E0509) 1980 1985 1990 1995 2000 2005 ©Copyright 2010 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html . For data vendor disclaimers refer to www.ndr.com/vendorinfo/ .
  15. 15. Need to create jobs! Unemployment is too high! Monthly Data 1/31/1948 - 12/31/2009 (Log Scale) Barclays Capital Long-Term Treasury Bond Price Index 2324 2324 2200 2200 2082 2082 1971 1971 1866 1866 1766 1766 1672 1672 1583 1583 1498 1498 1418 1418 1343 1343 1271 1271 Long-Term Tsy Bonds Gain/Annum When: 1203 1203 1139 Unemployment Gain/ % 1139 Rate Is: Annum of Time 1078 1078 1021 * Above 6.6 2. 4 24. 1 1021 966 Between 4.4 and 6.6 -0. 2 52. 3 966 915 4.4 and Below -3. 6 23. 5 915 866 866 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 10 Shaded areas represent 10 National Bureau of 9 Economic Research recessions. Will it stay high and 9 8 Weak Employment Growth how long? 8 7 7 6 6 5 5 4 4 Strong Employment Outlook 3 3 12/31/2009 = 10.0% (B644) Unemployment Rate ©Copyright 2010 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html . For data vendor disclaimers refer to www.ndr.com/vendorinfo/ .
  16. 16. Did you know? • During previous expansion from 2001-2007 we created about 100,000 jobs/month to keep unemployment rate under 6% (considered full employment) • Today it would take 150,000 new jobs /month for ten years to absorb the 15-17 million unemployed and keep up with population trends • If we create 200,000 jobs/month it would take 6 years to get to 6% unemployment • Our Government is going to try and create about 100,000/month from here forward— just to get the 8 million that lost jobs the past 2 years back to work
  17. 17. Global recovery is still accelerating • Australia leading index up for a 7th straight month • Germany’s Purchase Manager Index surged in Feb • Japan grew at 4.6% in 4qtr after a flat 3qtr • Canada manufacturing sales rose a 4th straight month Emerging Markets are still a good place to be • Valuations have corrected some • Deficits are in better shape than most of the rest of the world • Recent commodity sell-off due to sentiment not lack of growth • Earnings are still strong – have provided great returns the past ten years
  18. 18. Domestic valuations were getting stretched! Monthly Data 12/31/1968 - 12/31/2009 (Log Scale) Standard & Poor's 500 Stock Index 1426 1426 1206 1206 Price Move of: 1020 1020 863 -0.2% to Overvalued (+1SD) = S&P 500 Level of 1113.34 863 730 730 618 -25.5% to Median Fair Value = S&P 500 Level of 830.78 618 523 -50.8% to Undervalued (-1SD) = S&P 500 Level of 548.22 523 442 442 374 374 316 316 268 268 226 226 192 192 162 162 137 137 116 116 98 98 83 83 12/31/2009 = 1115.10 70 70 1970 1975 1980 1985 1990 1995 2000 2005 32 Very Overvalued 32 30 30 +2 SD 28 28 26 Overvalued 26 24 24 +1 SD 22 22 20 20 41.1-Year 18 Median = 16.5 18 Median 16 16 14 14 12 Recent sell off has helped 12 -1 SD 10 10 8 correct this somewhat 8 6 Bargains 6 12/31/2009 = 22.2 (DAVIS100) S&P 500 Median Price/Earnings Ratio (NDR Calculation) with Historical Median ©Copyright 2010 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html . For data vendor disclaimers refer to www.ndr.com/vendorinfo/ .
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