Gary's Blog

Thursday, September 24, 2009

Edward Jones: 8 Reasons Why (We Believe) the Recession Is Over

Check out this most recent article from Edward Jones:
(Shoot me an e-mail if you would like the pdf version.)

8 Reasons Why (We Believe) the Recession Is Over
We believe the worst recession since the 1930s is over. Signs of recovery are everywhere. It’s time for investors to look forward
and to stop looking back. In this report, we discuss eight reasons why we believe this recession may be over.
RES-5426A-A SEP 2009 Page 1 of 2
U . S . S t r a t e g y R e p o r t
1 Leading economic indicators are positive.
The Conference Board’s Index of Leading Economic Indicators, which is designed to anticipate changes in the economy by
three to six months, rose 0.6% in July for its fourth consecutive gain. This gauge has an impressive track record of calling
turns in the economy. The stock market, another leading economic indicator, has already rebounded 50% from its March lows.
2 Global economies are recovering.
The Organisation for Economic Co-operation and Development’s (OECD)1 composite leading indicators for its member
countries recorded their largest increase in June since records began in 1962. For the first time ever, all 33 countries
recorded an increase. Japan’s economy grew this past quarter for the first time since early last year. Europe also appears
to be pulling out of recession, with positive growth reported in the most recent quarters in Germany and France.
3 The job market is improving.
Non-farm payrolls fell by just 247,000 in June, while the unemployment rate eased from 9.5% to 9.4%. The rate of
decline in payrolls has been improving since January, when payrolls declined by 741,000. Employment has been a
lagging indicator of the economy, improving at the end of or well after every recession in the postwar period.
4 The Federal Reserve’s efforts to stabilize the financial system worked.
The massive efforts to slash interest rates and provide trillions in funds to the financial system have succeeded in restoring
conditions in the money and corporate credit markets. Corporate America has taken advantage of attractive rates to refinance
old debt and fund new acquisitions. Companies issued more than $800 billion in new bonds during the first seven months
of 2009 – nearly a third more than a year earlier. In the money markets, the three-month London interbank offered rate is
down to 0.43%, less than one-tenth of where this short-term benchmark stood at the worst of the credit crisis last October.
5 Bank lending is increasing.
Banks’ profitability and capitalization have improved, and banks have started lending again. According to the Fed’s recent
periodic survey of banks, about 30% said, on net, they tightened lending to businesses in May, June and July, but that’s
down from roughly 40% in April’s survey. The percentage of banks that tightened standards on commercial real estate
loans dropped 20 percentage points to 45%. For residential real estate, the percentage fell to 20% from a peak of about
75% a year ago. Most banks expected lending standards across all loans would remain tighter than their average levels
over the past decade until at least the second half of 2010. However, the improvement in bank lending should be enough
to support economic recovery.
6 Expectations for 2010 economic growth continue to improve.
❚❚ In a recent Wall Street Journal survey, 80% of economists said they believe the recession either has ended or will end by
September. In addition, economists continue to upgrade expectations for growth in the rest of 2009 and beyond.
❚❚ The top 50 U.S. economists2 expect the economy to grow 2.2% in the third quarter, after falling just 1% in the second quarter.
❚❚ Economists in August lifted their projection for third-quarter growth by 1.2 percentage points over July’s estimate to
2.2%, according to the median of 55 forecasts in a Bloomberg News survey. That is the biggest such boost in surveys
dating from May 2003. Forecasts for 2010 were raised to 2.3% from 2.1%.
❚❚ The International Monetary Fund said in a recently revised forecast that the world economy will expand 2.5% in 2010,
compared with its April projection of 1.9%.
RES-5426A-A SEP 2009 Page 2 of 2
7 Housing has bottomed.
Sales of existing U.S. homes jumped more than expected in July to the highest level in almost two years, signaling the
worst of the housing recession may have passed. Purchases climbed 7.2% to a 5.24 million annual rate, the most since
August 2007, the National Association of Realtors said recently. The gain was the biggest since records began in 1999.
The S&P/Case-Shiller home price index advanced 2.9% in the second quarter from the previous three months, the first
increase since 2006 and the biggest in almost four years. Foreclosure-driven declines in prices, government credits for
first-time buyers and near-record-low borrowing costs are expected to continue stoking demand.
8 Manufacturing is on the rebound.
The Fed said industrial production rose 0.5% in July, the first increase in nine months. European industrial orders
increased 3.1% from May, the biggest gain in 19 months, according to the European Union’s statistics office. For the first
time since January 2008, an index based on a survey of U.S. purchasing managers crossed a threshold indicating factory
output grew. Manufacturing activity in China, France and Australia, among other countries, also expanded in August,
separate surveys showed. The pace of contraction in Germany and some other nations slowed markedly.
Alan F. Skrainka, CFA
Chief Market Strategist www.edwardjones.com Member SIPC
Don’t Bet Against History
Historically, the stock market has performed well once
recessions end. The chart below shows the performance of
the S&P 500 six and 12 months after postwar recessions
ended. While history is not always an accurate guide to the
future, it does suggest that investors who are out of the
market are betting against a lot of history.
Source: Ned Davis Research. Daily data starting in 1947. Six months measured by 126
market days; 12 months measured by 252 market days.
You Can’t Recover If You’re Not Invested
There are always risks to the outlook. The recovery could be
uneven, or something unforeseen might derail the progress
we’ve made. The stock market could correct at any time for
any reason. But these things are unpredictable. Our advice
remains the same: Don’t base your investment decisions on
predictions; base them on investment principles. Focus on
the things you can control: the quality of the investments
you own and the diversification of your portfolio. Maintain a
long-term perspective.
It looks as though the economy is improving, but that
doesn’t mean you should throw caution to the wind. Instead,
sit down with your Edward Jones financial advisor and talk
about ways you can take advantage of the improving climate
while still managing risk.
And remember, you can’t recover if you’re not invested.
1 The OECD, located in Paris, spells “organisation” as it’s listed.
2 Latest Blue Chip Economic Indicators survey
Information in this report is as of 9/2/09.
S&P 500 Performance after Postwar Recessions
Recession End
Dates
% Change
6 Months Later
% Change
12 Months Later
10/31/1949 10.97% 19.57%
5/25/1954 18.63 29.98
4/30/1958 17.77 37.12
2/28/1961 7.86 7.51
11/30/1970 15.06 4.49
3/31/1975 6.57 30.63
7/31/1980 1.28 1.82
11/30/1982 15.46 22.18
3/28/1991 3.55 12.14
11/30/2001 -1.66 -10.04
7/31/2009 (est.) TBD TBD
Average 9.55% 15.54%
Why Does It Take So Long to Call Recessions “Officially Over”?
The official “scorekeeper” of recessions is the National Bureau of Economic Research (NBER), a private organization in
Cambridge, Mass. These folks aren’t terribly interested in forecasting turns in the economy. Instead, they focus on making
sure their recession start and end dates are absolutely accurate and not subject to future revisions. Robert Hall, who
heads the NBER’s Business Cycle Dating Committee, recently said it is “more important” this time around for the group
to adhere to the principle of not calling an end to the recession until after economic growth has surpassed its previous
peak, “which could take 18 months or more to determine.” The group took until July 2003, 20 months after the fact and
well after stock prices had begun to recover, to declare the last recession had ended.

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Federal Reserve Optimistic!

The Federal Reserve has signaled confidence in a recovery yesterday, when it decided to stretch out the pace of a program intnded to lower mortgage rates and prop up the housing market. Rather than buying $1.45 trillion in mortgage backed securityies and debt by the end of this year, they pushed that deadline back to the end of March. That's the second time since August that the Fed has opted to slow emergency programs designed to encourage spending and boost the economy.

On a personal note, my wife, Debbie, is an interior designer. She went into Pottery Barn yesterday, and they told her that nationwide, Pottery Barn just had its best month (last month) in the past two years! It looks like consumers are feeling more confident as well.

At Coldwell Banker Island Properties, as of the 15th of this month, our company has put 27 properties in escrow. That's about two new escrows per day, the same pace we had in August. September is typically a very slow month here, but it doesn't seem to have slowed down.

Also, another agent just told me yesterday she has a $10 million cash beachfront buyer coming into town, and when she searched for properties to show him, six beachfront properties that she had hoped to show were either in escrow or closed escrow.

On the low-end, Kihei Villages is showing some real strength. There are only 14 Active listings in the complex of 532 units. Typically, if less than 5% of a project is available for sale, that indicates strength in values. There are six units in escrow in the complex right now, and in the past six months, 13 unit sales have closed in the complex. That means we have less than six months' inventory, another strong indicator for future values.

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Wednesday, September 23, 2009

Another Economic Indicator Indicates Growth

The Index of Leading Indicators is up for the fifth month in a row. This is the most recent sign that the recession has ended. The report points to an economy on solid ground early next year, as this indicator is designed to project economic activity in the next three to six months. The Index was up 0.6% in August, following a 0.9% increase in July!

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Friday, September 18, 2009

U.S. Net Worth Up First Time since '07

For the first time in two years, Americans actually got wealthier. Household wealth grew by $2 trillion, or about 4%, this spring, ending the longest stretch of quarterly declines on records dating back to 1952, accourding to the Federal Reserve report on Thursday. Not Worth - Assets such as homes, checking accounts and investments minus debts like mortgages and credit cards, came to $53.1 trillion for the second quarter.

Hallelujah!

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Thursday, September 17, 2009

Production UP, Inflation DOWN

For the second month in a row, the output of the U.S. factories, mines and utilities posted widespread gains. Up 0.8% in August, even without autos and auto parts, the index was up 0.4%. And the future looks bright in this area too, because companies cut their stockpiles by a record amount in the second quarter of this year. Time for catchup.

As they say, what goes up... The reverse is also true, as we all know, in the economy.

It looks like manufacturers are leading the country out of recession.

Meanwhile inflation is very low; the "core" CPI, which excludes food and energy, rose only 0.1% in August, and only 1.4% for the past year. This is the smallest such increase in more than five years.

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Wednesday, September 16, 2009

Retail Sales Up!

The best showing in more than three years in August!

Also,the Dow Industrial Average hit a record yesterday, again.

Good times ahead!

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Saturday, September 12, 2009

More Growth Indicators

U.S. businesses reduced inventories at the wholesale level for a record 11th consecutive month in July. Plus sales rose by the largest amount in more than a year.

In a separate report, global trade is increasing U.S. imports by a record amount in July and boosting foreign demand for American goods for a third straight month.

An first-time unemployment claims for unemployment benefits fell more than expected last week - cause for more optimism.

It seems the positive indicators coming out in the news, if you compare them to the negative indicators, are winning 2:1.

I'm ready!

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Friday, September 11, 2009

Maui Visitor Arrivals Up!

Maui hotels maintained their occupancy rates in July, while visitor arrivals were up. They didn't stay as much at hotels, however: Instead, they stayed with friends and family (up 17.3%), on cruise ships (up 12.6%), and in time shares (up 12.4%). Although that may not directly be good news for the hotels, it is good news for the economy! More visitors means more visitors' dollars coming to Maui!

In a separate report, the Federal Reserve "Beige Book" study showed that 11 of the 12 Federal Reserve regions in the united states idicated economic activity was either "stable", "showed signs of stabilization" or had "firmed". Analysts predict the economy is growing in the current quarter, which ends September 30, at an annual rate of 3 to 4 percent.

Prices are down in Maui Meadows. A foreclosure at the top of Maui Meadows, on Kupulau Drive, listed at 650k, had four offers! One of those offers was my clients' offer for 700k. Our offer was the third best offer on the table!! Looks like there are buyers out there when the property is priced enough below market. Looks like the bottom to me.

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Thursday, September 3, 2009

Economic Recession is OVER

There is so much more evidence, just in the past two days:

1. Factory Orders up 1.3% in July, after a 0.9% increase in June.

2. Productivity of U.S. factories rose 6.6% in the April-June quarter, the largest advance since the summer of 2003.

3. Hawaii state bankruptsy filings increased at their slowest pace in 15 months in August. The state of Hawaii had the second-lowest bankruptcy filings per 1000 in the country, only behind Alaska. Between the start of July 2008 and the end of June 2009, there were 2.07 bankruptcies per 1000 population.

4. Oahu hotel occupancy ranked first among competitive international island destinations through the first half of the year, and fifth in major country and regional destinations around the world.

5. Home sales nationwide rose 12% compared to a year ago.

6. The manufacturing index reported by the Institute for Supply Management showed the highest number for its manufacturing index since June 2007. New customer orders jumped to a level not seen since late 2004!

7. U.S. residential construction spending just had the best showing for home builders in 10 months.

8. The National Association of Realtors said the index of sales contracts signed in July for previously occupied homes rose 3.2%. Coldwell Banker Island Properties just had our best month since 2007, with 66 new escrows opened in the month of August!

9. Wall Street seems to agree with the title of this Blog, as we just had a month-long rally in the stock market.

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