Marginal Efficiency Of Investment(Mei) Revised Feb 2011
4th Qtr Year End 2011 Economic Review Feb 15 [Autosaved] [Autosaved]
1. An Economic Overview
&
Analysis
2011 4th Qtr Economic Review
Economic Summary
Fed Policy
Bus Investment
Other Economic Indicators
Employment Analytics
“Falling Knife -1- Employment vs Skils”
“Falling Knife -2- The Great In-equality of Wages”
Thought Experiment
Market Forecast
Prepared by:
Picks
Gary Crosbie
2. Economic Summary:
Overview:
•In general, economic conditions have shown
sluggish growth through the year in a
downward sloping trading range in just about
every economic category. Job growth has
shown some improvement but not at levels
necessary to yield the kind of economic
growth normally seen 31 months into a
recovery. The most obvious example of this
is reflected in GDP. The peak in GDP since
the inception of this recession was 4% 4th Qtr
2009. The trend has been flat to down (see
chart to right) since than dropping on average GDP increased in
2.3% to an avg of 1.7% for the year 2011. 2011…but still down
from 2009/2010..
•Normally , at the end of a recession, defined by
the Fed as June of 2009 ..the following 5-8 Qtrs
would normally reflect an average of 5-8% GDP
growth . The good news is the current recovery
sees the growth of GDP increasing in 2011, the
bad news is the AVG GDP growth of 1.7% is
problematic on its own merit but more troubling
…decreasing from 2010 ….
3. Economic Summary:
• The current anemic recovery is best
understood when evaluated relative to
previous recessions and is perfectly en-
capsulated in the chart to the right which
compares this recovery to every
recessionary recovery post WW2. The main
message in this graphic re-emphasizes not
just the severity of the down turn but the
persistence of the problem and while there is
a recovery it is anemic in both duration and
magnitude compared to other recoveries
since WW2..
• The second chart is even more revealing
comparing this recovery with the 19 post
WW2 recoveries segmented into three
categories Mildest, median and Harshest…
reflecting this recovery significantly worse Compare the Median of all recoveries to the
than the harshest. current…The slope of the median is Positive the
current slope is negative..
• It is correct to observe some improvement
as we have through Jan of this year. It is just
as important to put that improvement into
context with other recessions and to
conclude the comparative differences are
significant to the point that this could be
appropriately summarized as a jobless and
growth less recovery. The average recovery
would reflect a $4000 higher per capita
GDP and a 5-6% unemployment rate.
4. Economic Summary:
• The ultimate consequence of the law of diminishing returns of a huge trillion dollar (including
interest) fiscal stimulus program and targeted cash subsidy programs that provided some
short term relief but left unresolved budgetary debt, capital flow, taxes and regulatory issues
that yielded risk and uncertainty impeding capital investment and formation which is the key
to improved business growth, Thus average GDP growth for 2011 came in under
expectations of 3-3.5% to aprox 1.7% . For 2012 according to the CBO less than 2% GDP
and unemployment at 8.9% %.
• The increased business risk defined above in concert with high productivity yielded
significant improvements in the balance sheets of business. Cash balances approached 2-
2.5 trillion dollars with The majority of corporate cash utilization currently allocated to M&A ,
stock buy backs and debt refinancing. This just continues to re-enforce balance sheets and
M& A which results in corporate consolidations resulting in fewer jobs and puts more
downward pressure on unemployment.
• Further as will be discussed later, in selective sectors currently but more significantly in the
future there will significant skill gap problems. The majority of the layoffs are skilled labor
who took early retirement. The problem is when expansion does occur and employers are
back in the market place…the skills will not be available to meet the skill gap or those that
are skilled will not be able to re-locate due to housing issues ..e.g. underwater mortgages.
5. Economic Summary:
• New capital formation and investment by business entities is occuring but the
majority occurs in emerging markets(BRIC) where taxes and regulations are
lower and more transparent and thus less of an impediment to capital formation,
business growth and shareholder wealth.
• Further , in addition to lower taxes and less regulation double taxation impedes
business from re-patriating there earnings back from foreign investment
enterprises to the U.S for new investment in capital and labor.
• This is why 40-45% of earnings in large Cap multi-nationals come from
international investments.
• Elimination of the double taxation on foreign earnings could result in approx 1-1.5
trillion dollars of new investment in US capital formation and labor growth(new
jobs)
• So..with microscopic growth of less than 2% and a 8.3 % unemployment rate it is
economic incompetence to continue the double taxation on Mult-nationals .
– You will not realize any new tax revenue because business will continue to keep 1-1.5
trillion dollars worth of potential capital formation and new jobs overseas rather than in
the U.S
– the negative incentive encourages NEW capital formation and growth outside the
US…
6. Economic Summary:
Overview:
• The bottom line is unlike previous recessions that have
V shape recoveries at 6-8% this is likely to be a long
slow slog of 2.- 2.5.%- growth thru 2012 and for some
time.
•Employment growth while seeing some minor
improvement is sluggish at best with an average of 137K
per month over the 2011 period. While Dec employment
came in at 200K and Jan at 243k the employment rate
needs to average 250-300k per month to impact the
unemployment rate of 8.3 -8.5% to levels of 5.5- 6.5%
63.5%..At this
normal for a recovery this “Long in the Tooth”.
participation
•The Dec number is artificially inflated due to the fact Rate the real
that more than 315000 individuals dropped out of the unemployment
rate is 16-20%
labor force totally. The Bureau of labor and statistics
does not measure these people so the real
Unemployment rate is really 16-20%.Gallop currently
calculated the rate at 19.2%
•. This is due to a low participation rate in the labor
market. These are people who have run out of
unemployment insurance or who just given up. The
Bureau of Labor and Statistics DOESNOT count these
individuals and they thus are lost in the smoke of the
total unemployed.
7. Economic Summary:
• Market Volume has been light for a prolonged period of time indicating that
the retail investor has been sitting on the side line for a lot of the same
reasons business is not spending. Uncertainty, risk aversion and fear has
driven any significant in flows of investment away from equities to treasuries
, commodities and the bond market. 2008 is still strong memory to the
average retail trader. The result is the market is more volatile driven by the
professional trader , & computer generated trading strategies
• In total the economy is at stall speed and significant improvement is not
expected untill things change politically. Right now existing policies are not
conducive to growth due to uncertainty on taxes, regulations , healthcare
and Demand. Personal Consumption Expenditures (PCE) was -.1% in Dec
which was a huge disappointment given holiday expectations.
• For the foreseeable future businesses are keeping inventories and
employment tight due to uncertainty….The uncertainty of the Euopean fiscal
crisis, Policy and regulation out of Washington to include healthcare, the
bond market , demand and supply issues.
8. Economic Summary:
• So the question is Where are the “Animal Spirits ” that fuel the economic
engine? Entrapanuear new starts, IPO’s and small business
growth….The answer is….due to the above there is a large amount of
risk aversion and the Risk OFF business strategy is in place.
• Further QE-2 has ended which means the money stimulus has ended
but the Fed has substituted QE2 for Operation Twist to improve the
Risk on trade for investors and the banking community . More about that
under Fed.
• Corp earnings were up in the 4th Qtr but not as much as in 2010. Never
the less the S&P valuations came in at around 12-13 times earnings
(Versus an average of 15-17 times ) making equities in any analysis the
investment of choice vs cash or fixed income.
• Thus markets are undervalued for 2012 and in addition with taxes due
to rise significantly in 2013 will likely act as a positive stimulus for higher
valuations at least through the first 6 months of the year. Further fear of
higher taxes in 2013 will cause some investors to move Investment
decisions forward to 2012.
9. Overview:
Economic Summary:
• The bond market is projecting sluggish economic 10 Year Bond Rate
growth. 4 th Qtr GDP was 2.8 % but the avg GDP
growth for the year was 1.7%. The CBO is projecting Effect on the yield
curve of QE1,QE2,
growth for 2012 in the 2-2.5% range significantly Operation Twist
below what is necessary to grow employment.
• The objective of Fed Monetary Stimulus …QE1,
QE2 and Current “Operation Twist” was three fold;
1. Improve Large Cap Investment:Put downward
pressure on the 10 year (see chart)through
more and more liquitity which provide a more
favorable environment for both equity & corp 30 Year Bond Rate
bond investment.
Effect of Operation
2. Improve Small Business Hurdle points for new Twist has flattened the
growth investments; Lower yield curve rates term structure of
provide lower cost of capital for new business interest rates yield
investment: curve to historical
levels between the 10
3. Housing: Support a faltering housing market and 30 year bond to
and thus keep mortgage interest rates low . 100 basis points.
• Results: Equity markets have responded with high
volitility ..up 5-6% first half ..down 7-8% second half..
• Small Business demand for new capital is still
lacking given all the uncertainty and while mortgage
rates are low-(3.5-4%) housing starts and prices are
still decreasing and threaten a housing double dip.
10. Economic Summary:
• Euro Contagion: Fear of Debt and deficit problems in Europe is
enhanced by the tendency of the EU to continually wait till the zero hour
before solutions are implemented. The problem is the EU is like the FED in
that it can provide the liquity…which it has …some 500 billion
euros(although the requirement is for close to 2 trillion Euros) to provide the
liquitity in addition to cutting Interest rates(sound vaguely familiar).
• However it has no authority over members to manage sovereign fiscal
issues(budgets, deficits) or dictate to banks to buy country sovereign debt to
recapitalize the health of countries like Greece, Spain, Italy , etc. In other
words to get the Toxic assets OFF the books.
• To accomplish this requires sacrifices by Germany and significant
haircuts(40-60%) by investors. It will eventually happen..despite the pain
because the fiscal viability of Europe is at stake. Bottom line….Despite the
negatives above…
• The combination of all this does not yield a great deal of optimism on the
small business new and growth front for 2012.
• Bottom line…… it is the “Fear Factor” rather than the actual economic
impact to the US that will drive impacts to the markets and general
economics.
11. Economic Summary:
Overview:
• The equity markets were down -2.8% DJ Total Stock Mrk
over the 4th QTR 2010.
• 1st and 2nd Qtr were up nicely but I Year -2.8%
Growth
matches history which basically
reflects a sell in May and go away
philosophy.
• Year to year results have been
trending down with uncharacteristic
volatility.
• This high volatility is driven by the end
of QE-2 , the uncertainty around the
impact of “Operation Twist” and the
uncertainty around the Euro Fiscal
crisis in Greece, Portugal, Spain and
Italy.
12. Economic Summary:
• Additional risk has been added due to a greater than
100% Debt/GDP Ratio due to low growth and a debt that
has increased by 5 trillion dollars over 3.5 years. As a CBOE Volitility
bench mark Bush spent 5 trillion dollars over 8 years. 1-Volitility
Market
down…..less
perceived risk positive
• Note this risk is reflected in the volitility chart to right. influence on market
thru June/July-
– from Dec to June. CBOE goes down indicating more
investors perceive less risk and thus are
buying(Buying calls) into growth early in the year to
June(see 1 in chart ).
– After June , the uncertainty discussed above finds
investors perceiving more risk thus selling and
shorting the market (buying PUTS)reflecting lower 2-Volitility up…..more
Market
market thru NOV …Sentiment changed thru the end perceived risk
NEGATIVE influence
of the year but the market could not make it up and on market thru Nov.
Positive from Nov to
ended up as a year end loss of -2.8% Dec yielding positive
market results.
• However, the effect of QE-2 and Operation Twist
resulting in 10 year note rates at around or below 2% still
make equities the investment alternative of choice with a
2. -3% dividend floor and a 4-5% growth risk premium.
• Some additional Comments:
13. Fed Policy :
Fed Policy :
• Monetary policy..”The Back Drop”
– 1ST and 2nd Qtr 2011…In response to a faltering economy and an economic recovery that
to date is going in the wrong direction the Fed has implemented a new phase of
quantitative easing (QE2). This translates into 600 billion dollars of monetary infusion into
the monetary base thru purchase of treasuries and Mortgage backed securities. The
objective , as mentioned in the summary was to put downward pressure on the 10 year
bond rate to :
• Help a “double dip:” prone housing market with lower mortgage rates,
• put downward pressure on the dollar relative to other currencies to improve exports
and infuse some inflation.
• Keep the cost of available capital low to Encourage borrowing and improve
incentives for more financial leverage and thus more velocity of money.
• Keep the comparatives between the bond market and equities favorable to equities
and corp Bonds by lowering the risk premium in favor of incentives to overweight
stocks and underweight fixed income.
– QE-2 ..other than providing additional liquity did not result in a significant infusion of risk
cap into the economy. As stated last quarter this continued pump priming is sort of the
last bullet in the chamber strategy due to the failure of questionable fiscal policy initiated
from the current administration over the past two years.
14. Fed Policy :
• Monetary policy- “ The Future Prospective”
• The real problem is still the velocity of money which comes from lending,
borrowing and investment which despite a minor up tick in the first QTR of
50 billion dollars , is all but invisible. Banks have much stiffer regulatory and
capital requirements not with standing the number of foreclosures, short
sales and suspect commercial loans sitting on there balance sheets.
• Bottom line ..there is no incentive for banks to make loan. With a 1.9-3.%
fed funds rate for 10-30 year bonds, what’s the incentive to loan when banks
can “carry trade” the yield curve….borrow at zero and than turnover the
money and buy 5,7, 10 years treasuries and earn 150 to 300 basis points
with ZERO risk……Even bankers can make money doing that.
• However……Bottom line: QE1 and QE 2 have not provided the needed
result so:
– As mentioned The Fed has implemented “Operation Twist” (QE-3) to flatten the
yield curve to dis-incentivize the carry trade……BUT
– There is no particular incentive on the demand side(demand for loanable funds
by business) because of regulations, taxes and product demand
– The supply side (loan availability ) by banks due to more restrictive capital
requirements as a result of all the toxic assets on the balance sheet.
15. Fed Policy :
• Monetary policy- “ The Future Prospective”(con)
– So when QE-2 expired and the economy continued to flounder The Fed
brought on operation Twist.
– As mentioned previously , the objective to Operation Twist was to
flatten the yield curve by selling 30 year notes and buying mortgage
securities.
– The purpose here was to tighten the spread between the 2 year and
lower maturity treasuries and the 30 year to minimize the carry trade
which banks were using to fatten there balance sheets at zero risk
rather than make loans. Further flatting the yield curve would put
additional downward pressure on 30 year mortgage rates thus a help to
the sinking housing market . Finally the flatten yield curve improves the
risk premium to invest in capital ..both stock and new venture rather
than fixed investments.
– However….perspective is important here… Outside of improvement in
global demand through higher exports, this addresses primarily the
SUPPLY side of the equation . This isn’t totally a supply issue …the fed
has 2 trillion dollars on its balance sheet(m2).
16. Fed Policy :
• Monetary policy- The Impact Dollar Index
• So ..we will see if Operation Twist works. As Fed increases
money supply
Right now all the Fed policy has done is Dollar is devalued
encourage the incest of the carry trade AND
and devalue the dollar There is no
significant increase in the velocity of
money which is the key to growth. Now ,
it does impact business investment Policy :
Fed
prospectives to be discussed below.
• Finally, The extended low FED funds rate
exacerbated by high level of monetary
stimulus has had an impact of inflation. Inflation
The core CPI rose 2.2 % in 2011 slightly 3%
higher than the FEDs hurdle rate of 2%
with the total CPI including food and Inflation
expectations
energy 3.2% for 2011 portending increase .
inflation. Leading indicators such as
commodity prices are up and the dollar
is down indicating inflation is on the
17. Business Investment:
Investment.
Velocity of Money.
– The velocity of capital measures the degree to
which increased financial leverage increases the
flow of money from those who demand it Fed increases money
(business) to those who supply it (banks as supply but Demand for
suppliers and intermediation vehicles, private money thru loanable
equity). funds as measured
thru Velocity of money
– As discussed above (see 1 above) the problem is not there .
is on both sides of demand and supply side of
loanable funds.
– On the demand side businesses still face
“political and financial uncertainty”. Despite the
Nov elections there is still a “hangover” from Fin
Reg and the healthcare bill that have a
significant potential impact on an uncertain
future revenue base. So despite the lower 10
year which is a proxy cost of capital for business
new investment capital budgeting , you should
see significant more capital investment in new
projects that now show much better cash flow
prove ins. But again…once you get past the
cash flow models…you still have to deal with the
uncertainty of the political and business
environment. And right now the uncertainty
sentiment is high.
18. Business Investment:
– On The Supply Side.. For those who
are optimistic about revenue growth
and that number is growing, there
balance sheets still don’t meet new
bank criteria which restricts loans to
only the best of customers. As stated The Demand for
above this is a result of the much loanable Funds
higher capital requirements that are has decreased
imposed on regional and community significantly .
banks that had nothing to do with the
financial crisis but have had a stifling
effect on small business growth and
thus employment.
– Additionally, as long as the toxic
assets are still on bank balance
sheets , restrictions on capital
availability will be high.
– Bottom line…High money velocity
flows ..translates in a geometric
fashion to capital creation ,
investment, employment, GDP and
thus growth.
19. Business Investment:
• Quantitative Easing(QE2) and Future Stimulus(Operation
Twist)
– We discussed Fed policy in 1 above. One advantage to
additional quantitative easing is the impact on lowering the
yield curve ..thus the cost of borrowing goes down. Lower
borrowing costs means a lower cost of capital which means a
lot of potential business growth projects that wouldn’t look
profitable now have higher positive Net Present Value prove
in’s due to the lower cost of capital. So what the Fed is
attempting to due here is trying to improve the sentiment for
more investment through low borrowing costs and indirectly
lower cost of capital for prospective investment.
– Now that QE-2 has ended and the economic trends are down,
the Fed is discussing the potential for future stimulus
envolving more purchases of Mortgage backed bonds .
20. Business Investment:
• More Quantitative Easing(”Opeartion Twist”)
– There is a financial paradox here: As discussed previously the Fed (thru QE2 ) wants to put
downward pressure on the 10 year bond rate to keep mortgage rates down and provide
incentives for investors to invest in equity alternatives rather than fixed income. That’s fine…
putting the inflation issue aside for a moment….the problem is the lower 10 year does not
provide a sufficient risk premium for banks to lend…that is to say, there is no disincentive to
continue to “carry trade “ the yield curve..
– Further there has to be more Demand for Money by small business either through expansions,
IPO’s or new start ups . As stated previously this growth has been dampened by higher cost of
capital through govt regulations and higher taxes.
– Given small business contributes 45-50% of GDP and 65-75% of new employment this is
obviously the critical success factor to future growth
– With low demand , low growth and currency devaluation, “the falling Knife” is inflation ….and
worse stagflation..where inflation is higher than GDP growth.
– The problem is …the “falling knife” has 2 edges…The other edge is slow to non-existent and a
possible double dip . With the unemployment rate at 8.3 % and GDP expected to be 1.8- 2 %
for 2012 that becomes a potential issue.
– Since 1948 whenever there has been a rolling 12 month GDP growth rate below 2% another
recession has followed within 1 -2 QTRS. The current 12 month moving average is 2.3%.
– That obviously is the worst possible alternative and why the FED is has implemented
Operation Twist.
21. Business Investment.
Capital Investment:
• After 2008 ,With no demand
and helped by historically low
interest rates businesses
rebuilt there balance sheets
through turnover and
refinancing there embedded .6%
debt to cut there carrying
costs.
• This in conjunction with
massive layoffs of human Industrial
capital resulted in 1.7-2 Production turned
trillion dollars of cash sitting up in Jan but long
on business balance sheets. term trend is still
That cash here to fore has flat to down.
not been invested due to low
demand and as stated
previously the sentiment of
“Uncertainty” as it applies to
taxes, fin regulation, Heath
care , Cap and Tax
• Small business in addition to
22. Business Investment.
Capital Investment (con)
– Technology: Utilized investment to substitute
capital for labor (will be discussed in the
unemployment section) to improve margins .
– Moves and Acquisitions (M&A)- To put the large
amounts of cash to work , large businesses have
been acquiring small and Mid cap companies that
are undervalued or with troubled balance sheets
to compliment there business objectives. The
problem here is the acquisitions which generally
are complimentary business functions usually
result in consolidation…..resulting in less total
employment.
– Manufacturing- The PMI(purchasing Managers
Index) for Dec was 55.3% indicating expansion.
By itself that is not a bad number . The problem it
reflects a significant change in trend from 4th QTR
2010 of above 60%.See chart.
23. Other Economic Indicators:
Retail Sales:
Retail sales were flat..0 % in
Dec.from the previous month a big
disappointment give all the
discounts given by retailers to
stimulate sales.
Up…6-6.2 % over Dec 2010
0 % Dec over Nov.
As reflected in the charts the 6.2 % annual
current numbers are only marginally
above 2008/9 levels in Retail
spending averaging aprox 3.5-
3.7%/yr
24. Other Economic Indicators:
Consumer Spending:
• Personal consumption expenditures for Dec
decreased $2 billion in Dec or - .1% .
• The key is the downward trend from 4th QTR 2010.
• Consumer Confidence was 61.1.5 % up from the
4th quarter 2010 of 60.6 , overall reflecting a -.1% in Dec
trading range of 55-61% with no significant
consistent breakout.
• The key to these two series in 2012 is a return to
more volitility that we saw in 2008/2009 until there
is more certainty about political realities which will
have significant impact on Fiscal and monetary
policy.
• This combination of these two indicators suggest
an average that is flat around 55% but more
uncertain about the future. 61.1% Jan
25. Other Economic Indicators:
•
GDP:
– We need a 3 -3.5% growth rate to just stay
even in unemployment(200-250k jobs a month)
and 6-8%(250-350 k jobs per month) to make
any significant gains at all…(Real gains not
artificial gains due to low participation rates)
– The GDP growth has been down from 3.7% in
the 1st qtr , 2.9 % in the 4th qtr 2010 to 1.9% 1st
QTR 2011 to 2.8% 4th QTR 2011. Growth was 2.8% 4th QTR,
progressive for 2011 but the trend growth (see 1.7% 2011 avg
chart) is still down.
– Thus, for all the reason’s stated above there
is not sufficient growth , consumption and
investment necessary to dramatically improve
the growth and therefore the employment
picture for a number of years.
26. Other Economic Indicators:
• Unemployment
Rate:
– Non farm payrolls
increased 243K in Jan
above expectations
of 200-220K. This 8.3%
resulted in a decrease In Jan
in the unemployment
rate to 8.3%. This
reflects a continued
increase in monthly
employment since
May..reflecting a
growth to rates
achieved earlier in the
year Jan thru April. 8.3%
In Jan
– The point is while the
243K is a solid
number looking at
the chart we have had Only 7 months since
only 7 months since
the inception of the
recession were = to
the beginning of the or > than
recession in 2008
that have been 200K
or larger. We need
27. Other Economic Indicators:
• Unemployment Rate (con)
– This is why it is necessary to have months of Note the correlation
250-300K employment because the real
unemployment rate is close to 17-20% given
that almost 2.5-3 million people have dropped
out of the labor market completely.
– Note the correlation in the chart ..As the
participation rate goes down the unemployment
rate decreases…because people who drop out
of the labor force are not counted by the Labor
Department
– Note….If the economics improve , that rate of
8.3% is likely to increase as those workers who
dropped out of the work force make there way
back in and are counted by the Labor Dept
when the economy improves.
– The unemployment issue has more
fundamental complexities than in previous
recessions and is not being addressed. I will
discuss this in the technology analytics section.
28. Other Economic Indicators:
• Housing Market:
– Interest rates have gone down .25-50 basis points during
2011 with the full impact of QE2 and Operation Twist At
less than 3.5-4% for some 30 year loans the cost of home
ownership has never been lower. However now that the
Fed has done about all it can due thru monetary policy
mortgage rates have somewhat stabilized.
– Absent the fear trade due to Eurpopean contagion ,
Operation Twist will likely maintain a flattened yield curve
over the term structure of interest rates. Further the Fed has
stated that it intends to maintain low interest rates (thru ,25
fed funds rate) thru 2014., Most of the positive impact of
lower rates has been realized . Most who could refinance
already did at the end of 2009.
– However, due to increased regulations and capitalization
requirements very few individuals except those with the very
best credit and income history qualify.
– The problem continues to be further downward pressure on
Single and
housing prices. Foreclosures continue to increase with 1/3 to
40% of all mortgages underwater. Even if home owners Multiple family
wanted to hold on they either don’t qualify for refinancing or construction
can’t meet or want to meet the new financing requirements Flat to marginal
(who wants to put more money down on a home that is increase.
underwater) .of 20% down.
– The government has come up with another program that
would require banks to refinance underwater loans for
customers with current payment records through principal
reduction. The details are not clear at this time except to
say the banks and the investor will have to assume the cost
– Bottom line single family residential construction is still flat to
down in the 400-500 k range…Multiple unit construction is in
the 700-800k range.
29. Other Economic Indicators:
• Housing Market : (con)
– Ex is ting ho m e s a le s a re s lo w
but im p ro v ing . Curre ntly the re
is a n 6 -7 m o nth inve nto ry o f
s tre s s e d p ro p e rtie s d o wn fro m
9 -1 1 m o nth s up p ly in the firs t
ha lf o f 2 0 1 1 with 1 1 %
uno c c up ie d . Ex is ting Ho m e
s a le s we re 4. 6 m illio n units Existing Home
re fle c ting a 5 % inc re a s e in sales reached
De c e m be r a nd 3 . 6 % a bo ve 4.6 million units
the De c e m be r 2 0 1 0 ra te . A g v in Dec 2012 with
m e d ia n p ric e s fe ll 5 % in 2 0 1 1 a 6-7 month
o ve r 2 0 1 0 . supply .
– A d itio na lly … I 2 0 1 1 thru 2 0 1 3
d n
a lo t o f 5 a nd 7 y e a r A ’sRM
tha t we re ta ke n o ut in 2 0 0 6 will
c o m e d ue fo r re fina nc e . A a in
g
m a ny o f the s e ho m e o wne rs
will no t be a ble to m e e t the
ne w fina nc ing re q uire m e nts
whic h m e a n m o re d o wnwa rd
p re s s ure o n ho us ing p ric e s
thro ug h d e fa ults , fo re c lo s ure
a nd s ho rt s a le s .
– This tra ns la te s into a no the r 1 0 -
1 5 % d e c re a s e in ho us ing
p ric e s a s inv e nto rie s o f
30. Other Economic Indicators:
• Housing Market: (con)
• It is hard to see how this economy can make much
progress until the housing market turns around. Here in
lies some of the justification for why most forecasts for
growth in 2011 and in 2012 are predicting around 2.5
- 3.0%.
• That is on the light side of trend line growth(3-3.5%)…
but to improve the employment picture the economy
needs to grow at least 4-6% a year generating 250-
350 k jobs a month in the initial stages of a recovery to
make any serious in roads on employment , growth and
investment in new capital formation.
31. Employment Analytics:
Employment Analytics:
• Structural Unemployment:
– The current status in unemployment represents a different taxonomy to the
unemployment picture than what we have seen historically ln previous
recessions. A lot of this can be attributed to the use of technology to maintain
or improve margins in a decreasing revenue environment.
– In the 90’s , as an out growth of the technology boom there was a movement
to improve productivity through the use of technology . It was generally
referred to as Process Re-Engineering. The darling of MBA programs and
management consultants alike.
– The objective was to save 20-35% through substitution of capital for labor
through new hardware infrastructure and software applications…at least until
management looked at the impact on the organization and power politics…
than the objective quickly dropped to.. ..hope to get 5-10% with “Low Hanging
Fruit”.
– Fast forward to 2008-2009…A recession resulting in massive reductions in
the labor force…..All of a sudden all those dusty Power point preso’s
generated on white boards in secluded corner conference rooms of Corp
head quarters on process re-engineering were pulled from old file cabinets
and re-invigorated.
32. Employment Analytics:
• Structural Unemployment:
– Result…Capital investment in technology increases to substitute for the labor
component yielding high productivity and profitability.
– The increased technology utilization has resulted in big margins and
profiabiity(1.5 – 2 trillion dollars) on Corp balance sheets tempering the
demand for labor .
– Small business …existing and new starts could help bridge the gap but for all
the reasons stated above, that is not forthcoming.
– This structural unemployment issue is complicated , important and not even
readily identified and discussed as a problem much less solutions offered.
– This unemployment situation is a lot more complicated than just opening
another manufacturing plant or stimulating shovel ready construction jobs.
– A significant component to solving the unemployment problem is going to have
to involve the solution to this problem
33. Employment Analytics:
• Structural Unemployment: “The Falling Knife”
1. Cause: As indicated in large businesses the substitution of
capital for labor in 2007-2008 made maximium use of
technology to increase productivity and efficiency through labor
reductions.
2. Effect: Everyone talks about the construction trades as the
driver be hind unemployment. But the big changes in major
corporations where a lot of older(>50) very skilled individuals
either retired early, forced retirement or were just let go. The
strategy was that when it was time to re-hire you could move
down the age scales and pay less for similar skill sets.The
problem not anticpated by the business community was the
individuals currently educated today do not have the skill sets
or are not prepared with the academic skill sets to meet
current job requirements.,
34. Employment Analytics:
Employment Analytics:
3 –Long Term Unemployed: It has been long recognized that
the longer
one
remains
unemploy
ed the rate
of skill
degradatio
n
increases
at an
increasing
rate.
4- Skill Set GAPS; Set by the trend established in 2007/2008
with all the
implement
ation of
new
35. Employment Analytics:
• 5- “The Falling Knife- Part-1 “ :
Employment vs. Skills
- Retired Skill Sets: So structural unemployment is
where you have on one end of the age spectrum a
lot of older technology savy people but who have
Unemployment
skills but been out of the workforce to long(>27 for those who
weeks). The result of process re-engineering have college
layoffs/early retirement packages referred to earlier. degrees or
higher is less
than 5%..
- Educated Skills vs Demand; On the other end an
“entitlement” oriented college graduate who doesn’t
have the analytical skill sets or critical thinking skills
to make a contribution to the business mission from
day one. This is a technology generated global
environment demanding skill sets that optimize the
achievement of those business goals.
- Minimum Education and skills: 25-28% of the work
force has a college or advanced degree. That leaves
over 75% of the workforce competing for a
diminishing demand for labor and that labor
demanded requires specialized skill sets.
Thus….This puts significant pressure on overall
employment.
36. Employment Analytics:
• 6- “The Falling Knife- Part-2” : The
Great In-Equality of Wage Gains.
• A lot has been written concerning the
stagnation of wages for the low & middle class Margins in real
hourly wages
over the past 30 years. The implication is that increase from
benefits have been inappropriately distributed insignificant to
significant due
to the “quote un quote” Rich while the middle to education
class and poor have suffered
disproportionately. A study by the Fed Reserve
addresses this with an explanation that
supports the comments made in the previous
sections and illustrated by the following
graphic.
• The blue arrow reflects the gap between those
with Degrees and non-degrees . Note back in
1982 the differences are virtually insignificant.
• There is also some significance in the rate of
hourly wage growth within the educated or
degreed segments. This..as stipulated in the
previous section is due to the growth in
demand for specialized skills in an analytically
Technology driven economy rather than to
simply have “Just a Degree”
37. Employment Analytics:
• So…this is not a case of the rich vs the “poor” as some would make it…
but rather a case of those who made the choice to not just get educated
but educated in the right skill sets.
• Further……..A final and probably the most significant point is class
Identity…..that is…… belonging to any class is transient for most. A Fed
Reserve study Shows that 40-50% of those in the lowest income class 5
years later have moved up the ladder to the middle class. Equivelently
those in the middle class move to the upper class while some fall back
to lower class. In other words the “Ladder of success” is fluid in BOTH
directions… movjng constantly between..up and down… the wage and
class ladder. So to talk about wage inequality as a static identifier of
individuals in one class or another is to make a false point.
• Class mobility is characteristic of a Capitalistic opportunity based system
and the acquisition of education and the appropriate skill sets discussed
previously simply allow a higher entry point in the wage and class scale
and maximize the potential for acceleration up the ladder of success.
38. Employment Analytics
Employment Analytics:
• A “Thought Experiment” on how to stop the “Falling Knife” of
structural unemployment.
– To help incentivize job growth and Improve the education Gap
….allow business to depreciate Labor for some period of time as a
test case.
• A “Thought Experiment:” Accelerated Labor Depreciation
Method(ALDM)
• The concept would be to allow business to depreciate labor as in
capital to include education costs.
• This would provide improved cash flow to small and large
businesses alike BUT in particular allow business cases for
entrapaneur ‘s to show positive hurdle points due to lower cost of
capital..
39. Employment Analytics:
Conclusion: You have a huge supply ..75-80% of the work force with limited
skills trying to compete in an employment environment looking for very
specialized skills …15-25% ….and willing to pay a premium for them.
Conversely for the other 75% there is little demand putting significant
downward pressure on non-technical wage rates…
If this is difficult to fathom…..Just think of two words….Professional Sports
7- Solution: This is a very complicated issue and requires a much
different view of educational needs overlaid on business requirements.
Clearly there are gaps that will not be provided in the short run. This
will most likely mean more labor investment in countries where more
emphasis is placed on critical thinking skills and discipline until there
is a better match between graduate capabilities and business needs.
40. Employment Analytics:
Employment Analytics:
• So based on defined Labor groups
• Analytical Skills (Engineers, Math, Science, Computer science)- 2
years
• Business analytical Skills-(Accounting, economics/econometrics)- 3
years
• Liberal Arts-(history, Language etc)- 10 years
• Technical Training- Mechanics, Manufacturing – 3 years
• Thus like capital costs Depreciate labor over a designated timeline.
• The timelines for depreciation above are “arbitrary talking points”
• The timelines are based on the value of the skill set based on demand and
supply in the market place.
• The emphasis here should be “simplicty”….set by The Federal accounting
Standards board(FASB)..(I know that’s an inherent contradiction…)
41. Market Forecast:
• Given the above and the S& P at 1277 at the
end of the 2011…(it was 1319 at end of QTR 1)
…. The S&P markets are still 14-15%% below
2008 highs(1550) before the crash.
• GDP Growth in the 2-2.5 % range in the next Double Exponential Smoothing
six months is meager but with Positive Corp
earnings price earnings multiples are still Optimistic.
around 13. This is undervalued relative to a
trend of 15-18 multiples.
• Fed Policy stipulated to:
– Keep interest rates (fed funds = .25) low thru
2014
– A floor of 2.5-3.0% dividend with Mid and Large
cap stocks ,
• Equities look favorable relative to fixed income Pessimistic
alternatives. Thus expectations for the range
of outcomes for the next 6 months of the year
are:
– 1- Optimistic… S&P a trading range of
aprox 6% -8% for the next 6 months….
………………….….1350 to 1380 .
– 2- Most Likely… S&P in a trading range
aprox …4- 6% …. for the next 6 months
……………………..1330 to 1350
– 3- Pessimistic….S&P moves flat to up
aprox….2 to 4% … for the next 6 months
……………….........1310 to 1330.
42. Market Forecast:
• After this next 3-6 months …unless growth in GDP and Jobs turn
around significantly (250-300K per month), there is a implementable
solution to the US and European fiscal crisis and a calmer middle
east 2012 market growth will fall in the range of 2-3 %.
• Alternatively, a major change in November would result in a 4th Qtr
10-15 % market increase.
• Picks:
– Large-Cap
• Yackman-YAFFX
• Monetta Young Investors-MYIFX
– Mid-Cap
• Brown Capital Mgt-BCMSX
• Meridian Midcap growth- MERDX
• Rydex S&P Midcap-RFG
– Small- Cap
• Brown Capital Mgt-
• Ridgefield Small Capo-SCETX
43. Market Forecast:
• Commodities/Technology (con)
– Industrials –Power share-PRN
– Energy-PXI
– Pimco Global-DRGTX
– First Hand e-commerce-TEFQX
– Gold-GLD
• International
– I Shares- Latin America-ILF
– Lazzard Emerging Markets
• Fixed Income:
– Fidelity Strategic Income-FSICX
– Artio Global High Yield-BJHX
– Metro West High Yield-MWHX