Professional Documents
Culture Documents
December 2009
(1209-11946)
The Case for Pessimism
• Debt levels for both private and public sector remain stratospheric with public
sector leveraging and private sector just beginning to deleverage
• Big move by stocks in short period suggests corrective phase
• Some asset classes over-heating…could trigger Fed
• Commercial real estate losses
• Budget deficit (federal, state and local) outlook horrendous
• Rising energy prices
• Some anti-growth government initiatives (taxes, protectionism)
• Unemployment rate remains elevated
• Weak U.S. dollar
2
(1209-11946)
The Case for Optimism
3
(1209-11946)
U.S. Economy in a V-Shaped Rebound
But Risks Remain For a “W” or “Square Root” Shaped Recovery
15%
ISI U.S. Economy Diffusion Index
10%
5%
0%
-5%
-10%
-15%
-20%
-25%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
4 As of 11/09. 13-week average. Diffusion Index represents economic strength minus weakness. Source: ISI Group.
(1209-11946)
International Economies Having V-Shaped Rebounds, Too
China Leading Emerging Economies’ Improvement
10%
Developed Economies
0%
-5%
-10%
-15%
-20%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
20%
Emerging Economies
ISI Emerging Economies
10%
Diffusion Index
0%
-10%
-20%
-30%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
5 As of 11/09. 13-week average. Diffusion Index represents economic strength minus weakness. Source: ISI Group.
(1209-11946)
Public Sector Takes Borrowing Lead
While Fed Picks Up Foreigners’ Lending Slack
Private Sector Public Sector
2,000
Borrowing
1,500
1,000
500
-500
1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008
Foreign Federal Reserve
1,250
Total Lending ($, billions)
1,000 Lending
750
500
250
-250
-500
1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008
6 As of 2Q09. Four-quarter moving average applied to data. Source: FactSet, Federal Reserve, MacroMavens.
(1209-11946)
Dollar Weakness Spurs Risk-Taking…
…In Paper Transactions Over Real Economy
95
U.S. Dollar Index
90 2
85
80
1
75 3
70
Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09
1-2 represents 12/17/08-3/9/09 performance. 2-3 represents 3/9/09-12/1/09 performance. Emerging markets based on
7 Morgan Stanley Capital International Emerging Markets Index. CRB (Commodity Research Bureau) based on
Reuters/Jefferies-CRB Index. Junk bonds based on Barclays Capital U.S. Corporate High Yield index.
Source: Barclays Capital, FactSet, New York Board of Trade (NYBOT). (1209-11946)
Policy Has Been Exceptionally Stimulative
No Where to Go but Down?
& Exchange Rate Policy Index
50
NDR Real Monetary, Fiscal
40
NDR Policy Index
30
20
10
0
1/31/1974-10/31/2009
-10
12-Month Dow Jones
-20 Change in Annualized
1974 1979 1984 1989 1994 1999 2004 2009
Policy Index Gain
12-Month Change in Policy Index
40
Policy Easing = Bullish > 8.8 14.4%
30
20
-9.4 – 8.8 8.3%
10 < -9.4 0.4%
0
-10
-20
-30
Policy Tightening = Bearish
-40
1974 1979 1984 1989 1994 1999 2004 2009
As of 10/31/09. Real Monetary, Fiscal & Exchange Rate Policy Index is: Real M2 Money Supply (year-to-year
8 change) plus Real Federal Expenditures (12m total, year-to-year change) less Real Federal Receipts (12m total,
year-to-year change) less Real Broad Index of the Foreign Exchange Value of the Dollar (year-to-year change).
Source: Ned Davis Research, Inc. (NDR). (1209-11946)
Leading Indicators Up Seven Consecutive Months
Signaling Stronger GDP Growth on Horizon
15
Leading Economic Index
10
5
(y/y % chg)
-5
-10
-15
1960 1967 1974 1981 1988 1995 2002 2009
Strong/Stable Still Weak But Improving
- vendor performance - average workweek
- stocks - unemployment claims
- money supply - new orders – consumer
- interest rate spread - new orders – capital goods
- consumer expectations - building permits
As of 10/09. Green-shaded areas indicate periods of recession. Current recession based on Sonders’ assumption
9 of June 2009 end date. See last slide for definition of recession. Source: The Conference Board, FactSet, National
Bureau of Economic Research (NBER). (1209-11946)
Initial Unemployment Claims Down Meaningfully
Historically, All Recessions Were Over at This Point
700
Initial Unemployment Claims
600 -80K
-70K
(4-week average)
-14K
500 0 -162K
-36K
-19K
400
300
200
100
1967 1974 1981 1988 1995 2002 2009
As of 11/20/09. Green-shaded areas indicate periods of recession. Current recession based on Sonders’
10 assumption of June 2009 end date. See last slide for definition of recession. Source: Department of Labor,
FactSet, National Bureau of Economic Research (NBER). (1209-11946)
Coincident Indicators Up Four Consecutive Months
Biggest Jump From Industrial Production
8
Coincident Economic Index
4
(y/y % change)
-2
-4
-6
-8
1960 1967 1974 1981 1988 1995 2002 2009
As of 9/09. Green-shaded areas indicate periods of recession. Current recession based on Sonders’ assumption
11 of June 2009 end date. See last slide for definition of recession. Source: The Conference Board,
FactSet, National Bureau of Economic Research (NBER). (1209-11946)
Payrolls Follow GDP
Will This Be Another “Jobless” Recovery?
10
Y/Y % change
-5
-10
1948 1958 1968 1978 1988 1998 2008
Nonfarm payroll as of 10/09. GDP as of 3Q09. Green-shaded areas indicate periods of recession. Current
12 recession based on Sonders’ assumption of June 2009 end date. See last slide for definition of recession. Source:
Bureau of Economic Analysis, Bureau of Labor Statistics, FactSet, National Bureau of Economic Research (NBER). (1209-11946)
Renewed Profit Strength
Should Lead to Payroll Gains
20
10
-10
-20
-30
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
(3-month annualized return)
2
Nonfarm Payroll
-2
-4
-6
-8
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
13 Corporate profits (with inventory valuation and capital consumption adjustments) as of 3Q09. Nonfarm
payroll as of 10/09. Source: Bureau of Economic Analysis, Department of Labor, FactSet.
(1209-11946)
Lagging Indicators Remain Weak
As Per Label, Turns Tend to Come During Recovery
10
Lagging Economic Index
8
6
4
2
0
-2
-4
-6
-8
1960 1967 1974 1981 1988 1995 2002 2009
12%
10%
Unemployment Rate
8%
6%
4%
2%
1948 1958 1968 1978 1988 1998 2008
6-month average lag between recession end and unemployment rate peak
As of 10/09. Green-shaded areas indicate periods of recession. Current recession based on Sonders’ assumption of
15 June 2009 end date. Red dots indicate unemployment rate at beginning of recessions and blue dots indicate
unemployment rate at end of recessions. See last slide for definition of recession.
Source: Bureau of Labor Statistics, FactSet, National Bureau of Economic Research (NBER). (1209-11946)
Market Typically Leads Economy
Many Bull Markets Born in Recessions
Average
unemployment
rate peak*
108
S&P 500 Around Recession
Recessions have
Start Dates (1929-2009)
190
180
170
S&P 500
160
150
140
130
120
110
100
Jan-09 Jun-09 Nov-09 Apr-10 Sep-10 Feb-11 Jul-11 Dec-11
As of 12/1/09. Historical composite is an equal-weighted index based on S&P 500 price returns during bull
17 markets since 1929. Current bull market (which began 3/09/09) returns are excluded from the composite.
Source: Ned Davis Research, Inc. (1209-11946)
Valuation No Worse Than Neutral
“Normalization” Smoothes Out the Bumps
S&P 500 P/E (5-year normalized EPS)
40
35
30
Median = 17.1x
25
20
15
10
5
1946 1955 1964 1973 1982 1991 2000 2009
18 As of 11/09. Based on 20-quarter moving average of 12-month trailing EPS. Source: The Leuthold Group.
(1209-11946)
Inflation and Valuation Inversely Correlated
Low Inflation and Better Earnings Visibility Will Help
1946-10/2009
Inflation Average P/E Peak P/E Trough P/E
You are here < 0% 12.6 17.1 9.3
0 – 1% 14.5 22.5 9.2
1–2% 19.8 32.6 9.2
2 – 3% 20.6 35.1 9.7
3 – 4% 18.6 34.4 9.7
4 – 5% 16.9 22.4 9.6
5 – 6% 15.8 19.8 7.4
6 – 7% 12.3 18.1 7.7
>7% 11.9 19.1 7.9
19 1946-10/09. Current P/E as of 11/27/09. Inflation is year-over-year based on CPI. P/Es based on 20-quarter moving
average of 12-month trailing EPS. Source: Department of Labor, The Leuthold Group. (1209-11946)
Coiled Spring For Earnings
Market Looks Ahead and Likes Earnings Rebounds
$90
$80
20 As of11/30/09 with 3Q09, 4Q09, 1Q10, 2Q10, 3Q10 and 4Q10 estimates. Earnings based on trailing 12-month as
reported earnings. Source: FactSet, Ned Davis Research, Inc. (NDR), Standard and Poor’s.
(1209-11946)
Sentiment Retreats With Market
Stocks May Continue to “Climb a Wall of Worry”
80
NDR Crowd Sentiment Poll
70
60
50
40
12/1/1995-12/1/2009
NDR Crowd Sentiment Poll S&P 500 Annualized Gain
> 62 -1.6%
56-62 6.3%
< 56 8.6%
21 As of 12/1/09. See last slide for description of Crowd Sentiment Poll. Source: Ned Davis Research, Inc. (NDR).
(1209-11946)
Retail Cash Slowly Finding its Way Back to Stocks/Bonds
Cash Remains High in Light of Low Yields
Current Month (11/09) Recent Highest Cash (3/09)
As of 11/09. For purposes of American Association of Individual Investors' Asset Allocation Survey cash is defined
22 to include cash products (savings accounts), and cash investments (CDs, money market funds).
Source: American Association of Individual Allocation Survey (1987-2009). (1209-11946)
Disclosures
The information provided here is for general informational purposes only and
should not be considered an individualized recommendation or personalized
investment advice. The investment strategies mentioned here may not be
suitable for everyone. Each investor needs to review an investment strategy for
his or her own particular situation before making any investment decision.
Examples provided are for illustrative purposes only and not intended to be
reflective of results you should expect to attain.
23
©2009 Charles Schwab & Co., Inc. All rights reserved. Member SIPC (1209-11946)
Definitions
Indexes are unmanaged, do not incur management fees, costs and expenses (or
"transaction fees or other related expenses"), and cannot be invested in directly.
The Dow Jones Industrial Average (DJIA, “The Dow”) is a price-weighted
average of 30 actively traded blue chip stocks, primarily industrials and is the
oldest and most widely quoted of all the market indicators.
The S&P 500 Index is a capitalization-weighted index of 500 stocks from a
broad range of industries. The component stocks are weighted according to the
total market value of their outstanding shares.
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©2009 Charles Schwab & Co., Inc. All rights reserved. Member SIPC (1209-11946)
Terms
Asset Allocation - The strategy of spreading your investment funds across
categories of assets such as stocks, bonds and cash investments to help offset
risks and rewards, based on your goals, time horizon and risk tolerance.
Ned Davis Research (NDR) Crowd Sentiment Poll - Shows perspective on a
composite sentiment indicator designed to highlight short- to intermediate-term
swings in investor psychology. It's based on seven different individual sentiment
indicators in order to represent the psychology of a broad array of investors.
Recession - As per National Bureau of Economic Research (NBER), a
recession is a significant decline in economic activity spread across the
economy, lasting more than a few months, normally visible in real GDP, real
income, employment, industrial production, and wholesale-retail sales.
25
©2009 Charles Schwab & Co., Inc. All rights reserved. Member SIPC (1209-11946)