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Fred Dickson, Chief Investment Strategist for DA Davidson spoke at the Southern Oregon Business Conference on January 26, 2011. While our region has some specific challenges, it is good to hear that we are avoiding a double-dip recession and we can expect to continue a slow recovery.
Citation preview
Fred H. Dickson, CMTSenior Vice President & Chief Investment Strategist
January 26, 2011
Important Disclosures on Slide 24
Looking Ahead to 2011: Surprise!! The Economy is Better
than You Might Think
SOUTHERN OREGON REGIONAL ECONOMIC DEVELOPMENT, INC
Market Thrills:
• Stock Market up between 10% and 30% (depending on Index)
• Consumer Spending Returned to the 2008 Prior Record Level by Year-end 2010
• No Double-Dip Recession
• 2010 Tax Reform Act (Extension of Bush Tax Rates)
• The 2008 TARP Program Produced a Profit for the US Treasury
D.A. Davidson Overview- Risks/Challenges 2010 A Year of Thrills, Chills, Spills
Updated 11/1/2010
Market Chills:
• Economic Uncertainties due to 2010 Healthcare Reform Act
• Massive Federal Reserve Quantitative Easing Programs
• Political Tensions between North and South Korea
• Escalated Domestic and Global Terrorist Threats
• China’s Recent Moves to Slow Economic Growth and Inflation
• Continuing Small Business Credit Lending Restraints
• Rising Commodity-based Inflation Rate
D.A. Davidson Overview- Risks/Challenges 2010 Thrills, Chills, Spills
Updated 11/1/2010
Market Spills:
• 96-Day British Petroleum Gulf of Mexico oil spill / Rising Oil Prices ($92/barrel)
• European Debt Crisis (Greece and Ireland)
• $14 Trillion Federal Debt – Rising Fiscal 2011 Budget Deficit to $1.5 Trillion
• Massive State and Municipal Budget Deficits
• 154 FDIC Bank Closures
• 9.8% National Unemployment Rate
• 1 Million Home Foreclosures – Slow Recovery of Existing Home Sales
D.A. Davidson Overview- Risks/Challenges 2010 Thrills, Chills, Spills
Updated 11/1/2010
• Stock Market: DJIA: + 11% (11,572)
• Gold: +28% ($1421/ounce)
• Crude Oil: +28% ($91.38/bbl)
• Economy: Real GDP +3.2% (2010 Est)
• Unemployment: 9.4% 12/2009: 9.6%
• Inflation: (CPI-Core) +1.1% 12/2009: +1.8%
• Household Net Worth: +4.6% YTD (Fed Estimate)
D.A. Davidson Overview- Risks/Challenges D.A. Davidson Overview- 2010 Overview
Updated 11/1/2010
• We expect the economy to grow slightly faster in 2011 with GDP hitting 3% to 3 ½%.
• We expect the dollar to swing in a wide range with the euro trading between $1.15 and $1.45
• We expect interest rates to remain low, but rise gradually throughout 2011 reflecting Fed policy
• We expect commodity prices to remain volatile with gold moving up to $1,500/ounce and crude oil trading between $70/barrel and $100/barrel in 2011
• We are looking for the stock market to be up from 10% to 15% in 2011 versus the year-end 2010 level
D.A. Davidson Overview- Risks/Challenges D.A. Davidson 2011 Outlook
• Geo-political tensions in Korea and the Middle East
• European Bank Debt Crisis dramatically widens
• The economic recovery stalls keeping the unemployment rate near 10% (20% probability)
• Home Foreclosures continue to expand – Home price weakness continues through 2011
• Long-term personal and corporate tax reform debate
• State and Municipal Government budgets problems dramatically worsen in 2011
• Unexpected fallout from the 2010 Healthcare and Financial Reform Acts
D.A. Davidson Overview- Risks/Challenges D.A. Davidson 2011 Risk Factors – Dark Clouds
D.A. Davidson’s Economic Overview Summary
Bullish Factors (14): Bearish Factors (7):
GDP – Positive – Contracting Annual Growth Personal/Corp Income Tax Increases (2013)
Corporate Investment Spending -Positive Home Foreclosure Rate –Negative
Federal Reserve Monetary Policy- Positive Federal Budget Deficit – Negative/Worsening
Real Corporate Profits-Positive Demographics (Age 45-54)—Negative Trend
Auto Sales/Price Trend -- Improving Crude Oil Price- $90/Barrel and Rising
ISM Indices – Positive -- Accelerating Unemployment rate – 9.4%
Interest Rate Yield Curve –Positive Slope Falling Home Prices – Double Dip
Inventories/Export Sales - Improving
Durable Goods Orders -- Improving Neutral Factors (8):
Major Global Economies –Positive Retail Sales Comps – Positive but Mixed
Inflation (CPI Core) - Positive Housing Starts – Still Very Depressed
Rail Car Loadings - Improving Employment Trends – Very Slow Improvement
Overtime Hours- Positive Leading Indicators- Positive but Slowing
Existing Home Sales – Weak but Accelerating Commercial Loan Write-offs –High/Declining
The Economy is Stronger than Most Realize
Source: Davidson Market Strategy
Long-term View of the Growth Rate of the US Economy
Source: Factset Data Systems
The Economy is Stronger than Most Realize
'65 '67 '69 '71 '73 '75 '77 '79 '81 '83 '85 '87 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07 '09-6%-6%
-4%-4%
-2%-2%
0%0%
2%2%
4%4%
6%6%
8%8%
10%10%
Recession
Expansion
US Real GDP Growth
(% 1YR) Gross Domestic Product, Bil. Chained 2000 $, SAAR - United States 12 Month % Change – Real GDP US Economy +3.2% Y/Y
Updated 11/1/2010
ABOVE THE LONG-TERM AVERAGE GROWTH RATE
D.A. Davidson’s Economic Overview Summary
Consumer spending is back to Summer 2008 record levels
Source: Factset Data Systems
'92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '100.0
50000.0
100000.0
150000.0
200000.0
250000.0
300000.0US Retail Sales Launch full data release
Retail Sales, Ex. Motor Vehicle & Parts Dealers, SA Recession Periods - United States
US Retail Sales ($ billions) – Excludes Auto Sales (Recession Periods Shaded)
The Economy is Stronger than Most Realize
Updated 12/6/2010
Corporate Earnings (Cash Flow Basis before Tax). Bottomed out 2Q 2008.
Source: Factset Data Systems '81 '82 '83 '84 '85 '86 '87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10
-40-40
-30-30
-20-20
-10-10
00
1010
2020
3030
4040
5050
US Corporate Profits Launch full data release
USD Bil. USD Bil.
(% 1YR) Corporate Profits Before Tax with IVA & CCAdj, Bil. $, SAAR Recession Periods - United States
12 Month % Change
Updated 12/6/2010
The Economy is Stronger than Most Realize
Updated 12/6/2010
Market Reaction to Government Programs:
• 2010 Patient Care Protection and Affordable Healthcare Act……Student Aid and Fiscal Responsibility Act (rider)
• Dodd-Frank Wall Street Reform and Consumer Protection Act
• 2011 Tax Reform Act (Extends Tax Brackets)
• $600 Billion Federal Reserve Treasury Purchase Program (Quantitative Easing)
Four Government Actions Continue to Impact the Financial Markets
D.A. Davidson’s Economic Overview Summary
Federal Budget Deficit – Projected to be $1.38 trillion in 2010 and $1.06 trillion in 2011. Big Deficits present a huge obstacle to rapid future economic growth
Source: US Treasury Department
Impact of Government Programs on the Debt
Annual Treasury Deficit 1981-2011(E)
-500
-250
0
250
500
750
1000
1250
1500
1750
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
E
$ B
illio
ns Reagan Bush 41 Clinton Bush 43
Obama
Calendar Year Basis
Federal Debt as a Percent of Real GDP (1954-2010)
Federal Debt Is a Big Growing Problem
Updated 12/6/2010
Source: Factset Data Systems
'54 '57 '60 '63 '66 '69 '72 '75 '78 '81 '84 '87 '90 '93 '96 '99 '02 '05 '082020
4040
6060
8080
100100
"Federal Debt, Total Amount Outstanding As A % Of Gdp - United States"US Debt Burden is now in the Top 20 List of the Most Indebted Global Nations
Updated 12/6/2010
Economic Reaction to Government Programs:
• Businesses are slowly adjusting to the Healthcare and Financial Reform Acts
• Financial services firm remain under market pressure due to uncertainty surrounding regulations that have not yet been defined
• Extension of 2001 and 2003 Tax Brackets and Definition of Estate Taxes for 2011 and 2012 gave the stock market a lift but set up uncertainty for the fall of 2012
• Banking Credit Regulatory Lending restraint while slowly loosening remains a huge problem for the economic recovery
Updated 12/6/2010
Economic Reaction to Government Programs:
• State Budgets feeling the pressure from the loss of Federal Funding resulting from the 2009 $784 billion Economic Stimulus Act …….. Not likely to be extended
• States must brace for substantial increases in Medicaid funding resulting from the 2010 Healthcare Reform Act
• Municipalities in Oregon, and nationwide, continue to responded by cutting jobs. 2400 state/municipal jobs were cut in Oregon in December
• We see this trend worsening until tax revenues begin to increase as the economy slowly recovers although municipal tax revenues rose 5% nationally in 2009.
Bond Market Overview – 10 Year Treasury Yield. Yields are extended on the downside barely providing a return that is above the inflation rate. Risk level: Moderate to High.
'86 '87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '101.0%1.0%
2.0%2.0%
3.0%3.0%
4.0%4.0%
5.0%5.0%
6.0%6.0%
7.0%7.0%
8.0%8.0%
9.0%9.0%
10.0%10.0%
11.0%11.0%
3.46
US 10Y Treasury Yield
Near Record Low Level Source: Factset Data Systems
Updated 12/6/2010
Should We Worry About a Bond Market Bubble?
Bond vs Stock Performance Last 15 Years… Bonds Won
Source: Factset Data Systems
Updated 12/6/2010
Should We Worry About a Bond Market Bubble?
Stocks Vs Bonds (1995-2010)
0
50
100
150
200
250
300
350
400
12/3
0/9
4
12/3
0/9
5
12/3
0/9
6
12/3
0/9
7
12/3
0/9
8
12/3
0/9
9
12/3
0/0
0
12/3
0/0
1
12/3
0/0
2
12/3
0/0
3
12/3
0/0
4
12/3
0/0
5
12/3
0/0
6
12/3
0/0
7
12/3
0/0
8
12/3
0/0
9
10-Year Treasury Notes S&P 500
S&P 500 – Still in a Long-term Bull Market. Market continues to track within is technical “Uptrend Channel”. Our Target is 1400 at 12/31/2011. Our DJIA Target is 13,000 at 12/31/2011.
D.A. Davidson’s Stock Market Overview
Updated 12/6/2010
S&P 500CURRENT PRIOR
LONG-TERM PERSPECTIVE UPTREND UPTREND 12/31/2010
400
600
800
1000
1200
1400
1600
1800
2000 Uptrend Channel
Downtrend Channel
INVESTABLE FUNDS LIQUIDITY/AVAILABILITY
ECONOMIC GROWTH
Geo-political / Currency FOMC POLICY
EPS EXPECTATIONS
STOCK PRICE TREND
INFLATION
EQUITY VALUATION
INTEREST RATES
MERGERS/IPO ACTIVITY
DEMOGRAPHIC TRENDS
LEGAL/REGULATORY/ POLITICAL
FEDERAL BUDGET DEFICIT
MARKET/ECONOMICCYCLE POSITION
PERSONAL SECURITY/SAFETY
Bullish
Bearish
Neutral
Federal, State. Local Personal/Corp Tax Rates
D.A. Davidson Financial Markets Overview- Weight of the Evidence – Favoring Equities
Source: DA Davidson Market Strategy
INVESTOR SENTIMENT
Market Valuation Metrics. The market valuation is well below the long-term average. The P/E ratio shows a very high degree of market “fear” given current low interest rates, low inflation and projected recovery earnings growth.
D.A. Davidson’s Market Metrics
2001 2002 2003 2004 2005 2006 2007 2008 2009 20108x8x
10x10x
12x12x
14x14x
16x16x
18x18x
20x20x
22x22x
24x24x
Average: 15.78x
Source: FactSet Estimates
S&P 500 Historical NTM Price to Earnings
S&P 500 - Price to Earnings - NTM (Mean) (AVG) S&P 500 - Price to Earnings - NTM (Mean)
Overvalued
Undervalued
Updated 12/6/2010
Source: Factset Data Systems
S&P 500 P/E (Projected Next Twelve Month EPS)
What’s Happening in Oregon?
Source: University of Oregon
The U of O Economic Index for Oregon --- Back on the Road to Recovery
What’s Happening in Oregon?
Source: Factset Data Systems
Case-Shiller Home Price Index – Portland, OR (Now at July 2005 Level)
What’s Happening in Oregon?
Source: Oregon Employment Dept
OREGON UNEMPLOYMENT RATE REMAINS STALLED AT 10.6% (Dec 2011)
What’s Happening in Oregon?
Source: Oregon Employment Dept
OREGON EMPLOYMENT 2005 2009 2010E 2011E 2012EPrivate Non-Farm Employment 1,654.4 1,612.4 1,596.4 1,611.4 1,647.1Federal Govt 29.7 30.0 31.0 29.6 29.2State Govt 27.5 29.0 29.7 29.9 30.0Local Govt 179.8 191.7 190.6 187.7 188.4Total Employment 1,891.3 1,863.1 1,847.6 1,858.6 1,894.6
Private Non-Farm Employment 87.47% 86.54% 86.40% 86.70% 86.93%Federal Govt 1.57% 1.61% 1.68% 1.59% 1.54%State Govt 1.45% 1.55% 1.61% 1.61% 1.58%Local Govt 9.50% 10.29% 10.32% 10.10% 9.94% TOTAL 100.00% 100.00% 100.00% 100.00% 100.00%
Source: Oregon Employment Dept
What’s Happening in Oregon?
Source: Oregon Employment Dept
Source: Oregon Employment Dept
Private Non-Farm Employment (Oregon: in thousands)
2005 2009 2010 2011 2012 % Change2012 vs 2010
Transportation and Warehousing, and Utilities 57.2 53.7 53.3 55.0 57.8 8.40%Information 33.6 33.1 34.0 35.5 36.6 7.76%Other Durables 24.0 19.6 20.2 21.1 21.7 7.52%Professional and Business Services 185.6 178.8 176.1 182.1 189.3 7.48%Wholesale Trade 77.8 75.5 75.3 76.9 80.2 6.43%Computer and Electronics 41.3 35.5 34.9 35.8 36.8 5.52%Health Care and Social Assistance 171.5 192.9 194.3 197.1 203.5 4.75%Metals and Machinery 36.2 31.8 29.4 29.7 30.7 4.59%Other Services 57.3 57.5 57.5 59.0 59.8 4.05%Financial Activities 102.1 95.6 93.1 94.1 96.9 3.99%Educational Services 27.2 30.3 29.2 29.7 30.4 3.90%Other Nondurables 30.1 25.8 25.0 25.6 25.8 3.43%Food Manufacturing 21.6 23.7 23.9 23.7 24.6 2.83%
Retail Trade 193.5 183.6 183.1 184.4 188.0 2.71%Leisure and Hospitality 159.1 163.1 164.4 165.0 165.9 0.91%Transportation Equipment 18.0 10.0 8.8 8.7 8.8 0.32%Wood Products 32.7 20.9 19.8 18.8 19.3 -2.24%Natural Resources and Mining 9.6 7.0 7.2 7.1 7.0 -2.59%
TOTAL 1,369.3 1,312.5 1,295.4 1,315.4 1,351.0
Fastest Industry Growth in Oregon
What’s Happening in Oregon?
Source: Oregon Employment Dept
Source: Oregon Employment Dept
Private Non-Farm Employment Where the Jobs Will Be in 2012(Oregon: in thousands)
2005 2009 2010 2011 2012 % Change2012 vs 2010
Health Care and Social Assistance 171.5 192.9 194.3 197.1 203.5 4.75%Professional and Business Services 185.6 178.8 176.1 182.1 189.3 7.48%Retail Trade 193.5 183.6 183.1 184.4 188.0 2.71%Leisure and Hospitality 159.1 163.1 164.4 165.0 165.9 0.91%Financial Activities 102.1 95.6 93.1 94.1 96.9 3.99%Wholesale Trade 77.8 75.5 75.3 76.9 80.2 6.43%Construction 90.8 73.9 65.9 66.2 67.8 2.81%Other Services 57.3 57.5 57.5 59.0 59.8 4.05%Transportation and Warehousing, and Utilities 57.2 53.7 53.3 55.0 57.8 8.40%Computer and Electronics 41.3 35.5 34.9 35.8 36.8 5.52%Information 33.6 33.1 34.0 35.5 36.6 7.76%Metals and Machinery 36.2 31.8 29.4 29.7 30.7 4.59%Educational Services 27.2 30.3 29.2 29.7 30.4 3.90%Other Nondurables 30.1 25.8 25.0 25.6 25.8 3.43%Food Manufacturing 21.6 23.7 23.9 23.7 24.6 2.83%
Wood Products 32.7 20.9 19.8 18.8 19.3 -2.24%Transportation Equipment 18.0 10.0 8.8 8.7 8.8 0.32%
TOTAL 1,369.3 1,312.5 1,295.4 1,315.4 1,351.0
What’s Happening in Oregon?
Source: OregonLive.com
SPOT NOW
What’s Happening in Oregon?
Source: Start-upHire.com
Oregon Startups are Hiring
1. ClearEdge Power – Hillsboro
2. Inside Track Learning – Portland
3. Mobil Productivity, Inc – Portland
4. Archive Systems – Portland
5. Avnera – Beaverton
6. Ryan Herco Products – Portland
7. Dachis Group – Portland
8. Vesta – Portland
9. Barracuda Networks – Portland
10. Jive Software – Portland
11. Omneon – Beaverton
12. TriVium -- Beaverton
What Type Jobs?
Source: Start-upHire.comOregon Startups are Hiring - 70 Jobs are Advertised
1. Customer Advocate 13. Senior Web Designer
2. Helpdesk Specialist 14. Senior Linux Programmer
3. Automotive Trainer 15. Applications Developer
4. Human Resources Manager 16. Software Engineer
5. Sales Associate 17. UI Designer
6. Communications Systems Engineer 18. Java Developer
7. Warehouse Facilitator 19. Documentation Engineer
8. Informational Designer 20. Revenue Manager
9. Senior Account Manager 21. Korea Program Director
10. Project Manager 22.Field Services Technician
11. Sales Engineer 23. Executive Assistant
12. Business Analyst 24. Senior Mechanical Engr.
Huge $ trillion long-term economic global growth drivers remain in place including:
• Water resource acquisition, development and distribution;
• Global food production and distribution; • National and business security activities; • Preventive and diagnostic healthcare; • Productivity/advanced technology solutions; • Alternative energy/global environmental
solutions; --- • Major infrastructure upgrades (roads,
bridges, schools, energy refining and distribution, utility grid)
Looking Ahead: 2011 and Beyond
In Summary:
D.A. Davidson Overview
1. The economic data points to a gradual expansion that should translate into a 10% to 15% operating earnings growth for the S&P 500
2. We project a 2011 year-end unemployment rate of 9%, down from 9.8% in 2010..
3. We remain in a very volatile long-term cyclical bull market for US equities
4. Market volatility remains high due to investor concerns over the economy, the European debt situation, pending long-term tax reform, inflation concerns.
5. We expect US interest rates to remain low but slowly rise during 2011 pending improving signs of a sustainable economic recovery with a modest rebound in jobs growth. Inflation remains subdued.
6. Market fundamentals matter most – above average dividend yield, very attractive stock market valuation, accelerating merger activity, and the need to investment invest huge amounts of cash sitting on the sidelines.
Disclosures
This material has been compiled from sources we deem to be reliable; it is not guaranteed as to its accuracy and does not purport to be complete. All opinions and estimates contained in these reports constitute D.A. Davidson & Co.’s judgment as of the date of such reports, are subject to change without notice and are provided in good faith but without legal responsibility. The information is not intended to be used as the primary basis of investment decisions. Because of individual client requirements, it should not be construed as advice designed to meet the particular investment needs of any investor. It is not a representation by us, or an offer, or the solicitation of an offer, to sell or buy any security. Further, a security described in a report may not be eligible for solicitation in the states in which a client resides.
Analyst Certification: The research analyst(s) responsible for this report, attests (i) that all the views expressed in this research report accurately reflect the personal views about the common stock of the subject company and (ii) that no part of the compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by him/her in the report. Further information and elaboration is available upon request.