This document provides an analysis of the US economy from Dr. Bob Froehlich. He argues that while the economy has hit a soft patch, the signs point to continued growth rather than a double-dip recession. He cites three reasons for his bullish outlook: strong demand for big-ticket items like homes and cars; state and local government budget surpluses; and unspent stimulus funds still available to drive growth. He also notes record corporate cash levels and argues earnings reports point to future spending that will benefit the economy and markets.

1. July 26, 2010
Dr. BOB FROEHLICH
Senior Managing Director, The Hartford Mutual Funds
GIMME AN “E”!
In my 33-plus-year career, I’ve been inappropriately Slowdown, yes, but recession, no way. Before you
branded a “perma-bull” on our markets. A perma-bull is overreact to any individual economic release, let me make
someone who is always bullish on our markets. Well, I sure you understand that these releases are looking in the
guess that’s better than being branded a perma-bear, rearview mirror; in other words, they tell us what has
someone who is always bearish, despite any facts to the already happened, not what is going to happen next.
contrary. There are three reasons I believe our economy will get
I’m really not a perma-bull, but rather I’m always looking stronger, not weaker. The first is big-ticket items, such as
for bullish ways to make money. I believe there is money to homes and autos. Secondly, state and local governments
be made in every stock market cycle and every economic are now in a surplus. Thirdly, and finally, we still haven’t
cycle; we will just make it differently. spent all of the stimulus money to stimulate our economy.
While I’ll never plead guilty to being a perma-bull, there is
one thing I am guilty of, and that is being a cheerleader for
BIG-TICKET ITEMS
our markets. Guilty as charged. Every day I do root for our
Two of the biggest “big-ticket” items for most consumers
markets to go higher, so if that’s a crime, then lock me up.
are cars and homes. While I realize there are hundreds of
ways to look at both of these sectors, I have found a way
BATTLE OF THE 2 E’s that should help us figure out what will happen, not what
In my role of self-proclaimed cheerleader, let me begin has already happened.
with “Gimme an E.” I’ll make the case that this is currently The most recent data
the story of our markets, namely, which of the two “E’s” from the automotive From July 1, 2008 to
will win. The first “E” is for our economy and the second industry shows that September 30, 2009,
“E” is for earnings. Right now we are in a classic market we’re scrapping more 14.8 million cars and light
tug-of-war, if you will. Every time we get stronger-than- cars than we’re buying, trucks were taken out
expected earnings reports, the next day is followed by which puts us behind of service. Over that
weaker economic releases on either consumer confidence the curve and is a same time frame, only
or employment, and the market ends up giving back all of bullish sign for future 13.6 million new-vehicle
its recent gains as a result of strong earnings. It’s pretty automotive demand. registrations were
much like taking one step forward and then two steps From July 1, 2008 to recorded. That means we
back. Or is it two steps forward and one step back? September 30, 2009, are falling behind by 6.1
Anyway, I think you get the picture. So if our entire market 14.8 million cars and light percent. You couldn’t ask
is dependent on which of these two “E’s” wins out, the trucks were taken out of for a more bullish sign for
economy or earnings, then we’d better take a closer look service. Over that same the automotive industry.
at both, beginning with the economy. time frame, only 13.6
million new-vehicle registrations were recorded.
That means we are falling behind by 6.1 percent.
“E” FOR ECONOMY You couldn’t ask for a more bullish
I will be the first to admit that our economy does seem to sign for the automotive industry—
have hit a soft patch, so to speak. But a soft patch does especially when you realize the
not mean we are heading into a double-dip recession. revised forecast for new car sales is
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2. only 11 million. When you junk almost 15 million vehicles STIMULUS PACKAGE
and only add 11 million vehicles, something has to give. The third and final reason I’m bullish about the future of
From a housing perspective, it’s even better. Throughout our economy is that we’ve only spent about half of our
all of 2009, we averaged 398,000 new households created massive stimulus package. That’s right; the other half
each month. The most recent new-home sales data shows hasn’t even been spent yet. Here are the numbers: The
we’re only selling 300,000 new homes each month. So total stimulus package totals $862 billion. Of that amount,
every month, 398,000 new households are formed and $626 billion is in spending and $236 in tax cuts.
only 300,000 homes are purchased. That’s almost 100,000 Here is where things stand: Of the $236 billion in tax
households of pent-up demand every single month. At cuts, $209.5 billion (82.4 percent) has been spent so far.
some point, something has to give. However, from a spending perspective, we have only spent
$247.15 billion, which is
only 39.5 percent. So, of So, of the $862 billion
GOVERNMENT SURPLUS
the $862 billion stimulus stimulus package, only
Try using the words “surplus” and “government” in the $456.65 billion or 52.9
package, only $456.65
same sentence. Talk about an oxymoron! Well, believe it percent has been spent.
billion or 52.9 percent
or not, state and local governments officially turned to a That means we still have
has been spent. That
surplus at the end of the first quarter of this year, which 47.1 percent still left to
means we still have 47.1
is the most recent data available. So now, for the first time drive our economy.
percent still left to drive
since the third quarter of 2007, in aggregate, state and
our economy.
local governments’ budgets are showing a surplus, not
a deficit. How is that possible? In short: because tax I don’t mean to sound like a cheerleader; however, if you
revenues are soaring. In fact, tax revenues are currently look at our economy from a big-ticket auto and housing
running at a 20 percent increase over last year. perspective, state and local government budget surplus,
or the government stimulus that has yet to be spent, then
So state and local governments had a $70 billion deficit
there is plenty to cheer about.
in mid-2008, and now they have an almost $20 billion
surplus. This boom-bust scenario is nothing new. In 2003,
state and local governments had an $82 billion deficit, “E” FOR EARNINGS
and by 2006, turned it into a $50 billion surplus. The good Let me now move on to the second “E.” This one is for
news is, despite the headlines, state and local government earnings. I can already hear the perma-bears right now,
finances are now in the “black,” not the “red,” and that’s screaming that all of these great earnings reports are
bullish for our economy. looking in the rearview mirror, telling us what already
happened, not what will happen. All right, for once I agree
with these perma-bears; the earnings do indeed tell us
what has already happened. So if we want to figure out
what will happen next, in my view, the most important
thing is cash. In other words, follow that money and that
will tell you what will happen next.
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3. CASH IS KING MONEY IN MOTION
In my view, there are two measurements of corporate cash, Watch what is about to happen next. When that money
and both of these measurements show cash at an all-time goes into motion, no matter what corporations do with
high. The Federal Reserve Board has been monitoring it, it will be bullish for our markets. They only have five
corporate America since 1959 in a report called “Flow of choices: First, they could buy back shares of their own
Funds.” Regarding cash, there are two aspects of this stock. If they do that, it will not only be good news for
report that tell the best story. their stock prices, but stock buy-backs are bullish for the
The first report is titled overall market as well. Second, they could increase
“U.S. Non-Financial U.S. Non-Financial dividends or establish dividends, both of which would be
Corporations’ Cash as bullish, because in this low-interest-rate environment, it
Corporations’ Cash as a
a Percentage of Total would bring even more investors into the stock market.
Percentage of Total Assets
Assets.” This report Third, they could use the money to buy other companies.
has never been as high as
excludes financial That, too, is bullish. Any uptick in merger-and-acquisition
5.9 percent. That is, until
companies, because activity is viewed as an increase in business confidence,
today. This is what it means
their large cash and that is bullish for our markets. Fourth, they could
when you hear somebody
positions would taint spend the money on capital improvements, such as
say corporate America is
this report. Only twice technology, which would also be bullish for our markets,
flush with cash. as any time companies make big-ticket expenditures,
in the history of this
report has this number they’re placing a bet on the future of our economy. Fifth
ever been above 5 percent; the first time was in 1961, and finally, here is an innovative thought: How about hiring
and the second time was in 2004. U.S. Non-Financial a few employees? Talk about bullish signs for our markets!
Corporations Cash as a Percentage of Total Assets has When employment finally turns the corner, look out, as just
never been as high as 5.9 percent. That is, until today. about everyone will turn into a perma-bull then.
This is what it means when you hear somebody say With record amounts of cash on corporate balance sheets,
corporate America is flush with cash. I’m not sure if there could be a more bullish sign for our
The second report is markets. But then again, I’m a cheerleader. Monica Author,
Undistributed Corporate “Undistributed a real cheerleader from Lima, Ohio, put it best when she
Profits never hit $500 Corporate Profits.” quipped: “There’s no halftime for cheerleaders.”
billion until this year, This number includes I might add that there are no halftimes—or even time-
when it has crossed both financial companies. outs—for strategists like me, who are perceived to be the
$500 billion, an all-time Again, this number has 24/7 cheerleaders for our markets. It’s a tough job, but
record, and $600 billion, been tracked since somebody’s got to do it, so it might as well be me.
1959. It took almost 30 Gimme an “E”!
where it stands today—
years for this number
a new all-time record.
to break $100 billion,
as it did so for the first
time in 1986. A decade later in 1996 it broke $200 billion.
Two years later, in 1998, it broke $300 billion, and in 2004,
it broke the almost-unheard-of amount of $400 billion.
Undistributed Corporate Profits never hit $500 billion until
this year, when it has crossed both $500 billion, an all-time
record, and $600 billion, where it stands today—a new
all-time record. No matter how you look at it, corporate
America is flush with cash, and cash is truly king.
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4. The views expressed here are those of Dr. Bob Froehlich. Dr. Bob Froehlich’s views are not necessarily underlying funds, which you can obtain from your investment representative or by calling
those of The Hartford and should not be construed as investment advice. They are subject to change. 800-862-6668. Please read them carefully before you invest or send money.
All economic and performance information is historical and does not indicate future results.
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Dr. Bob Froehlich’s sources of information include Bank of Canada, The Bank of England, Bank of Japan, (countrywide: HL-14991; NY & FL: HL-14973) and group variable funding agreements (HL-16553 and
Bloomberg News, Business Roundtable, China Investment Corporation, CIA. World Fact Book, CNBC, HL-16553 (NY)) issued by Hartford Life Insurance Company (Simsbury, CT), or by The Hartford Mutual
Congressional Budget Office, Deutsche Bank, The European Monetary Union, Federal Reserve Board, Funds, which are underwritten and distributed by Hartford Investment Financial Services, LLC. 401(a),
The Financial Times, Freddie Mac, FOX Business, Goldman Sachs, International Monetary Fund, 457, and 403(b) retirement programs are funded by group variable annuity contracts (HL-15811, HVL-
International Strategy & Investment, Journal of Commerce, Merrill Lynch, PIERS Global Intelligence 11002 and HVL-21002 series, HVL-14000, HVL-14001, HVL-20000, HL-17402, HL-14848, HL-17402 and HL-15420
Solutions, Strategas Research, Thomson Reuters, Union Bank of Switzerland, U.S. Census Bureau, U.S. with Rider HL-16957) and group variable funding agreements (HL-16553 and HL-16553 (NY)) issued by
Department of Commerce, U.S. Department of Labor, U.S. State Department, U.S. Treasury Department, Hartford Life Insurance Company (Simsbury, CT). Group variable annuity contracts are underwritten
The Wall Street Journal, and The World Bank. and distributed by Hartford Securities Distribution Company, Inc. where applicable. Retirement
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