Commentary on Economics, Markets and Politics to Help Business Leaders Make Good Decisions August 12, 2009 – Update Sean Lannan www.linkedin/in/SeanLannan

Commentary on Economics, Markets and Politics for Good Decision Making The financial markets and real economy show several months of stabilizing activity. Economic commentators expect 2 – 4% annualized GDP growth in the second half of 2009 and 2+% growth in 2010, modest growth but growth none the less. Unemployment rates are expected to drift higher through Q1 2010. Companies will have the opportunity to hire high-quality employees. Existing employees will look for regular assurance that the company and their positions are secure. Rising unemployment will limit improvement in consumer spending. Defaults on mortgages and consumer credit will continue to rise for the rest of 2009. Now is a good time to access intermediate and longer term credit and equity now that capital is more readily available than in the last 12 months in the debt and stock markets. From April through June this year companies raised $92 billion through equity issuance, the highest 3-month issuance in 20 years. Banks may not be willing lenders at this time and other source of credit are preferred. About the author: Sean Lannan is a CFO for a high technology company. He has a background in corporate finance, treasury, investor relations, mergers & acquisitions and fixed-income securities trading, an MBA in finance and BA in economics and political science.

The financial markets and real economy show several months of stabilizing activity.

Economic commentators expect 2 – 4% annualized GDP growth in the second half of 2009 and 2+% growth in 2010, modest growth but growth none the less.

Unemployment rates are expected to drift higher through Q1 2010.

Companies will have the opportunity to hire high-quality employees.

Existing employees will look for regular assurance that the company and their positions are secure.

Rising unemployment will limit improvement in consumer spending.

Defaults on mortgages and consumer credit will continue to rise for the rest of 2009.

Now is a good time to access intermediate and longer term credit and equity now that capital is more readily available than in the last 12 months in the debt and stock markets.

From April through June this year companies raised $92 billion through equity issuance, the highest 3-month issuance in 20 years.

Banks may not be willing lenders at this time and other source of credit are preferred.

About the author:

Sean Lannan is a CFO for a high technology company. He has a background in corporate finance, treasury, investor relations, mergers & acquisitions and fixed-income securities trading, an MBA in finance and BA in economics and political science.

Politics and the Economy Only 20% of the $787 billion federal stimulus plan has been spent. There are business opportunities available for shovel-ready projects, green energy projects, modernization of health care information systems, etc. Public spending is the main incremental source of demand in the economy now. Politicians will be under constant pressure to do something about high unemployment. This will create an incentive for additional government spending and reluctance to impose additional taxes to pay for spending. Funding high government deficits will create interest rate volatility and the threat that foreign investors will demand higher rates to compensate for potential weakening of the U.S. dollar long-term. It is hard to judge how strong the private sector economy is with high levels of government intervention in the economy through stimulus spending and an easy monetary policy. Look for positive surprises from economic numbers during the stimulus spending through 2010.

Only 20% of the $787 billion federal stimulus plan has been spent.

There are business opportunities available for shovel-ready projects, green energy projects, modernization of health care information systems, etc.

Public spending is the main incremental source of demand in the economy now.

Politicians will be under constant pressure to do something about high unemployment.

This will create an incentive for additional government spending and reluctance to impose additional taxes to pay for spending.

Funding high government deficits will create interest rate volatility and the threat that foreign investors will demand higher rates to compensate for potential weakening of the U.S. dollar long-term.

It is hard to judge how strong the private sector economy is with high levels of government intervention in the economy through stimulus spending and an easy monetary policy.

Look for positive surprises from economic numbers during the stimulus spending through 2010.

Four Bad Bear Markets – ‘29-’32, ‘73-’74, ‘00-’02, ‘07-’09 The current bear market looked Depression-like through losses as of 3/6/09 (57% decline) but have taken a favorable tone in the last five months. The market has rebounded 49% from the March lows on the largest injection of liquidity in U.S. economic history (equivalent to 29% of GDP) and large-scale government intervention. Doug Short at http://dshort.com/charts/bear-markets.html?four-bears , 8/10/09

The current bear market looked Depression-like through losses as of 3/6/09 (57% decline) but have taken a favorable tone in the last five months.

The market has rebounded 49% from the March lows on the largest injection of liquidity in U.S. economic history (equivalent to 29% of GDP) and large-scale government intervention.

Deterioration of the Labor Markets has Slowed Since the First-Half of 2009 but Will Continue to be an Economic Drag The U.S. economy is shedding jobs very rapidly and creates a negative feedback loops since consumers drive 70% of U.S. GDP. In June unemployment hit 9.5%, the highest since August 1983, 26 years ago. The comprehensive unemployment rate of marginally attached and involuntary part-time workers (called U-6 by the Dept. of Labor) hit 16.5% in June. More jobs have been lost in this recession than were created in the previous expansion – a first in the U.S. for economic cycles since WWII. Watch initial claims for unemployment –they are a leading economic indicator. Watch unemployment rates as a lagging indicator for the robustness of the recovery. July: 9.4% 8/6/09

The U.S. economy is shedding jobs very rapidly and creates a negative feedback loops since consumers drive 70% of U.S. GDP.

In June unemployment hit 9.5%, the highest since August 1983, 26 years ago.

The comprehensive unemployment rate of marginally attached and involuntary part-time workers (called U-6 by the Dept. of Labor) hit 16.5% in June.

More jobs have been lost in this recession than were created in the previous expansion – a first in the U.S. for economic cycles since WWII.

Watch initial claims for unemployment –they are a leading economic indicator.

Watch unemployment rates as a lagging indicator for the robustness of the recovery.

Job Losses Will Weigh on the Recovery The rate of job losses has slowed in the last four months. The U.S. economy has lost 6.7 million jobs since the start of the recession in Dec ’07 more than at any time since the Depression. The ultimate shape of the recovery will be determined by how well the economy creates new jobs in the future. 8/5/09 7/24/09

The rate of job losses has slowed in the last four months.

The U.S. economy has lost 6.7 million jobs since the start of the recession in Dec ’07 more than at any time since the Depression.

The ultimate shape of the recovery will be determined by how well the economy creates new jobs in the future.

Source of Job Losses is Different This Time A recession has never destroyed this many service jobs before. In prior recessions manufacturing has taken the brunt of job losses as manufacturing jobs moved overseas and did not return in subsequent recoveries. Service sector jobs have the potential to rebound quickly in a recovery. 8/7/09

A recession has never destroyed this many service jobs before.

In prior recessions manufacturing has taken the brunt of job losses as manufacturing jobs moved overseas and did not return in subsequent recoveries.

Service sector jobs have the potential to rebound quickly in a recovery.

The U.S. Recession is in Its 19 th Month This is the first time since quarterly record keeping started in 1947 that GDP contracted for four quarters in a row (3Q08 – 2Q09). Q2: -1.0%

This is the first time since quarterly record keeping started in 1947 that GDP contracted for four quarters in a row (3Q08 – 2Q09).

Manufacturing Continues to Contract But at Slower Rate – Mild or Strong Recovery? June: -0.4% Still contracting but at a slower rate than the last year July: 48.9 Still contracting but at a slower rate than late 2008 and early 2009

Consumer Spending Fell Badly in 2008 But Has Stabilized – Consumer Will not be Source of Longer Term Growth June: $342.1 billion June: + 0.4%

Housing Unit Sales Appear to Be Stabilizing But Price Declines Continue June: 582,000 June: 4.89 million 6/22/09 More upscale homes are going into foreclosure, prices continue to fall

Inflation Pressures Have Faded Near-Term June: + 1.8% June: - 1.4% 6/15/09

Watch US Dollar, Gold and Oil for Inflation and Health of the Global Economy Oil price collapsed in 2008 after hitting a record high in the summer. Oil prices appears to have found a bottom at $40 - $45 per barrel) and has rallied $30 as world economy improved and some fear of inflation drove funds into commodities. Gold has appealed as a safe-haven investment, hedge against inflation oil and looked less interesting as riskier asset classes promise better returns. The U.S. dollar hit highs as a safe-haven currency in late 2008 and early 2009 but has declined since risk appetites for emerging market securities grew and fears of U.S. deficits (trade and fiscal) encourage investors to look for other currencies. 7/30/09 8/12/09 7/28/09

Oil price collapsed in 2008 after hitting a record high in the summer. Oil prices appears to have found a bottom at $40 - $45 per barrel) and has rallied $30 as world economy improved and some fear of inflation drove funds into commodities.

Gold has appealed as a safe-haven investment, hedge against inflation oil and looked less interesting as riskier asset classes promise better returns.

The U.S. dollar hit highs as a safe-haven currency in late 2008 and early 2009 but has declined since risk appetites for emerging market securities grew and fears of U.S. deficits (trade and fiscal) encourage investors to look for other currencies.