TDWM Blog

Weekly Economic Commentary

2012-03-06T11:41:00.000-08:00

JustWarming Up

TheFebruary employment report and the economic data for February in China are thehighlights on this week’s economic and policy calendar. In addition, theFebruary data on ADP employment, layoff announcements, and merchandise tradefor January are due out in the United States. The week will likely be quiet forthe Fed, as Fed officials observe the unofficial "quiet period" aheadof the next Federal Open Market Committee (FOMC) meeting on March 13. However,central banks outside the United States will be busy this week, with ratesetting meetings in Brazil, Australia, New Zealand, Russia, South Korea, theEurozone, the UK, Peru, Canada, Poland, Indonesia, and Malaysia. Of these, onlyBrazil is expected to cut rates. The rest of these central banks are on hold,for now. There are bond auctions in Austria, the Netherlands, Germany andBelgium, as investors await the March 8 deadline to swap out existing Greekdebt for newly issued debt as part of the latest bailout.

TheChinese authorities will begin to release China's economic data for Februarylater this week, with the key report being the Consumer Price Index (CPI)report. A deceleration in the CPI in February could pave the way for the Chinacentral bank to continue to ease monetary policy in the coming weeks andmonths. All of the Chinese economic reports for February will be impacted bythe shift in the Lunar New Year to January this year versus February in 2011.

Warm Weather Impacting Economic Activity in Early 2012

Onbalance, the vast majority of the economic data in the United States releasedsince early October 2011 has exceeded expectations. This trend reflectsunderlying improvement in the overall economy due to:

· Lessuncertainty surrounding the debt issues in Europe

· Alittle less rancor (and a little more cooperation) out of Washington comparedto this past summer

· Theimproving job market as companies have reached the limit on productivity gains

· Arebound in global economic activity following the global supply chaindisruptions that resulted from the Japanese earthquake and tsunami in March2011.

Atleast some of the improvement in the economic backdrop may be associated withthe weather, which has been warmer and drier than usual since last autumn. Ingeneral, warmer (and drier) than normal weather tends to boost economicactivity. We saw evidence of these trends in the details of the FederalReserve’s (Fed) latest Beige Book — a qualitative assessment of business andbanking conditions compiled via contacts in the private sector in each Feddistrict. On balance, the Beige Book was relatively upbeat, with all 12districts reporting expanding (albeit modest) growth and improving conditionsin the labor market, bank lending and credit conditions, and in residential andcommercial real estate.

TheBeige Book noted that the economic uncertainty that was pervasive in theeconomy in the summer and fall of 2011 continued to fade, as the word“uncertainty” was used just nine times, down from 33 mentions in the September2011 Beige Book as, worries over the future of Europe and a greater-than-usualamount of discord in Washington dominated the headlines. There was just onemention of Thailand (and none of Japan), and just 14 mentions of Europe in thisBeige Book, versus 16 in the January 2012 Beige Book. However the word“weather” appeared 29 times in the latest Beige Book, and the phrase “warmweather” appeared 12 times. In the January 2012 version of the Beige Book, theword weather appeared 13 times, with the phrase “warm weather” appearing justseven times.

Itis not unusual for a Beige Book released in March of any year to cite weatheras a factor impacting some aspect of economic activity around the nation, butit is unusual to see warm weather mentioned so often. For example, in the BeigeBook released one year ago (in March 2011) the word weather was mentioned 36times as the nation suffered through a very cold and snowy winter season. Theword warm appeared just twice the March 2011 Beige Book. A year earlier, in theMarch 2010 edition of the Beige Book, the word weather appeared 41 times, butthe word warm appeared just twice.

Thus,at least some of the improvement in the economic backdrop since last fall haslikely been weather-related, although it is difficult to pinpoint exactly howmuch. Weather often has a bigger impact when there is a big change in patternfrom a long stretch of colder and wetter-than-usual weather to warmer and drierweather. For the most part, since the harsh winter of 2010 – 2011 ended, 2011 wasrelatively warmer and drier than usual.

Still,the October 2011 through February 2012 period has been warmer than usual, withJanuary 2012 being the fourth warmest January since 1921. This period has alsobeen drier than usual, with the exception of November 2011. Taken together,these trends have added to economic activity. We again turn to the Beige Bookfor details.

Lookingat the detail from Beige Books during recent warmer-than-usual winters (1997 –98, 1998 – 99, 1999 – 2000, 2005 – 2006), we find that all else equal, the warm(and dry) temperatures will boost:

· Overallconsumer spending as consumers spend less on heating their homes

· Constructionactivity (houses, office parks, high ways, public work projects, etc.)

· Homesales

· Apartmentleasing activity

· Mortgageoriginations

· Autosales

· Non-clothingretail sales (hardware stores, gardening centers, sporting goods)

· Energyand mining activity

· Tourism(beach and golf)

· Agriculture

· Restaurants

· Overallemployment in the areas listed above, lowering initial jobless claims

· Onthe other hand, warmer-than-usual weather this time of the year can:

· Hurtsales of winter clothing and winter sports gear

· Dampenoutput of natural gas and oil as consumers and businesses use less heat

· Puta crimp in demand for hotel rooms and services around ski areas and other areasthat cater to winter recreational activities

· Hurtdemand for feed supplies for livestock

Onthe price side, warmer-than-usual weather at this time of year can alsoincrease the supply (and perhaps lower the cost) of fruits, vegetables, plants,and flowers. These products are also at risk of a late frost, which couldreduce supply and cause rising prices later in the spring. Warmer weather canmean lower feed costs for dairy, cattle, and hog producers. Inventories can bealtered as well, as too much winter clothing piles up on stores’ shelves, butnot enough lumber or building materials are produced, leaving inventories lowerthan they would normally be.

Althoughwarm weather this time of the year does not impact every area of the economy oreven every area of the country, generally, the warmer weather can “pullforward” some purchases (like sporting goods, gardening supplies, springclothing, and even autos and houses). These purchases may inflate the economicdata in January, February, and March and depress activity in the spring if theweather returns to normal.

Sohere in March, we get reports mainly for February, which should be stronger thanotherwise due to weather. Note that for retailers, March will likely be muchstronger this year versus last year due to the earlier Easter holiday (April 8versus April 24). March data gets reported in April. But looking further outinto the year, if we have a return to “normal weather,” the data reported inApril and May for March and April could look weak and cause markets to getconcerned about another double-dip scare.

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IMPORTANT DISCLOSURESThe opinions voiced in this material are for general information only and arenot intended to provide specific advice or recommendations for any individual.To determine which investment(s) may be appropriate for you, consult yourfinancial advisor prior to investing. All performance reference is historicaland is no guarantee of future results. All indices are unmanaged and cannot beinvested into directly.

The economic forecastsset forth in the presentation may not develop as predicted and there can be noguarantee that strategies promoted will be successful.

Stock investinginvolves risk including loss of principal.

Internationalinvesting involves special risks, such as currency fluctuation and politicalinstability, and may not be suitable for all investors.

The Beige Book is acommonly used name for the Fed report called the Summary of Commentary onCurrent Economic Conditions by Federal Reserve District. It is published justbefore the FOMC meeting on interest rates and is used to inform the members onchanges in the economy since the last meeting.

The Federal OpenMarket Committee (FOMC), a committee within the Federal Reserve System, ischarged under the United States law with overseeing the nation’s open marketoperations (i.e., the Fed’s buying and selling of United States Treasuresecurities).

This researchmaterial has been prepared by LPL Financial.

The LPL Financialfamily of affiliated companies includes LPL Financial and UVEST FinancialServices Group, Inc., each of which is a member of FINRA/SIPC.

To the extent you arereceiving investment advice from a separately registered independent investmentadvisor, please note that LPL Financial is not an affiliate of and makes norepresentation with respect to such entity.

Not FDIC orNCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | NotGuaranteed by any Government Agency | Not a Bank/Credit Union Deposit

Tracking #1-050823(Exp. 03/13)

Weekly Economic Commentary

2012-02-27T16:27:00.000-08:00

Unemployment Improving, but Still Uncomfortably High

This week is extraordinarily busy for economic reports and potentially market-moving events in the United States and abroad. On the domestic economic front, the February Institute for Supply Management (ISM) report highlights a week that will also include the release of February vehicle sales data, January personal income and spending, and the second look at the fourth quarter Gross Domestic Product (GDP) data. Fed policy will also vie for attention as the Fed releases its Beige Book and Fed Chairman Bernanke delivers his semiannual monetary policy testimony to Congress.

It is just as busy overseas as Greece, Finland and Germany will vote to approve the latest Greek bailout. In addition, there is a European Union summit late this week, and several European nations (Italy, Germany, Spain and France) will hold bond auctions. The key event of the week will likely be the European Central Bank’s (ECB) offering of an unlimited amount of cheap money for three years to European financial institutions. There are parliamentary elections in Iran, and Iran will likely be in the news over its nuclear program and as long as oil prices stay high and in the headlines. China will release its ISM data for February as well.

Unemployment Rate Putting Pressure on Wage Growth and Spending

· Any way you slice it, the unemployment rate remains uncomfortably high. We would be more skeptical of the drop in the unemployment rate if other measures of labor market stress (layoff announcements, initial claims for unemployment insurance, job openings) had not moved in the same direction as the unemployment rate. The recent rise in consumer sentiment to four-year highs also helps to corroborate the dip in the unemployment rate.

· The slow pace of income growth (which takes underemployment into account) and the tepid pace of consumer spending for this stage in the business cycle confirms that the labor market is far from “normal.”

· The basic methodology used to calculate the unemployment rate (and the other measures of labor market stress) has been in place since 1940.

The nation's unemployment rate dropped from a recent high of 10.0% in October 2009 to 8.3% in January 2012. The next employment report is due out on Friday, March 9. The pre-recession low in the unemployment rate was 4.4%, hit in late 2006 and early 2007. Thus, even after declining steadily for two-and-a-half years, the unemployment rate is still double where it was just prior to the onset of the recession. Broader measures of the stress in the labor market have moved lower recently as well, but also remain at nearly twice the level seen prior to the onset of the recession. For example, a measure of the unemployment rate that takes into account both people who have largely given up looking for work and workers who are able to find only part-time work stood at 15.1% in January 2012, down from the peak of 17.2% hit in late 2009, but still nearly double the rate (7.9%) in late 2006 and early 2007.

A survey of 60,000 households nationwide — an incredibly large sample size for a national survey — generates the data set used to calculate the unemployment rate. (Nationwide polling firms typically poll around 1,000 people for their opinion on presidential races.) The “household survey” has been conducted in much the same way since 1940, and although it has been "modified" over the years, the basic framework of the data set has stayed the same. The last major modification to the data set (and to how the data is collected) came in 1994.

The headline unemployment rate is calculated by dividing the number of unemployed (12.8 million in January 2012) by the number of people in the labor force (154.4 million). The civilian population over the age of 16 stood at 242.3 million in January 2012. You are identified as being part of the labor force if you are over 16, have a job (employed) or don’t have a job (unemployed) but are actively looking for work. You are not in the labor force if you are neither employed nor unemployed — this category includes retired persons, students, those taking care of children or other family members, and others who are neither working nor seeking work.

In January 2012, the labor force was 154.4 million, which consists of 141.6 million employed people and 12.8 million unemployed people. Another 87.9 million people over the age of 16 were classified as not in the labor force.

Stress Measures

We would be more skeptical of the drop in the unemployment rate if other measures of labor market stress (layoff announcements, initial claims for unemployment insurance, job openings, hours worked, etc.) had not moved in the same direction as the unemployment rate.

· Layoff announcements — collected by a private sector outplacement firm, Challenger, Grey and Christmas — in the 12 months ending in January 2012 totaled 621,000, very close to a 12-year low hit in early 2011. In mid-2009, the 12-month total of announced layoffs was over 1.6 million.

· Initial claims for unemployment insurance — tallied at the state level — averaged just 359,000 per week in the four weeks ending February 18, 2012, the lowest reading in four years. Claims peaked at nearly 650,000 per week in mid-2009. In mid-February, just under nine million people were receiving some type of unemployment benefit, down from close to 15 million in early 2010.

· The number of job openings, as measured by the Bureau of Labor Statistics Job Opening and Labor Turnover report, found that in December 2011, there were nearly three million open jobs, up from just under 1.9 million in mid-2009.

· Virtually every measure of consumer sentiment, all of which are collected by the private sector, is at or close to four-year highs. The improved sentiment is a function of a stronger equity market, less volatility in financial markets, improved labor markets, and until recently, lower gasoline prices.

· The private sector Gallup polling firm regularly asks 18,000 Americans about their employment status, and the unemployment rate derived from that survey has moved down significantly since the beginning of 2010, tracking the official unemployment rate calculated by the U.S. Department of Labor.

· However, the Gallup data also suggest that “underemployment” remains quite high, consistent with the government’s measure of “underemployment.”

The high level of underemployment (15.1% reading on the broadest measure of the unemployment rate) can be seen in the tepid gains in personal income derived from wage and salary income, which takes into account unemployment, underemployment and part-time work. By this measure, personal income (derived by adding up all the paychecks earned by all workers throughout the economy) is up by less than 4.0% from a year ago. The weak pace of personal spending (up just 3.9% from a year ago in December 2011) is another sign that while the labor market is healing, consumers are still struggling, especially as we are nearly three years into the economic expansion. Normally, at this point in the business cycle, personal incomes from wages and salaries, as well as personal spending are growing between 5% and 7% per year.

_________________________________________

IMPORTANT DISCLOSURES The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

Stock investing involves risk including loss of principal.

The Federal Open Market Committee (FOMC), a committee within the Federal Reserve System, is charged under the United States law with overseeing the nation’s open market operations (i.e., the Fed’s buying and selling of United States Treasure securities).

This research material has been prepared by LPL Financial.

The LPL Financial family of affiliated companies includes LPL Financial and UVEST Financial Services Group, Inc., each of which is a member of FINRA/SIPC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity.

Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

Tracking #1-049093 (Exp. 02/13)

Weekly Economic Commentary

2012-02-14T11:56:00.000-08:00

Trade Offs

With the fourth quarter earnings reporting season wrapping up for corporate America, financial market participants will likely be focused on this week’s full docket of United States economic data and the latest flare-up in the European debt debacle in Greece. European debt markets outside of Greece will likely be in focus this week, as Italy, the Netherlands, France and Spain are slated to hold debt auctions. Central banks in Japan, Chile, and Sweden meet to set rates this week, with Sweden’s Riksbank expected to cut rates for a second time in two months after tightening monetary policy in 2010 and 2011. While the Federal Reserve’s next policy meeting isn’t until mid- March, several Fed officials are scheduled to make public appearances this week, including Fed Chairman Ben Bernanke.

All Eyes on Greece and Full Slate of U.S. Economic Data in the Week Ahead

Greece dominated the headlines last week in the vacuum created by a lack of United States economic data releases and only a scattering of corporate earnings reports for the fourth quarter of 2011. As we prepared this report for publication, the latest flare-up in the European fiscal mess that has dominated the headlines for nearly two years appears to have subsided (for now) after the Greek parliament agreed to another round of severe budget cuts in exchange for another round of loans from the international community led by the International Monetary Fund (IMF), the European Union and the European Central Bank. We continue to expect a mild recession in Europe in 2012 amid ongoing fiscal flare-ups similar to the one witnessed in Greece over the past week or so. This week’s debt auctions in several key European nations will be another test for markets wary of (and perhaps weary of) another debt-related market disruption in Europe.

Looking ahead, Bernanke will deliver his semiannual monetary policy report to Congress on February 29, the same day the Fed will release its Beige Book, a qualitative assessment of economic and banking conditions in each of the 12 Federal Reserve districts (Boston, Kansas City, Philadelphia, etc.) The next FOMC meeting is on March 13. Markets this week will try to reconcile the recent set of stronger than expected economic reports (especially the very robust January employment report) in the United States with the Fed’s aggressively loose monetary policy stance.

Trade Offs and Trade Flows

At his latest press conference (January 25, 2012) Fed Chairman Bernanke answered a question about whether or not the Fed had doubts about the recent run of stronger than expected economic reports in the United States by noting: “...we continue to see headwinds emanating from Europe, coming from the slowing global economy and some other factors as well. So, you know, we are obviously hoping that the strength we saw in the fourth quarter and in recent data will continue into 2012, but we’re going to continue to monitor that situation. I don’t think we’re ready to declare that we’ve entered a new, stronger phase at this point; we’ll continue to look at the data.”

We concur with Fed Chairman Bernanke that Europe remains a risk to the outlook for economic growth in the United States. However, in our view, the risk to the United States economy from Europe is concentrated on the financial side — a collapse of a European financial institution similar to the collapse of Lehman in the fall of 2008, which would likely trigger a freeze of global credit and another sharp contraction in the global economy — rather than on the strictly “economic” side of the ledger via fewer U.S. exports to Europe. The risks of such a collapse have diminished, thanks to bold policy actions by policymakers in late 2011, which included:

· A commitment to closer fiscal and monetary integration within Europe (The “Grand Plan”) hammered out in October 2011;

· The introduction of coordinated swap lines by global central banks in late November 2011; and

· The European Central Bank’s (ECB) offering of an unlimited amount of cash (Long Term Refinancing Operation or LTRO) to financial institutions for three years in late December 2011.

But risks of this sort remain, as markets were reminded last week by the latest drama in Greece. There is still more work to do, as European nations face many monetary, fiscal and political hurdles in 2012. The ECB’s next LTRO is on February 29, and Italy, Spain, France, and the Netherlands issue debt this week. But, should a systemically important European financial institution trigger a global credit crunch, a recession in the United States is quite likely.

However, the mild recession that we expect (and is currently unfolding) in Europe in 2012 may not have as big an impact on the United States economy or on the sales and profits of U.S. corporations as is widely feared. The United States’ trade with Europe is relatively small. In 2011, we shipped just $268 billion worth of goods to Europe, equal to about 2% of the United States’ gross domestic product (GDP). In that same period, the United States shipped more than $700 billion in goods to fast-growing emerging markets, a figure equal to nearly 6% of U.S. GDP. In 2011, 50% of our exports headed to fast-growing emerging markets, while just 15 – 20% of our goods exports head to Europe.

The trade flows between Europe and the emerging markets are also of interest, as market participants weigh the possibility of a “hard landing” in China. What stands out to us is just how enormous the trade of goods is between Europe and emerging markets. The size of these flows may cut both ways however, as investors asses the risks of a slowdown in Europe on the global economy. In 2010 (the latest full year of data available) the emerging market economies shipped $1.4 trillion worth of goods to Europe, an amount that dwarfs the size of the trade flows between the United States and Europe. At the same time, Europe sent $1.1 trillion in goods to fast-growing emerging markets, a figure that represents 60% of Europe’s overall exports. Europe’s ability to send 60% of its exports to fast-growing emerging markets will help to offset some of the weakness in consumer, business and government spending within Europe in 2012.

Of course the slowdown in Europe will crimp demand for emerging market economies’ goods, which will, at the margin, slow growth in that region. But, on balance strong domestic demand for consumer goods, housing and investment, robust government spending in many emerging market economies, decent growth in emerging markets’ “other” major export destination (the United States) and central banks cutting rates should allow emerging markets to easily weather the mild recession in Europe. As in the United States, however, a collapse of a European financial institution and a freeze up of global credit and trade would likely also send many emerging markets on a course towards a “hard landing.”

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IMPORTANT DISCLOSURES The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

Gross Domestic Product (GDP) is the monetary value of all the finished goods and services produced within a country's borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory.

Federal Funds Rate is the interest rate at which depository institutions actively trade balances held at the Federal Reserve, called federal funds, with each other, usually overnight, on an uncollateralized basis.

Private Sector – the total nonfarm payroll accounts for approximately 80% of the workers who produce the entire gross domestic product of the United States. The nonfarm payroll statistic is reported monthly, on the first Friday of the month, and is used to assist government policy makers and economists determine the current state of the economy and predict future levels of economic activity. It doesn’t include: - general government employees - private household employees - employees of nonprofit organizations that provide assistance to individuals - farm employees

The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

Stock investing involves risk including loss of principal.

International investing involves special risks, such as currency fluctuation and political instability, and may not be suitable for all investors.

The Federal Open Market Committee (FOMC), a committee within the Federal Reserve System, is charged under the United States law with overseeing the nation’s open market operations (i.e., the Fed’s buying and selling of United States Treasure securities).

This research material has been prepared by LPL Financial.

The LPL Financial family of affiliated companies includes LPL Financial and UVEST Financial Services Group, Inc., each of which is a member of FINRA/SIPC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity.

Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

Tracking #1-045634 (Exp. 02/13)

Weekly Economic Commentary

2012-02-07T10:13:00.000-08:00

Job Creation on Track to Sustain Economic Growth

The week after the release of the monthly employment report is typically quiet for economic data and events in the United States, and this week (February 6 – 10) is no exception. There are few, if any, potentially market-moving economic events in the United States this week, and with the fourth quarter corporate earnings season winding down, market participants are likely to be focused on monetary and fiscal policy at home and abroad, along with Chinese economic data for January. In addition, this week’s quiet domestic economic calendar will allow market participants to continue to mull over the January employment report in the United States, which was released on Friday, February 3. On balance, the report was one of the best readings on the United States labor market in years.

Private Sector Jobs Climb, Unemployment Rate Falls

The January employment report was one of the most robust employment reports in many years. The report found that the private sector economy added 257,000 jobs in January (versus expectations of a gain of just 160,000 jobs) and that the unemployment rate dipped another 0.2 percentage points to 8.3%. This result was much better than expected. Far from fluky, the January employment report was solid in nearly every respect, but more importantly, confirms other data on the economy in recently weeks that suggests the pace of the healing in the labor market has been accelerating.

Over the course of 2011 in the Weekly Economic Commentary, we wrote about “the next two million jobs,” after the United States economy had created two million jobs between early 2010 and April 2011 — after shedding nearly nine million jobs in and immediately after the Great Recession (December 2007 – June 2009).

In July 2011, we laid out our base, bull, and bear case scenarios for how quickly the economy would create the next two million jobs. Our base case was that the economy would create “the next two million jobs” by early 2012. The release last week of the United States government’s labor market report for January 2012 provided a good opportunity for us to revisit our forecast. But first, a few housekeeping issues about the employment report, which is subject to a number of revisions that impact the labor market data each year at this time.

Breaking Down the Revisions in January’s Employment Report

Every January, the Bureau of Labor Statistics (BLS) within the United States Department of Labor — the government agency that has been compiling the monthly jobs report for more than six decades — releases revised data on the number of workers on businesses’ payrolls and on the unemployment rate. The January report also incorporates new seasonal factors that slightly changed the month-to-month pattern of job gains and losses over the past several years. The net result of the benchmark revisions and the new seasonal factors was that the economy created 162,000 more jobs than previously thought between March and December 2011.

This upward revision is not unusual, as the revision usually matches to the direction of the overall data. That is, when the economy is weakening, and jobs are being lost, the annual benchmark revision to jobs is typically downward. On the other hand, when the economy is improving, and is generally adding jobs, the benchmark revisions to the data tend to add more jobs. The upward revision to the jobs data based on the new information was the first since 2006, a year in which the economy created a significant number of jobs.

Economy Continues to Track Our Base Case for the “Next Two Million Jobs”

According to the revised data, the private economy created the first two million jobs in this recovery between March 2010 and March 2011. Since then the private sector economy has created an additional 1.7 million jobs, and continues to track our base case for the “next two million jobs” as first detailed in our July 5, 2011 Weekly Economic Commentary. As we noted in that commentary, which was updated on October 10, 2011, how quickly the economy created the next two million jobs would help to determine the health and sustainability of the recovery.

At our last update on the “next two million jobs” topic in October 2011, job creation had stalled amid the growth scare surrounding the global supply chain disruptions resulting from the Japanese earthquake and tsunami in March 2011, the uncertainty surrounding the European fiscal situation throughout the spring, summer and fall of 2011, and the debate in the United States about the debt ceiling and near-term tax and spending outlook in the summer and early fall of 2011. At that time, job creation was tracking at or below our bear case for the “next two million jobs” as first outlined in July 2011. However, since the summer hiring lull (the economy created just 52,000 private sector jobs in August) the economy’s job creation engine has revved back up. On average, the economy has created under 220,000 private sector jobs per month since the beginning of September 2011, as some of the economic uncertainty surrounding the issues noted above retreated.

If sustained in the next several months, the economy will achieve our base case scenario of creating “the next two million jobs” by early 2012, by creating two million jobs between April 2011 and March 2012. A continuation of this pace of private sector job growth would see the economy recoup all the private sector jobs lost during the Great Recession in two years, by January 2014. This type of job growth would likely be accompanied by economic growth at or slightly above our GDP forecast for 2012 of 2.0% growth. This pace of job growth would likely still keep the Fed on hold until the end of 2014/early 2015.

The pace of job creation since early 2010 (when the economy began to regularly create jobs again) is right in line with job creation seen at similar points in the recoveries from the 1990 – 91 and 2001 recessions. However, this pace of job creation pales in comparison to the 5 million and 7 million jobs created at similar points in the robust economic recoveries of the mid-1970s and early-1980s, respectively.

Thus, at around 220,000 private sector jobs per month, the economy continues to track toward modest job gains, a modestly declining unemployment rate, a slightly below average rate of GDP growth, and a Fed that is poised to provide the economy more stimulus. However, if the pace of job growth accelerates to over 300,000 per month on a sustained basis, the Fed would likely hold off on any more moves to ease monetary policy. Alternatively, if job growth slows back to the 100,000 or so per month rate seen during the spring and summer of 2011, the Fed would likely need to remove easy monetary policy measures more quickly than the market now expects.

____________________________________________

IMPORTANT DISCLOSURES The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

The unemployment rate is the percentage of the total labor force that is unemployed but actively seeking employment and willing to work.

The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

International investing involves special risks, such as currency fluctuation and political instability, and may not be suitable for all investors.

This research material has been prepared by LPL Financial.

The LPL Financial family of affiliated companies includes LPL Financial and UVEST Financial Services Group, Inc., each of which is a member of FINRA/SIPC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity.

Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

Tracking #1-043628 (Exp. 02/13)

Weekly Economic Commentary

2012-01-31T10:11:00.000-08:00

Unintended Consequences of Low Rates

As is typical in the first week of a new month, this week (January 30 – February 3) is packed with key economic releases in the United States. Employment, manufacturing, consumer spending and consumer confidence will compete with another flare-up of the European fiscal woes and key manufacturing data in China. In addition, a number of Federal Reserve (Fed) officials are scheduled to make public appearances this week, including Fed Chairman Ben Bernanke, who will deliver testimony to the House Budget Committee on Thursday, February 2.

Impact of Energy Prices, Interest Rates and Dividends on Personal Income and Spending

Last week (January 23 – 27) the news that real gross domestic product (GDP) grew at just 2.8% in the fourth quarter of 2011 was a disappointment relative to expectations of a 3.0% gain. Consumer spending, which accounts for more than two-thirds of GDP, was a major contributor to that disappointing result, rising at just 2.0% between the third and fourth quarters of 2011. Market participants were looking for a slightly more robust gain of 2.4%.

The causes of tepid consumer spending in the economic recovery that began in mid-2009 are well documented and include (but are not limited to):

· Sluggish labor market, underemployment and very modest income growth

· Large overhang of consumer mortgage and consumer installment debt

· Increased economic uncertainty leading to increased savings

· Weak housing market

· Tighter lending standards for consumer installment and mortgage debt

Consumer Income Growth Improving Modestly, but Employment Picture Needs to Change

Over time, consumer income growth is the best determinate of consumer spending growth. In 2011, personal incomes (which include income from wages and salaries, government transfer payments, rental income and income of small business owners) rose 4.7%, a stronger pace of growth than seen in 2010 (+3.7%), and a complete turnaround from 2009, when personal income fell 4.3%. However, over the past 50 years, personal income growth has averaged 7% per year. During the middle of the last economic recovery (2001 – 2007), personal income growth averaged close to 6%. The subpar growth in personal income in the current recovery relative to history and to prior recoveries is a direct result of the high unemployment rate (8.5% in December 2011) and the high underemployment rate (workers who are working part time, discouraged workers, etc.). Both the unemployment rate and the underemployment rate need to decline further in order to see a higher pace of income (and spending) growth in 2012 and beyond.

Some of the factors weighing on spending have improved in recent quarters, and some of the factors that have restrained incomes have eased as well. Consumers have spent the past three years spending a little, saving a little and paying down debt, reducing the record high debt-to-income levels seen at the worst of the financial crisis. However, debt burdens (as measured by total debt to income) remain high by historical standards. The housing market likely bottomed out nationally in early 2009, and has been recovering (albeit very slowly) since then. This has helped some consumers feel “wealthier,” but in general, the tepid housing market remains a key impediment to consumer spending. Banks’ lending standards for businesses and consumers seeking loans have loosened over the past several years, but it remains difficult for many consumers to borrow at low rates to finance a home or some other type of consumer good.

Lower Energy Prices Putting Dollars in Consumer Wallets

On the spending side, although the rise in consumer energy prices crimped economic growth in the first half of 2011, lower consumer energy prices since their peak in mid-2008 have helped to put more spending power in consumer wallets. In mid-2008, consumers were spending $713 billion per year on consumer energy products. In December 2011, the spend rate was just $621 billion. That is nearly $100 billion in additional spending power for consumers relative to the peak in energy prices in mid-2008. Warmer weather in much of the nation in December 2011 helped to hold down energy costs, and that warm weather extended into January 2012, which should leave some additional dollars in consumers’ pockets in early 2012.

Consumers Are Experiencing Lower Interest Payments and Less Interest Income

However, the big drop in interest rates (engineered by the Fed at the short end of the yield curve and the result of flight to safety, a lack of inflation and sluggish growth at the long end of the curve) cuts both ways. In general, consumers are net recipients of interest income (from savings accounts, certificates of deposit, Treasury notes and bills, etc.). As 2011 ended, consumers were receiving $975 billion in interest income and paying about $685 billion in interest to their creditors (credit cards, banks, mortgages, etc.). Both figures have dropped dramatically since the peak in 2008, when consumers were on the receiving end of over $1.4 trillion in interest income while paying out around $950 billion in interest. Thus, as 2011 ended, consumers were net recipients of around $300 billion in interest payments, down from close to $500 billion in mid-2008.

At his press conference after last week’s Federal Open Market Committee (FOMC) meeting, Fed Chairman Ben Bernanke acknowledged that low interest rates were impacting savers, but pointed out that “savers in our economy are dependent on a healthy economy in order to get adequate returns. In particular, people own stocks and corporate bonds and other securities as well as say, Treasury securities. And if our economy is in really bad shape, then they are not going to get good returns on those investments.”

Comeback of Dividend Payments by Corporations Provides Modest Offset

To Chairman Bernanke’s point, a modest offset to this hit to income for consumers is the comeback of divided payments by corporations since mid- 2008. Dividends paid by corporations to individuals are now almost back to their all-time peak set in early 2008, and have increased by more than $225 billion since their low in mid-2009. Adding dividends to the net interest received, we find that consumers’ net interest income plus dividends at the end of 2012 was $1.1 trillion, about $200 billion lower than at the peak in late 2008.

On balance then, lower rates have hurt consumer incomes and consumer spending, but Fed policies that help to stimulate growth helped companies to achieve and sustain profitability and increase their dividend payments to consumers, providing a slight offset. Lower consumer energy prices have also helped to boost consumers’ disposable incomes slightly, leaving more jobs and more incomes as the key driver of consumer spending in the period ahead.

____________________________________________

IMPORTANT DISCLOSURES The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

* Gross Domestic Product (GDP) is the monetary value of all the finished goods and services produced within a country's borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory.

^ Federal Funds Rate is the interest rate at which depository institutions actively trade balances held at the Federal Reserve, called federal funds, with each other, usually overnight, on an uncollateralized basis.

† Private Sector – the total nonfarm payroll accounts for approximately 80% of the workers who produce the entire gross domestic product of the United States. The nonfarm payroll statistic is reported monthly, on the first Friday of the month, and is used to assist government policy makers and economists determine the current state of the economy and predict future levels of economic activity. It doesn’t include: - general government employees - private household employees - employees of nonprofit organizations that provide assistance to individuals - farm employees

The unemployment rate is the percentage of the total labor force that is unemployed but actively seeking employment and willing to work.

The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

Consumer Price Inflations is the retail price increase as measured by a consumer price index (CPI).

Stock investing involves risk including loss of principal.

International investing involves special risks, such as currency fluctuation and political instability, and may not be suitable for all investors.

Yield Curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity dates. The most frequently reported yield curve compares the three-month, two-year, five-year and 30-year U.S. Treasury debt. This yield curve is used as a benchmark for other debt in the market, such as mortgage rates or bank lending rates. The curve is also used to predict changes in economic output and growth.

This research material has been prepared by LPL Financial.

The LPL Financial family of affiliated companies includes LPL Financial and UVEST Financial Services Group, Inc., each of which is a member of FINRA/SIPC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity.

Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

Tracking #1-041464 (Exp. 01/13)

Weekly Economic Commentary

2012-01-24T10:08:00.000-08:00

State of the Union Preview

President Obama’s State of the Union (SOTU), scheduled for Tuesday, January 24, is unlikely to be a big market mover. In fact, most SOTU speeches see less than a 1% move in the stock market on the following day and the average move is only 0.14%. However, the themes and philosophy presented may shape the market’s movements in the months to come.

Rather than break new ground, the SOTU address is likely to echo the President’s December 6 speech in Osawatomie, Kansas. That speech was modeled after President Theodore Roosevelt’s 1910 historic address in that city on economic and social equality that led into 20th century progressivism, the central philosophy of Obama’s presidency.

The many topics of the speech — and their market impacts — can be broken down in terms of what will happen, what will not happen, and what could happen in 2012.

What Will Happen

In the SOTU address, Obama is very likely to highlight the immediate need for Congress to come together to extend the payroll tax cut and unemployment insurance benefits through 2012. In December 2011, a bitterly divided Congress could not come together on how to pay for a year-long extension and so only extended them for two months. We expect Congress to further extend these stimulus measures before they expire at the end of February, but the hostile negotiations — something the markets have had a break from in recent weeks — are likely to garner attention and help to renew market volatility after a remarkably stable advance in the first few weeks of the year.

Regulatory policy, an area where the executive branch is less dependent upon Congress’ leadership, will be a key part of the speech. The President is likely to highlight revamped housing programs, such as the Home Affordable Refinance Program (HARP), and announce a settlement that would end long running negotiations among Obama administration officials, state attorneys general and at least five of the nation’s largest financial services companies over “robo-signing” and questionable foreclosure practices. The settlement could be good news for Financials, one of the top performing sectors this year.

What Will Not Happen

The President is likely to call for increased infrastructure investment in the U.S. economy, including school construction, roads and bridges, and high-speed rails. Congress is unlikely to appropriate the funding to meet the President’s call on these items. Companies in the Industrial sector have performed well so far this year, but do not appear to be pricing in increased domestic infrastructure spending.

Job growth is key to the President’s re-election chances. Historically, inflation-adjusted, after-tax income growth of about 3% appears to be the threshold for incumbents to get 50% of the popular vote. Currently, this measure of per capita income is only growing at 0.1%.

While factors other than jobs have a bearing on the election, job creation may be the key measure by which Obama’s presidency will be judged. However, much like infrastructure initiatives, measures to stimulate job growth presented in the SOTU are unlikely to be funded.

The President will likely address eliminating the so-called Bush tax cuts for higher earners, especially those making $1 million or more a year. In addition, given the recent attention to Mitt Romney’s tax filings, the President may call for applying income taxes to carried interest. With the President due to release his budget on February 6, he may also address overseas corporate tax breaks. However, with the House in Republican hands, none of these tax proposals will pass this year.

What Could Happen

This SOTU may foreshadow the President tilting his focus away from domestic politics to foreign affairs over the course of 2012. In doing so, he is shifting from the area where the President is institutionally weak (domestic policies) to the place where the President is institutionally strong (foreign policy). A Congress divided into two houses, a Supreme Court, and the states limit the President dramatically in domestic politics. However, the Constitution and American tradition give the President tremendous power in foreign policy. The President will surely highlight the U.S. withdrawal from Iraq and the winding down of the war in Afghanistan. Another foreign policy matter that may move the oil markets will be his discussion about Iran and the potential impact of U.S., Japanese, and European sanctions on Iranian oil.

Obama’s re-election strategy may be one of opposition to Congress. Essentially, this was Bill Clinton’s strategy in 1996 with a Republican Congress and it worked. Going into opposition against Congress could energize the President’s base, but that base is in the low to mid-40s. By itself, this may not be enough. Instead, over the next 10 months, Obama’s strategy may be to shift from the domestic aspects of the presidency where he is weaker to the stronger part, foreign policy, where a president can generally act decisively without congressional backing.

The critical issue for post-Iraq war foreign policy may be the U.S. relationship with Iran. An often rumored “October” surprise is the idea of attacking Iran’s nuclear facilities. But a precise strike can be messy since it carries the risk of Iranian retaliation in the Strait of Hormuz through which a meaningful percentage of the world’s oil travels. An approach with less chance for global economic disruption is a generalized air campaign against both Iran’s nuclear and military sites. But, in our view, starting a war is a huge risk. Setting aside all other considerations, from a political point of view, it would alienate Obama’s political base, many of whom supported him because he would not undertake the unilateral military moves of his predecessor. This is not intended to imply President Obama would consider starting a war for political ends, but merely to show that even if it were a consideration it is unlikely to be a successful strategy.

However, there is another foreign policy option, one that would appeal both to Obama’s political philosophy and to his political situation: pulling a Nixon. In February 1972, the last year of his first term as he ran for re-election, President Richard Nixon visited China in a grand diplomatic gesture even while Chinese weapons were being used to kill American soldiers in Vietnam. In another interesting parallel that rings with echoes of the themes of Obama’s SOTU address, President Theodore Roosevelt did the same thing with the Soviets in 1941. A diplomatic engagement with Iran would seem to appeal to the President and his political base and rejuvenate some of the energy around a theme that helped him win the election in 2008.

We will be listening to the SOTU for clues as to the President’s foreign policy initiatives. If the President were to pursue this foreign policy choice, it may have the effect of sharply lowering oil prices — and help to stimulate the U.S. economy — as geopolitical risk fades and added supply returns with the potential for a lift of the long-running embargo that has blocked critical parts and equipment needed to ramp up Iranian oil output. While a gesture by no means guarantees a resolution, the markets may welcome news of a potential arrangement with Iran.

__________________________________________

IMPORTANT DISCLOSURES

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

International and emerging markets investing involves special risks, such as currency fluctuation and political instability, and may not be suitable for all investors.

This research material has been prepared by LPL Financial.

The LPL Financial family of affiliated companies includes LPL Financial and UVEST Financial Services Group, Inc., each of which is a member of FINRA/SIPC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity.

Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

Tracking #1-037503 (Exp. 01/13)

Weekly Economic Commentary

2012-01-10T10:30:00.000-08:00

Does Economic Momentum Exist?

In June 2011, Federal Reserve (Fed) Chairman Ben Bernanke noted that the economic recovery had been “uneven across sectors and frustratingly slow.” In November 2011, Bernanke said that there “have been some elements of bad luck” impacting the economy. Even before November, however, the recovery had been picking up some steam.

Has the economy’s luck turned, and is some forward momentum happening finally? This week’s rather modest set of data, compared to the deluge of data in the first week of 2012, is unlikely to change the market’s view that the U.S. economy gained some momentum as 2011 ended and 2012 began.

The slate of economic data this week — which includes early January readings on initial claims for unemployment insurance and weekly retail sales, December readings on retail sales and consumer sentiment, and November readings on job openings, business inventories and merchandise trade — will likely continue to show that the economy gathered momentum as 2011 drew to a close. The Fed's Beige Book, a qualitative assessment of banking and business conditions in each of the Fed's 12 regional districts, is also likely to garner significant market attention ahead of the late January Federal Open Market Committee (FOMC) meeting. Overseas, Chinese economic reports for December are due this week and are likely to show that China is headed for a soft landing, not a hard landing, and, more importantly, that Chinese inflation continued to moderate in December, which paves the way for more monetary policy easing in China in the coming weeks.

Economic Momentum Is Rare

The U.S. economy rarely proceeds, either forward or backward, in a straight line, accelerating or decelerating evenly as a car would when its driver is applying steady pressure to the gas pedal or the brakes. Normally, economic growth in the United States from quarter to quarter is a series of uneven fits and starts, acting more like a car with a manual transmission being operated by a teenager just learning how to drive.

Over the last 60 years, the quarter-to-quarter change in gross domestic product (GDP), the most comprehensive measure of the health of the economy, has rarely moved steadily up (or down) for more than a few quarters at most. The last time the economy steadily accelerated for three consecutive quarters was in mid-2004 into early 2005. The last time the economy steadily accelerated over four consecutive quarters was in the mid-1950s!

During the first nine quarters of the current economic expansion (which began in mid-2009), the economy has posted an average annualized growth rate of just 2.4%. This pace of growth trails the average growth rate experienced over similar time periods after the mild 1990 – 91 and 2001 recessions (2.8%), and is well below the average growth rate (5.7%) seen in the nine quarters after the severe 1973 – 75 and 1981 – 82 recessions.

However, over the first three quarters of 2011, the economy actually accelerated in a straight line, with growth in the first quarter increasing at a 0.4% annualized rate, 1.3% in the second quarter, and 1.8% in the third quarter. Our view is that the straight-line acceleration will continue into the recently completed fourth quarter of 2011, with real GDP rising at a 3.0 to 3.5% pace versus the third quarter. The third quarter GDP data is due out in late January, although financial markets have probably already discounted the acceleration in economic growth in the fourth quarter. Market participants are now more concerned with growth prospects in the current first quarter of 2012, and, to a larger extent, growth prospects for all of 2012.

The longer-term growth rate (or speed limit) for the U.S. economy is regulated by the growth in the labor force plus the output per worker (productivity). The Great Recession and its aftermath had noticeable impacts on both the growth in the labor force and productivity. However, the Fed (and other market participants) estimate the U.S. economy’s longer-term speed limit as being around 2.5 to 3.0%. Often, the economy is subject to temporary factors (natural disasters, unusual weather, supply chain disruptions, worker strikes, geopolitical events, etc.) that depress growth for a quarter or two, and the economy grows at a pace below its long-term potential. Once those factors fade, the economy oftentimes plays “catch up”, and growth can accelerate for a quarter or two, and grows above its long-term potential growth rate.

Recently, most of the fits and starts impacting the economy have depressed, rather than boosted, economic growth. From the fourth quarter of 2009 through the second quarter of 2010, the economy grew at 3.8%, 3.9%, and 3.8% as growth accelerated from the end of the Great Recession in the second quarter of 2009. However, the first flare-up of the European fiscal crisis in the spring and summer of 2010 (Greece, Portugal and Ireland) acted to depress growth, and later in the year and into 2011, rising consumer energy prices (largely the result of political turmoil in the Middle East) also pressured growth. By mid-2011, the European fiscal crisis broadened out, the dysfunction in Washington surrounding the U.S. fiscal situation negatively impacted both business and consumer sentiment, and the earthquake in Japan in March 2011, along with the long lasting disruptions to the global supply chain, slowed growth to nearly stall speed. An unusually snowy early 2011, together with record flooding and tornadoes in the U.S., also hampered growth in early 2011.

Momentum Turned in Late 2011

As 2011 turned into 2012, however, many, but by no means all, of these temporary factors that depressed growth between mid-2010 and mid-2011 were fading and beginning to reverse course, which appeared to provide the economy with some momentum:

· The global supply chain disruptions due to the earthquake in Japan had largely run their course, although massive flooding in Thailand in mid-to-late 2011 has already begun adversely impacting output of some key components in the technology area.

· Consumer energy prices moved sharply lower over the second half of 2011, and declines in food prices have also helped to cool consumer inflation.

· The fiscal and legislative concerns surrounding the debt ceiling, our nation’s credit rating, and the extension of payroll tax cuts and unemployment insurance benefits appear to have waned for now. In general, the market and economy-driving political battles that hampered growth in 2011 are unlikely to be repeated in 2012, although they simmer just below the surface.

· While the uncertainty surrounding the European fiscal situation remains a concern for consumers and businesses, our view is that recent policy actions by European politicians and the European Central Bank (ECB) have taken the worst case scenario off the table for now.

Looking ahead, warmer-than-usual weather, monetary policy easing in China, strong auto production schedules for the first quarter, the recent drop in initial claims for unemployment insurance, the surge in consumer sentiment, and the solid December jobs report (released on Friday, January 6) all suggest that “economic momentum” will persist into the first quarter of 2012. However, with several sectors of the economy still struggling (housing, state and local government, construction of office parks, malls and factories), another round of economic speed bumps could very easily slow the economy’s hard won momentum as 2012 progresses.

_________________________________________

IMPORTANT DISCLOSURES The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

Stock investing involves risk including loss of principal.

International investing involves special risks, such as currency fluctuation and political instability, and may not be suitable for all investors.

Credit rating is an assessment of the credit worthiness of individuals and corporations. It is based upon the history of borrowing and repayment, as well as the availability of assets and extent of liabilities.

This research material has been prepared by LPL Financial.

The LPL Financial family of affiliated companies includes LPL Financial and UVEST Financial Services Group, Inc., each of which is a member of FINRA/SIPC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity.

Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

Tracking #1-035765 (Exp. 01/13)

Weekly Economic Commentary

2012-01-04T10:04:00.001-08:00

Hitting the Ground Running

Financial markets absorbed a lot of bad news in 2011, but will have to set those memories aside quickly here in the New Year, and be ready to focus on another key round of economic data and policy events. Key reports on the state of the manufacturing sector, consumer spending and the labor market as 2011 ended will compete for attention with the minutes of the December 13 Federal Open Market Committee (FOMC) meeting.

As noted in our final Weekly Economic Commentary of 2011, “Bucking the Trend” (December 19, 2011), in recent months, domestic manufacturing activity has bucked the global trend of deceleration, and has reaccelerated a bit. Part of the reacceleration has come as the global supply chain returned to normal after the Japanese earthquake and tsunami. For example, auto and light truck production in the United States in December was the strongest since early 2008, and orders for durable goods surged by 3.8% month-over-month in November, indicating that the manufacturing sector had enough momentum to carry it into early 2012.

As this report was being prepared for publication, the Institute of Supply Management (ISM) released its report on manufacturing for December. The market is looking for another modest acceleration in manufacturing activity in December. The ISM (a reading above 50 on this index means that the manufacturing sector is expanding while a reading below 50 indicates that the manufacturing sector is contracting; a reading at or below 42 indicates a recession) decelerated sharply from readings over 60 in early 2011 to just 50.6 in August, as the domestic manufacturing sector experienced the full brunt of the global supply chain disruptions. Since then, the ISM has moved steadily higher as the global supply chain recovered.

However, the likely recession in Europe along with slower growth in China and other emerging markets may halt the improvement in the manufacturing sector in early 2012. Our view is that the turmoil in Europe and the slowdown in China have probably already had an impact on manufacturing in the United States, though manufacturing has been stronger than the consensus forecast just a few months ago.

The consumer will also be in the spotlight this week, as retailers report their December sales and automakers report their tally of December auto and light truck sales. In recent weeks, consumer sentiment has recovered nearly all the ground lost during, and just after, the wrenching debate in Washington over the debt ceiling in July and August 2011. Lower gasoline and grocery prices as well as some better news on housing helped to lift sentiment, but sentiment continued to be weighed down by horrible news in Europe, the late December 2011 wrangling in Washington over the extension of the payroll tax cuts, and extreme volatility in the financial markets.

In mid-December, the National Retail Federation (NRF) — a trade group of the nation’s retailers — raised its 2011 holiday sales forecast by a full percentage point. The group, which forecast a modest 2.8% year-over-year gain in holiday shopping in 2011 back in early October 2011, now says holiday shopping is likely to rise by 3.8% — above the long-term average gain in holiday sales of 2.6%, but below the robust 5.2% sales gain seen during the 2010 holiday shopping season.

As noted in our Weekly Economic Commentary from December 19, in the past, the National Retail Federation has been very conservative in its holiday sales forecasts. Thus, the positive guidance provided by the NRF along with the return of cold weather to much of the nation in mid-December, and the solid gain in the equity market since September, all suggest that sales are likely to come in at around 4 to 5% when all the receipts are counted. Retailers will report their December sales on Thursday, January 5.

The key report of the week is likely to be the December employment report, due out on Friday, January 6. Underlying improvement in the labor market in recent months has helped to drive the number of Americans filing initial claims for unemployment insurance to three-and-a-half-year lows and has also probably helped to boost consumer sentiment as well. The December employment report will provide a comprehensive look at the labor market in the month.

Our view is that the labor market is stuck in neutral, but recent data suggests it may be moving into gear, as some of the economic, policy and regulatory uncertainty that restrained hiring in the middle part of 2011 is beginning to lift. This is by no means an “all clear” on the labor market, as the private sector economy shed more than 8.8 million jobs between the end of 2007 and early 2010, and has added just under 3 million back since then. A steadier pace of economic growth coupled with ongoing reduction in the economic, policy and regulatory uncertainty that weighed on hiring will lead to an improved labor market in the months and quarters ahead.

The unemployment rate, which is derived from a survey of 60,000 households, is expected to tick up to 8.7% in December after falling a stunning 0.4% between October and November to 8.6%. The dip in the rate, which was widely questioned at the time, now seems more reasonable given the data we now have on initial claims, consumer sentiment and consumer spending for November and December. The unemployment rate is calculated by dividing the number of unemployed persons seeking work (about 14 million) by the number of people in the labor force (about 154 million). The unemployment rate peaked at 10.1% in October 2009, but was as low as 4.4% as recently as early 2007.

The monthly job count is derived from a survey of businesses (140,000 businesses representing more than 400,000 worksites) and has been conducted each month for more than 60 years. The market is expecting an increase of 160,000 private sector jobs in December, a slight acceleration from the 140,000 private sector jobs created in November. From January through November 2011, the economy created an average of 156,000 private sector jobs per month, which is about the same pace at which the labor force increases each month, which helps to explain why the unemployment rate has remained around 9.0% in 2011. While the private sector is expected to have added about 160,000 jobs in December, the public sector (federal, state, and local governments) is expected to see another drop in jobs. In particular, the state and local government sector shed jobs in ten of the first eleven months of 2011 and in 32 of the past 40 months. In all, state and local governments have shed 610,000 jobs since mid-2008, an average of about 15,000 per month. We expect this pace of downsizing in the state and local government sector to persist for the foreseeable future as state and local governments struggle to realign costs with revenues. We expect that 2012 will be another year in which the state and local government sector provides little support for the overall economy.

Communication Clarification from the Fed?

As this report was being prepared for publication, the Federal Reserve (Fed) will release the minutes of its December 13 FOMC meeting. The December 13 FOMC meeting itself was a non-event, as the Fed made very few changes to the statement it released after the meeting, reiterated its promise to keep rates at extraordinarily low levels until at least mid-2013, and maintained its program of extending the maturity of its Treasury holdings to keep yields low in order to encourage more borrowing by households, homebuyers, and businesses (dubbed “Operation Twist”, set to end in mid-2012).

Between now and then, Fed policymakers must grapple with the European financial crisis and its impact on the global and U.S. economies. As the Fed continues to monitor its view of the economy — which is more optimistic than our view, the consensus view, the market’s view and the financial media’s view — one of the tools it can employ is its communications policy. Market participants are hoping to learn more about how the Fed intends to alter the way it communicates with the public, the markets and its bosses in Congress from the minutes of the December 13 meeting.

However, given that the December 13 meeting was just a one-day meeting — four of the Fed’s eight meetings a year are two-day affairs at which policymakers craft a new economic forecast — the Fed was unlikely to have agreed to employ any of its new “tools” at that meeting, but it more than likely discussed the options on the table ahead of the two-day FOMC meeting at the end of this month. In our view, those tools would include enhancing the way the Fed communicates with the public, and, if warranted, yet another round of fixed income security purchases in the open market, also known as quantitative easing, round three (QE3). While the economic hurdle of implementing QE3 may be low, the political hurdles both within and outside the Fed remain high, which leaves only the Fed’s communication policies as a viable alternative in the near term.

As we noted in a recent Weekly Economic Commentary, while more timely communication from the Fed is one possibility, the minutes of recent FOMC meetings (prior to the December 13 meeting) suggest that Fed policymakers are leaning toward providing more clarity on their views of inflation, economic growth, their balance sheet (Operation Twist, QE3, etc.) and even interest rates. Some members of the FOMC have even hinted that having the Fed target a level of gross domestic product (GDP) or inflation may be appropriate ways to communicate with the public and financial markets (and its bosses in Congress, too!). Thus, we expect the communications issue was a key topic of discussion at the December 13 FOMC meeting, and the minutes of that meeting will likely pave the way for some action to be taken on the communications front at the two-day FOMC meeting in late January 2012.

_____________________________________________

IMPORTANT DISCLOSURES The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

Stock investing involves risk including loss of principal.

Quantitative Easing is a government monetary policy occasionally used to increase the money supply by buying government securities or other securities from the market. Quantitative easing increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity.

International investing involves special risks, such as currency fluctuation and political instability, and may not be suitable for all investors.

The Federal Open Market Committee action known as Operation Twist began in 1961. The intent was to flatten the yield curve in order to promote capital inflows and strengthen the dollar. The Fed utilized open market operations to shorten the maturity of public debt in the open market. The action has subsequently been reexamined in isolation and found to have been more effective than originally thought. As a result of this reappraisal, similar action has been suggested as an alternative to quantitative easing by central banks.

The University of Michigan Consumer Sentiment Index (MCSI) is a survey of consumer confidence conducted by the University of Michigan. The Michigan Consumer Sentiment Index (MCSI) uses telephone surveys to gather information on consumer expectations regarding the overall economy.

This research material has been prepared by LPL Financial.

The LPL Financial family of affiliated companies includes LPL Financial and UVEST Financial Services Group, Inc., each of which is member of FINRA/SIPC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity.

Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

Tracking #1-033445 (Exp. 01/13)

Weekly Economic Commentary

2011-12-20T10:47:00.000-08:00

Bucking the Trend

Housing, the consumer, and the manufacturing sectors will likely dominate the economic landscape this week in the United States, as the U.S. government’s economic data mills make one final push ahead of the traditional lull in the economic calendar the week between Christmas and New Year’s Day. Of course, the U.S. economic data has taken a back seat to other events in recent weeks, and this week is not likely to be an exception. The debt dilemma in Europe, the final wrangling in Congress over the extension of the payroll tax cut and unemployment benefits, along with the fallout from the death of North Korean leader Kim Jong Il might once again force financial market participants’ focus elsewhere.

The state and local government sector is likely to continue exerting downward pressure on U.S. economic growth in 2012, even after restraining growth in gross domestic product (GDP) in all but three of the 15 quarters since the beginning of 2008.

The Week’s Economic Reports Likely to Take a Back Seat to Washington, Europe and Korea

Even as consumers rush to make their final purchases of the 2011 holiday shopping season — Hanukkah begins on December 20 and ends on December 28, and of course Christmas is December 25 — the government’s data mills are making one last push to get all of the economic data out the door. This week’s dataset in the United States is dominated by housing, manufacturing and the consumer. The housing data due this week includes a mix of reports on sales, prices, starts, permits and sentiment for both November and December 2011. In general, the housing reports due this week are likely to show that the modest recovery in the housing market that began nationally in early 2009 continued through the end of 2011.

Manufacturing is another focus of this week’s data in the United States. In recent months, domestic manufacturing activity has bucked the global trend of deceleration, and has reaccelerated a bit. Part of the reacceleration has come as the global supply chain returned to normal after the Japanese earthquake and tsunami. For example, auto and light truck production in the United States in the latest week (ending December 16) was the strongest since early 2008. Auto and light truck production has not been sustained at these levels since late 2007, prior to the onset of the Great Recession.

This week, data on durable goods orders and shipments in November are likely to provide further evidence that the U.S. manufacturing sector continues to move in the right direction as 2011 draws to a close. Will the likely recession in Europe along with slower growth in China and other emerging markets impact manufacturing in the United States in 2012? It almost certainly will, but it probably already has had an impact. But, despite the slowing, the underlying strength in the manufacturing sector has been stronger than the consensus thought just a few months ago.

Finally, the consumer will be in the spotlight this week as well with the regular weekly reading on retail sales due out on Tuesday, December 20, the University of Michigan’s consumer sentiment index for December on Thursday, December 22, and the November personal income and spending data on Friday, December 23. Consumer spending, which accounts for two-thirds of the overall economy, has been buoyed in recent weeks by a sharp drop in gasoline and other consumer energy prices, better news on the labor market and more stability in the housing market. Last week (December 12 – 16), the National Retail Federation (NRF) — a trade group of the nation’s retailers — raised its 2011 holiday sales forecast by a full percentage point. The group, which forecast a modest 2.8% year-over-year gain in holiday shopping in 2011 back in early October 2011, now says holiday shopping is likely to rise by 3.8% — above the long-term average gain in holiday sales of 2.6%, but below the robust 5.2% sales gain seen during the 2010 holiday shopping season.

In the past, the National Retail Federation has been very conservative in its holiday sales forecasts. Thus, the guidance provided by the NRF last week, along with the return of cold weather to much of the nation in mid-December, and the solid gain in the equity market since September, all suggest that sales are likely to come in at around 4 to 5% when all the receipts are counted. Retailers will report their December sales on Thursday, January 5.

State and Local Governments Likely to Continue to Be a Drag on Economic Growth in 2012

Since the onset of the Great Recession in the first quarter of 2008, the state and local government sector — traditionally a reliable, though modest source of strength for the U.S. economy over the past 30 years — has exerted downward pressure on economic growth amid a major disconnect between revenues and spending. Over that time (15 quarters), the state and local government sector has been a drag on overall GDP in 12 quarters, or 80% of the time. Between the end of World War II and the end of 2007, the state and local government sector made a positive contribution to growth 85% of the time.

As the Great Recession took hold, state and local governments struggled to match declining revenues — as property taxes, corporate taxes, sales taxes, income taxes and fees all were negatively impacted by the downturn — with rising costs. The most visible realignment of costs to lower revenues came in state and local government employment. Since peaking in August 2008, state and local governments have shed nearly 4% of their workers, or more than 610,000 jobs. If anything, that figure probably understates the impact to the overall economy, because it does not take into account that many older state and local government employees are retiring early, and being replaced by lower paid workers, who often are not receiving the same level of benefits.

Looking ahead, the decline in state and local government workers is likely to persist into 2012, though at a more modest pace than over the past three and a half years. As the economy has stabilized in 2010 and 2011, so too have state and local government revenues. However, the Great Recession did little to relieve state and local governments of their obligations to meet mounting post-retirement benefits like healthcare and pension costs for current and former employees. When continued pressure on federal aid to state and local governments is factored in it leaves state and local governments with very little wiggle room to hire any additional workers or make any major commitments to spend on social programs, education or infrastructure projects. Thus, one of the few avenues left for state and local governments to continue to align short and long term costs with revenues is to continue to pare workers and cut back on expansion of existing programs. The net result is likely to be another year in which the state and local government sector provides little support for the overall economy.

_________________________________________________

IMPORTANT DISCLOSURES The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

Stock investing involves risk including loss of principal.

International investing involves special risks, such as currency fluctuation and political instability, and may not be suitable for all investors.

This research material has been prepared by LPL Financial.

The LPL Financial family of affiliated companies includes LPL Financial and UVEST Financial Services Group, Inc., each of which is a member of FINRA/SIPC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity.

Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

Tracking #1-031423 (Exp. 12/12)

The Investment Tax Landscape: Countdown to 2013

2011-12-12T15:07:00.000-08:00

In December 2010, Congress extended the so-called Bush-era tax cuts by passing the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. However, for investors, the legislation may represent not a pardon but a stay of execution. While it's true that federal tax rates on income, qualifying dividends, and capital gains have been extended through the end of the 2012 tax year, many of the issues that influenced the debate over tax rate extensions will continue to be the subject of heated discussion. As a result, investors have been granted a reprieve while Congress wrestles with those issues. That's time you can use to think about how best to position your portfolio.

The can won't stay kicked down the road forever

Why should you look at the time between now and 2013 as an opportunity? Because the U.S. budget deficit is at levels that both political parties recognize can't be sustained long-term. Even if Congress canagree on budget cuts, the possibility of higher taxes in the future can't be ruled out.

There are several categories of investors who should be paying particular attention to the planning process in the coming years. They include people with investments that have appreciated substantially in value; people who rely on dividends and bonds to provide them with ordinary living expenses; and people who are considering investing in the newly issued stock of a small business.

Capital gains and dividends

The tax cut extensions gave investors who have large unrealized capital gains some breathing room. Rather than a top tax rate of 20%, long-term capital gains will generally continue to be subject to a maximum rate of 15%, and the rate for investors in the lowest two tax brackets will remain at zero. If you own investments that have appreciated substantially in value and that now represent a bigger portion of your portfolio than you'd like, you have another chance to examine whether it makes sense to unwind those investments before the end of 2012. Taxes obviously are only one factor in making such a decision, of course. However, if you've been considering selling an asset anyway, you've got some time to plan and gradually implement a strategy for doing so.

Two points worth remembering: first, unless further action is taken, the top long-term capital gains rate will increase to 20% after 2012 (a top rate of 10% will apply to investors in the 15% tax bracket); and second, even at the increased level, the rates on those gains would still be relatively low. As recently as 1986, under President Ronald Reagan, the Tax Reform Act of 1986 provided for capital gains to be taxed at the same rates as ordinary income, with a top rate of 28%. To paraphrase Mark Twain, no one is safe when Congress is in session, and there's no guarantee that the top capital gains rate after 2012 might not be increased beyond the scheduled 20% maximum.

Qualified dividends will continue to be taxed through 2012 at the long-term capital gains rates rather than as ordinary income, as they were before 2003 and are scheduled to be again beginning in 2013. The higher your tax bracket and the more reliant you are on dividends for your income, the more you should be aware of the potential impact if that income were subject to higher taxes. Again, many factors will affect your decision about the role of dividends in your portfolio, including the potential for higher interest rates in the future. However, doing some "what-if" analysis might be useful.

Taxable vs. tax-free bonds

Taxable bonds typically pay higher interest rates than municipal bonds. However, if you're in a relatively high tax bracket or expect to be in one in the future, munis can potentially offer a better after-tax return. They may be worth a second look between now and 2013, when--separate from any potential increase in federal income tax rates--the unearned income of people making $200,000 a year ($250,000 for couples filing a joint return) is scheduled to be subject to a new 3.8% Medicare contribution tax. Absent further legislative changes, that could make munis even more attractive for affluent investors.

However, as with any investment decision, there are many factors to consider. Local and state governments have come under severe financial constraints in recent years, and though the default rate on muni bonds has historically been low, default by individual governmental bodies is always possible. Also, the legislation that extended the tax cuts did not authorize continued issuance of Build America Bonds (BABs) beyond 2010. During the almost two years BABs were authorized, many local and state governments used them to tap the taxable bond market; that temporarily reduced the issuance of new tax-free munis. However, since BABs can no longer be issued without further authorization from Congress, the supply of new munis may increase, which could affect prices. Finally, interest rates have been at historic lows since the end of 2008; since bond prices move in the opposite direction from their yields, rising interest rates would not be good news for bond prices.

2013 and beyond

The nation's financial pressures will almost certainly mean continued adjustments to the tax code as 2013 approaches. Though there are no guarantees about what will happen when the new provisions expire, investors generally have another chance to fine-tune their planning efforts while taxes remain historically low. If a bird in the hand is worth two in the bush, why not get expert help in taking advantage of the opportunities available now?

College Costs Keep On Climbing

2011-12-12T11:05:00.000-08:00

As federal and state budgets continue to shrink due to falling revenues and lawmakers attempts to reign in deficits and spending, the fallout is being increasingly absorbed by current and future college students and their families as they try to deal with the skyrocketing costs of post-secondary education around the country.

Two recent reports from the College Board Advocacy & Policy Center, Trends in College Pricing 2011 and Trends in Student Aid 2011 detail the rapid rise in tuition costs for the nation’s two- and four-year public, private and for-profit colleges and universities. The headline of the report is an 8.3% increase nationally in tuition and fees at public four-year colleges and universities (a 4.5% increase at private four-year colleges) between 2010-2011 and 2011-2012. The report also breaks out the increase state-by-state, however, and to no one’s surprise, California lead the way in tuition and fee increases during the same period.

“California, which enrolls about 10 percent of the nation’s full-time public four-year college students, had the highest percentage increase in published in-state tuition and fees (21 percent) for that sector in 2011-12.”

Those numbers are causing sticker shock to the millions of families trying to cope with current costs or plan for the future, and causing them and their financial advisors to completely re-evaluate their projections. And while the costs continue to rise, it has not become a deterrent for enrollment. Total post-secondary enrollment increased by about 22 percent between 2005-06 and 2010-11 according to the reports as young people clearly realize the importance of a college degree as it relates to future earnings power.

“While the importance of a college degree has never been greater, its rapidly rising price is an overwhelming obstacle to many students and families,” said College Board President Gaston Caperton. “Making matters worse is the variability of price from state to state.”

In California, already one of the nation’s most expensive states to attend college, a recent budget proposal by University of California officials is calling for steep rate increases of up to 16% per year over the next four years if the state doesn’t increase funding to the U.C system. According to a recent Associated Press report, “In July, UC officials approved a 9.8 percent tuition increase for the current school year -- on top of a previously approved 8 percent -- after the state reduced UC funding by $650 million, or about 20 percent. The system could lose another $100 million if the state generates less revenue than anticipated.”(Chea)¹. While the regents have not yet taken action on the newest proposed increases, unless greater funding can be obtained from the state, which seems unlikely, it is hard to imagine that further large-scale increases will not be implemented.

It is important to understand that while the percentage increases in tuition and fees are eye-popping, the published charges are not always an accurate indicator of the actual total costs of attending various universities. The price variability of additional costs such as room and board, is often magnified due to the difference in cost of living from region to region. According to a recent article in the Daily Californian, “Although UC Berkeley’s in-state tuition and fees — which were $8,353 in 2009-10 — are the lowest of all the UC campuses with the exception of UCLA, the high cost of living in the Bay Area makes the total cost for students much higher. According to estimates from the report, the total cost of attending UC Berkeley in 2009-10 was $28,312.” (Bickham)².

Students are increasingly forced to make tough budgetary decisions in the face of these additional costs in an effort to control their total debt obligations once they have finished school. One of our interns from U.C Berkeley recently explained the measures she and some of her classmates have made to this end: “…on-campus student housing has gotten so expensive, that for this year, 5 of us got together and found a one bedroom apartment to share which costs less than half of what we would be paying for student housing”.

Students are making these kinds of decisions because they are keenly aware that there is no guarantee of a good-paying job waiting for them once they graduate with their degree in-hand. “In the current economic climate, recent college graduates who borrowed for their education face particular challenges in paying back their student loans. The unemployment rate for young college graduates rose from 8.7 percent in 2009 to 9.1 percent in 2010, the highest annual rate on record.”(Reed)³. These numbers closely mirror the current national averages for unemployment which is surprising given that unemployment among college graduates has traditionally been considerably lower than the national average.

The rapidly rising prices of college tuition coupled with the deterioration of the labor market following the recent deep recession have contributed to soaring American student debt, which, by some estimates, now exceeds a trillion dollars and is larger than total US credit card debt. It is no wonder that among current students who are absorbing these higher costs, and recent graduates facing the realities of a stagnant job market, frustration is mounting. The huge debt burdens and the inability to service them are among the main undercurrents of the ‘Occupy’ movements around the country, and the recent clashes on college campuses highlight the growing concerns surrounding them.

Despite the fact that the state and federal governments have slashed funding for public higher education and all indications are that trend will continue for the foreseeable future, they have at least tried to provide some small amount of relief by way of tax credits and continued favorable tax treatment of certain college savings vehicles such as 529 plans. These measures are small consolation however for the growing numbers of over-leveraged, under-employed young people entering the workforce each year fresh out of America’s colleges and universities.

So what does all of this mean for the millions of families that are trying to save for future college costs? Certainly, the importance of a college degree is as great as ever, even if it doesn’t grant the holder an automatic path to financial freedom. Increasingly, we are seeing parents using these current conditions as a teaching moment for their children on the importance of financial literacy and the value of saving. Providing guidance and incentives for children to learn to budget and save for their own educations can have a lasting effect in preparing them for their post-education lives. As always, careful planning and saving are the keys to success, and the earlier the better.

¹ Chea, Terence. "UC Tuition Could Nearly Double Under Budget Plan." Huff Post Los Angeles 09 Sept 2011. n. pag. Web. 16 Sept. 2011

² Bickham, Travis. "UC Berkeley student loan debt less than nation’s average." Daily Californian 07 Nov 2011. n. pag. Web. 9 Nov. 2011

³ Reed, Matthew, Lauren Asher, Pauline Abernathy, Diane Cheng, Debbie Frankle Cochrane, and Laura Szabo-Kubitz. "Student Debt and the Class of 2010." Project on Student Debt. The Institute for College Access and Success, Nov 2011. Web. 9 Nov 2011.

Weekly Economic Commentary

2011-12-06T10:17:00.001-08:00

The Labor Market Continues Its Long Climb Back

Market participants with the loudest voices and financial media were virtually convinced during the summer and fall of 2011 that the U.S. economy was in, or about to enter, a recession. Our view was, and remains, that the U.S. economy would avoid recession in 2011 and 2012, and the recent run of better-than-expected economic data in the United States has reinforced our view. We expect the U.S. economy to grow about 2% in 2012, which is below the long-term average and the consensus forecast, while emerging market countries post stronger growth and Europe experiences a mild recession.

Our forecast for a economic growth in 2012 is supported by solid business spending and modest, but stable, consumer spending. While inflation may recede early in the year, by year-end it may begin to re-emerge as the impact of a falling dollar, rising commodity prices and the record-breaking monetary stimulus by the Federal Reserve (Fed) begin to be reflected in prices. We expect global growth in 2012 to be supported by solid emerging market growth including the consensus of 8 – 9% growth in China, the world’s second largest economy, while Europe experiences a mild recession.

The Fed’s economic projections, released at the conclusion of the November 2011 Fed policy meeting, call for 2.5 – 2.9% GDP growth in 2012, well above our forecast and the consensus forecast, and an even more robust 3.0 – 3.5% pace of growth in 2013. The Fed’s forecast for the economy represents the upper bound of the range of forecasts for the economy and the labor market for 2012 and beyond, and lies in stark contrast to the financial market and financial media’s dour outlook for the economy next year as noted above.

The Fed surprised investors twice in 2011. First, in August, by announcing its commitment to keep rates at their current low level until at least mid- 2013; and secondly, in September, by announcing a bolder-than-expected Operation Twist, a program to sell short-term Treasuries and buy long-term Treasuries to pressure long-term interest rates lower. In late October 2011, several Fed officials discussed so-called Quantitative Easing 3 (QE3), or another round of large-scale securities purchases, perhaps this time taking place in the mortgage-backed securities market. While we think another program of stimulus from the Fed faces high hurdles, it is clearly leaning towards keeping rates low, which is generally a positive for the bond market.

However, the Fed may find itself increasingly between a rock and a hard place as 2012 matures. Too little growth and the fear of deflation is the “rock” that the Fed has been aggressively focused on avoiding. The Fed is much less concerned about the “hard place,” or the entire stimulus it has provided leading to too much inflation. Now, the distance between the two risks is far apart. However, the Fed may find itself in an increasingly narrow gap between a rock and a hard place as 2012 matures leading to higher yields in the bond market by year-end. While the Fed may have to scramble in 2013 to begin to take up some of the extraordinary amount of monetary stimulus now in the system, in the meantime it is likely that the economy will fail to live up to the Fed’s relatively lofty expectations for growth.

The Labor Market Continued Its Long, Slow Climb Back in November

The solid, but not spectacular November employment report (released on Friday, December 2) points to modest economic growth, not recession, in the fourth quarter. On balance, the details of the November jobs report were mixed, but the report was generally consistent with other data released in recent weeks that suggested a modest improvement in the labor market in November. The survey of businesses within the November employment report revealed that the private sector economy added 140,000 jobs in November, and that the job count in prior months was higher than previously thought. While the result was below both the published consensus (+150,000) and the "whisper number" (175,000 or more), the report generally confirmed further modest improvement in the labor market. The economy shed 8.9 million private sector jobs between late 2007 and early 2010, and has added back just 2.6 million jobs since then. At the current pace of private sector job creation — our forecast is for a gain of around 150,000 jobs per month — it would take another three and a half years to recoup all the jobs lost during the Great Recession.

The survey of households within the monthly employment report revealed that the unemployment rate dropped to 8.6% in November from 9.0% in October. The 8.6% unemployment rate was the lowest since March 2009, when the rate was on the way up to its peak of 10.1%. The media’s focus on Friday was on the stunning 0.4% point drop in the unemployment rate in November. The drop was partly due to an improving labor market, and probably partly the result of some statistical quirks.

The unemployment rate is calculated by dividing the number of unemployed (13.3 million) by the number of persons in the labor force (154 million). In November, the labor force fell by 315,000 while the number of unemployed fell by 594,000. Both readings are relatively large by historical standards. However, in the past 65 years, in 60% of the months in which the unemployment rate drops by at least 0.3% in a month, the labor force also posts a monthly decline. The household survey has its own tally of employment, and that measure increased by 278,000 in November, and has increased by 1.3 million in the past four months. This pace of job growth is consistent with job growth during the economic recoveries in the mid-90s and mid-2000s. It needs to be sustained in the coming months in order for the labor market to continue to heal.

Our view remains that the U.S. economy is likely to grow between 2.5% and 3.0% in the fourth quarter of 2011 and post growth of around 2.0% in 2012. A further, dramatic deterioration of the fiscal and market situation in Europe, a policy mistake here in the United States or abroad, or an exogenous event (terror attack, natural disaster, etc.), among other events, may cause us to change our view.

________________________________________________

IMPORTANT DISCLOSURES The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

International investing involves special risks, such as currency fluctuation and political instability, and may not be suitable for all investors.

This research material has been prepared by LPL Financial.

The LPL Financial family of affiliated companies includes LPL Financial and UVEST Financial Services Group, Inc., each of which is a member of FINRA/SIPC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity.

Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

Tracking #1-027809 (Exp. 12/12)

Weekly Economic Commentary

2011-11-29T15:33:00.001-08:00

A November To Remember for the Economy?

Concerns over the eurozone dominated the month of November in the global financial markets, leading to another difficult month for equity market returns and risk assets in general, and another solid month of returns for U.S. Treasuries and other safe-haven investments. While the economic backdrop soured in the eurozone, and continued to slow in China, the U.S. economy held up reasonably well in November, and this week’s batch of economic reports are likely to support that view. Monetary policy will also garner a great deal of attention this week, with a full slate of Federal Reserve (Fed) officials scheduled to speak, along with the release of the Fed’s Beige Book, a qualitative assessment of economic and business conditions in each of the 12 regional Fed districts. No fewer than six global central banks meet to set rates this week; three of the six are likely to cut rates.

Throughout November and indeed over the past several months as well, financial markets have largely ignored the solid, but not spectacular, growth in the United States. Many market participants remain focused on the current and potential impact of the euro-zone crisis on the United States and global economies, and rightly so. A loss of confidence in policymakers, stresses in banking and financial markets, and higher borrowing rates are all ways in which the fiscal mess in Europe may impact the United States and other global economies. A likely recession in the eurozone (and in the United Kingdom) will slow U.S. exports to those areas. The United States sends about 15% of its exports to the eurozone and the United Kingdom. Since 20% of China’s exports head to the Eurozone, China’s export driven economy is likely to slow as well. While the direct impact of a recession in Europe on the global economy would certainly slow global growth, a global recession similar to the Great Recession of 2007 – 2009 is not a foregone conclusion, although many markets are already in the process of pricing in just such an outcome.

Easier monetary policy can offset some, but not all, of the financial market stresses and higher borrowing costs associated with the eurozone fiscal mess. Many emerging market central banks are already easing policy, and developed market central banks, including the Fed, have already begun to use nontraditional measures (such as quantitative easing) to cushion the global economy from the situation in Europe.

As we wrote in last week’s Weekly Economic Commentary, financial markets continue to ignore the relatively solid run of economic data seen over the past several months, focusing instead on the fiscal crisis in Europe. Nevertheless, the economic data helps to drive earnings prospects in the United States, and earnings are the ultimate driver of stock prices. The economic and corporate data may not matter to market participants today, but once it starts to matter again, some market participants may be surprised by how well the U.S. economy is performing.

Will it be a November to Remember for the United States Economy?

This week, the focus in the United States will be on November data, with key reports on employment, the consumer, and manufacturing. The reports on employment, which include the ADP employment report on private sector hiring in November, the Challenger report on layoff and hiring announcements in November, along with the government’s November employment report, are likely to be consistent with the weekly reports on initial claims for unemployment insurance in November which revealed that the labor market was improving, albeit modestly as the month progressed. The market is looking for about a 150,000 gain in private sector employment in November, following the 104,000 increase in private sector jobs in October and an average monthly gain of 152,900 so far this year. The unemployment rate is expected to remain at 9.0% in the month.

Early reports from the retailers over the just-completed Thanksgiving weekend suggest that the consumer got off to a very good start in the holiday shopping season, confounding the experts who were looking for a more modest gain in sales this holiday shopping season. The market will get more detail on the solid start to the 2011 holiday shopping season as retailers report their November sales (and provide guidance for December) on Thursday, December 1. The market will also digest a report on vehicle sales in November this week. Vehicle sales and production are at three-and-a-half year highs.

The manufacturing sector is also in the spotlight this week, highlighted by the Institute for Supply Management’s (ISM) report on manufacturing for November. The market is looking for a slight expansion in manufacturing activity in November to 51.6 from 50.8 in October. A reading above 50 on the ISM indicates that the manufacturing sector is expanding. A reading above 42 has historically been consistent with growth in the overall economy. The ISM has been over 50 in every month since July 2009, and has been above 42 since April 2009.

As previously noted, monetary policy will also be in focus this week, with the release of the Fed’s Beige Book, accompanied by a full roster of Fed speakers. We continue to expect the Fed to pursue historically accommodative monetary policy in the period ahead. Even if the economy tracks to the consensus expectation (roughly 2.0% real gross domestic product growth in 2012 and 2.5% in 2013), the Fed is likely to ease even more in 2012 (via additional purchases of Treasury securities or mortgage-backed securities in the open market), as the Fed’s forecasts for economic growth and the unemployment rate remain more optimistic than the consensus.

The Beige Book is once again likely to be dominated by the word “uncertain”. The words (or derivations of the word) appeared 26 times in the Beige Book released in October and 33 times in the Beige Book released in early September 2011. Europe, the super committee, the economic outlook and the holiday shopping season are all likely to be mentioned in this edition of the Beige Book, which is being prepared ahead of the December 13 FOMC meeting.

There are a number of Fed officials slated to make public appearances this week, but the only member of the Fed’s “center of gravity” set to speak this week is Vice Chair Janet Yellen. We continue to look to the Fed’s “center of gravity” — Chairman Bernanke, Vice-Chair Yellen and New York Fed President Dudley — rather than the fringes of the Fed, for any shift in tone.

Outside of the United States, no fewer than six central banks meet this week to set policy and three of the six (Brazil, Thailand, and the Philippines) are expected to cut rates, in part to help combat the impact of the Eurozone debt debacle on their domestic economies. China’s central bank, the People’s Bank of China (PBOC), does not have a set meeting schedule. However, the PBOC is watching the domestic inflation data in China closely, and may choose at any time to reverse some of the restrictive monetary policy it put in place between early 2010 and mid-2011. The official Chinese ISM report (commonly referred to as the PMI) for November is due out this week, and could provide a catalyst for the PBOC to act, especially if the report shows — as expected — that manufacturing in China contracted in November 2011 for the first time since early 2009.

______________________________________________________

IMPORTANT DISCLOSURES The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

The Beige Book is a commonly used name for the Fed report called the Summary of Commentary on Current Economic Conditions by Federal Reserve District. It is published just before the FOMC meeting on interest rates and is used to inform the members on changes in the economy since the last meeting.

This research material has been prepared by LPL Financial.

The LPL Financial family of affiliated companies includes LPL Financial and UVEST Financial Services Group, Inc., each of which is a member of FINRA/SIPC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity.

Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

Tracking #1-026045 (Exp. 11/12)

Weekly Economic Commentary

2011-11-22T12:03:00.001-08:00

Leading The Way

Concerns over the eurozone are likely to continue to dominate the investing landscape this week, but the super committee’s failure, a full slate of economic data, the minutes of the November 1 – 2 Federal Open Market Committee (FOMC) meeting, along with the build up to “Black Friday”, the unofficial start of the holiday shopping season, will also compete for the market’s attention.

The data in the United States this week include manufacturing (durable goods orders, Richmond Fed, Kansas City Fed, and Dallas Fed), existing home sales, personal income and spending, and the regular weekly readings on initial jobless claims and retail sales. The market continues to ignore the relatively solid run of economic data seen over the past several months, focusing instead on the fiscal crisis in Europe. Nevertheless, the economic data helped to drive earnings prospects in the United States, and earnings are the ultimate drivers of stock prices. The economic and corporate data may not matter today, but once it does start to matter again, some market participants may be surprised by how well the U.S. economy is performing in the fourth quarter.

Orders for core durable goods (business capital equipment expected to last more than one year, excluding defense and aircraft), are expected to post a month-over-month decline in October — as is often the case as the most orders tend to be placed at the end of the quarter, pulling forward demand from the first month of the following quarter. The expected decline in October would mark the fourteenth consecutive time that core orders posted a month-over-month decline in the first month of the quarter (i.e. January, April, July and October). The durable goods data — along with virtually all of the other data we monitor — is seasonally adjusted, and should help to smooth out these anomalies, but this one persists. We will focus on the other aspects of the report (shipments, backlog of new orders, etc.), and we and the markets will discount a mild decline in core orders in October and place more weight on the regional Fed surveys (Kansas City, Dallas and Richmond) of manufacturing for November due out this week.

The release of the minutes from the November 1 – 2 FOMC meeting this week is likely to reignite talk about the internal discord at the Fed, the Fed’s next policy move, and the Fed’s latest forecast for the economy. We will continue to watch the “center of gravity” — Chairman Bernanke, Vice-Chair Yellen and New York Fed President Dudley — for any shift in tone at the Fed, and continue to expect the Fed to pursue historically accommodative monetary policy in the period ahead. Even if the economy tracks to the market’s expectations (roughly 2.0% real gross domestic product growth in 2012 and 2.5% in 2013), the Fed is likely to ease even more in 2012 (via additional purchases of Treasury securities or mortgage-backed securities in the open market), as the Fed’s forecasts for economic growth and the unemployment rate remain more optimistic than the market’s.

Expectations for the holiday shopping period are low. The National Retail Federation is expecting just a 2.8% gain in holiday sales in 2011 versus 2010, while the International Council of Shopping Centers is projecting a gain in holiday sales of between 2.2% and 3.5% from a year ago. ShopperTrak, a group that tracks the number of shoppers at malls, is looking for a 3.0% year-over-year gain in holiday sales, despite a 2.2% drop in foot traffic at the malls this holiday season versus a year ago.

Looking at the relationship between equity market performance and holiday shopping trends over the past 20 years suggests that equity prices drive shopping, not the other way around. Despite the 6% drop in U.S. equity prices over the past week or so, the equity market’s performance since mid-September suggests that holiday sales will increase by between 4.5% and 6.0% from a year ago. Thus, the market has a slightly better outlook for the holiday shopping season than the pundits do, although this does set the bar a bit higher should sales disappoint.

Index of Leading Economic Indicators Place Low Odds on Recession in the Next 12 Months

The index of leading economic indicators (LEI) rose a larger-than-expected 0.9% month-over-month in October, the largest month-over-month increase since February 2011. The October LEI was released on Friday, November 18. The 0.9% month-over-month gain was the sixth consecutive increase, and the twenty-ninth gain in the past 31 months dating back to early 2009. The consensus of economists surveyed by Bloomberg News expected just a 0.6% month-over-month increase in the LEI in October. The gain in October was broad-based as nine of the ten components of the LEI increased in the month. Only vendor deliveries — a measure of the backlog of businesses new orders — were a detractor from the index in October. Because virtually all of the ten components of the LEI are known to the market prior to the release of the report, the LEI is rarely market moving, even when it surprises like it did in October.

The LEI is designed to predict the future path of the economy, with a lead time of between 6 and 12 months. The 0.9% month-over-month increase in the LEI in October pushed the year-over-year gain in the LEI to 6.6%. Over the past 50 years (1962 to today), the year-over-year increase in the LEI has been at least 6.6% in 93 months. Not surprisingly, the U.S. economy was not in a recession in any of those 93 months. Thus, it is highly unlikely that the economy was in recession in October, despite the ongoing fiscal and political turmoil in Europe, the fiscal uncertainty here in the United States and the slowdown in economic growth in China.

But, the LEI is designed to tell market participants what is likely to happen to the U.S. economy, not what has already happened. Three months after each of the 93 months that the LEI was up 6.6% or more, the economy was never in recession. The same is true six months after the LEI is up by 6.6% or more on a year-over-year basis. Looking out 12 months after the LEI is up 6.6% or more, the economy was in recession in just six of the 93 months, or 6% of the time. For the record, those six months all occurred in 1972 and 1973, when the LEI was up strongly in late 1972 and early 1973. The Arab oil embargo — and an overnight tripling of consumer energy prices — in October ‘73 triggered a recession. Aside from that unusual episode, the current strong year-over-year reading on the LEI suggests virtually no chance of recession in the next 12 months.

However, the LEI says the risk of recession in the next 12 month is negligible (6%), but not zero. We would agree. But, the financial markets — along with the historically low level of consumer sentiment — are telling us that the risk of recession is much higher than 6%. Our view remains that the U.S. economy is likely to grow between 2.5% and 3.0% in the fourth quarter of 2011 and post growth of around 2.0% in 2012. A dramatic deterioration of the fiscal and financial situation in Europe, a policy mistake here in the United States or abroad, or an exogenous event (terror attack, natural disaster, etc.), among other events, may cause us to change our view. Market participants continue to assess what impact a potential recession in Europe and slowdown in emerging markets will have on the U.S. economy, and when that impact is likely to be felt.

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IMPORTANT DISCLOSURES The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

The index of leading economic indicators (LEI) is an economic variable, such as private-sector wages, that tends to show the direction of future economic activity.

This research material has been prepared by LPL Financial.

The LPL Financial family of affiliated companies includes LPL Financial and UVEST Financial Services Group, Inc., each of which is a member of FINRA/SIPC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity.

Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

Tracking #1-024993 (Exp. 11/12)

Weekly Economic Commentary

2011-11-15T09:42:00.001-08:00

Moving to the Muddle

The ongoing political and financial turmoil in Europe is likely to draw most of the market’s attention this week. Against that somewhat unsettling backdrop, market participants will digest a relatively busy slate of U.S. economic data for October and November, as well as a full docket of appearances by Federal Reserve (Fed) officials.

With only a scattering of earnings reports and guidance for the third quarter of 2011 remaining, this week’s full slate of economic reports and heavy schedule of Fed speakers will compete with the economic and fiscal turmoil in Europe for the market’s attention. Participants continue to assess what impact a potential recession in Europe and slowdown in emerging markets will have on the United States economy, and when that impact is likely to be felt.

The European summit of late October 2011 produced measures that were clearly a positive and removed the extreme risks in our view. However, details will be slowly forthcoming in the months ahead and implementation risks remain. Delays or disruptions could undermine market confidence and lead to bouts of safe-haven buying of Treasuries. Furthermore, should European economic growth be weaker than expected, investors may deem recently agreed upon safeguards as insufficient and peripheral European government bond weakness may create safe-haven buying of Treasuries.

Looking ahead, developments in Europe will remain a major market driver in the weeks and months ahead, and well into 2012. We believe a financial crisis and accompanying deep global recession erupting from the European debt problems has a small, but not insignificant, chance of taking place. We will continue to monitor the developments and signs of stress in the European banking and sovereign funding markets. But, as Europe muddles along, we believe investors are better served to watch the real-time indicators of economic performance as a guide to market behavior.

This week is a very busy week for U.S. economic data, including reports on:

· Housing: November homebuilders sentiment, October housing starts, third quarter mortgage delinquencies and foreclosures

· Inflation: consumer price index (CPI) and producer price index (PPI) for October

· Manufacturing: industrial production for October, Philly Fed and Empire State Manufacturing indices for November

· The consumer: October retail sales and weekly retail sales for the week ending November 12

In addition, the weekly reading in initial claims for unemployment insurance will be closely watched as this data set in recent weeks has suggested some positive momentum in the labor market.

In addition to the data, there are a number of Fed speakers on tap this week, although Fed Chairman Bernanke is not among them. This week’s Fed speakers lean a bit toward the “dovish” side (Fed officials who favor the full employment side of the Fed’s dual mandate of low inflation and full employment), although some notable “hawks” (Fed officials who favor the low inflation side of the Fed’s dual mandate) are on the schedule as well. We will continue to watch the “center of gravity” at the Fed - Chairman Bernanke, Vice-Chair Yellen and New York Fed President Dudley - for any shift in tone. Of the three, only Dudley is slated to speak this week. The Fed will release the minutes of the November 1 – 2 Federal Open Market Committee (FOMC) meeting on November 22, and the next Beige Book, a qualitative assessment of business and financial conditions in each of the 12 regional Fed districts, is due out on November 30. The next FOMC meeting is December 13.

We continue to expect the Fed to pursue historically accommodative monetary policy in the period ahead. Even if the economy tracks to the market’s expectations (roughly 2.0% real gross domestic product growth in 2012 and 2.5% in 2013), the Fed is likely to ease even more in 2012 (via additional purchases of Treasury securities or mortgage-backed securities in the open market), as the Fed’s forecasts for economic growth and the unemployment rate remain more optimistic than the market’s.

_____________________________________________

IMPORTANT DISCLOSURES The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

Core CPI is a subset of the total Consumer Price Index (CPI) that excludes the highly volatile food and energy prices. It is released by the Bureau of Labor Statistics around the middle of each month. Compare to Personal Consumption Expenditures (PCE); Core PPI; Producer Price Index (PPI).

This research material has been prepared by LPL Financial.

The LPL Financial family of affiliated companies includes LPL Financial and UVEST Financial Services Group, Inc., each of which is a member of FINRA/SIPC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity.

Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

Tracking #1-022964 (Exp. 11/12)

Weekly Economic Commentary

2011-11-08T15:20:00.000-08:00

Can The Labor Market JOLT the Economy?

The upcoming week (November 7 – 11) is heavy on speakers from the Federal Reserve (Fed) and relatively light on U.S. economic reports, providing markets ample time to reflect on the October employment report and to focus on the deliberation of the congressional super-committee and the latest news in Europe. The next round of Chinese economic data for October is due out this week, as the market continues to debate the hard landing/soft landing issue in China. We will continue to watch the “center of gravity” at the Fed — Chairman Bernanke, Vice-Chair Yellen and New York Fed President Dudley — for any shift in tone.

Aside from the regular weekly reports on retail sales and initial claims for unemployment insurance, none of this week’s batch of economic data in the United States is likely to be market moving. There are a number of Fed speakers this week, as market participants mull over last week’s Federal Open Market Committee (FOMC) meeting as well as the press conference held by Fed Chairman Bernanke. This week’s speakers range from very hawkish (Fed officials known to favor the low inflation side of the Fed’s dual mandate from Congress) to very dovish (Fed officials known to favor the full employment side of the dual mandate). The hawks slated to speak this week are Philadelphia Fed President Charles Plosser and Minneapolis Fed President Narayana Kocherlakota. The doves on the docket this week are San Francisco Fed President John Williams, Chicago Fed President Charles Evans and Boston Fed President Eric Rosengren.

It is likely that the hawks will say that the Fed is putting too much monetary stimulus in the system, and equally as likely that the doves will say the Fed needs to do even more to support the economy. While the media will likely focus on the extremes, we will continue to watch the Fed’s “center of gravity” — Bernanke, Yellen and Dudley — for any shift in tone at the Fed. Two of the three (Bernanke and Yellen) are set to make public appearances this week. We continue to expect the Fed to pursue historically accommodative monetary policy in the period ahead. Even if the economy tracks to the market’s expectations (roughly 2.0% real gross domestic product growth in 2012 and 2.5% in 2013), the Fed is likely to ease even more in 2012 (via additional purchases of Treasury securities or mortgage-backed securities in the open market), as the Fed’s forecast for economic growth and the unemployment rate remains more optimistic than the market’s. The next FOMC meeting is in mid-December.

This week’s economic calendar is filled mainly with second-tier reports on the economy and with little in the way of corporate earnings news on tap this week, markets are likely to continue to focus on Europe, the super-committee’s deliberations on the federal budget and on the full docket of Chinese economic reports for October.

Unlike most developed markets (and most emerging markets), where the economic data calendar is set well in advance, the Chinese economic data calendar is relatively flexible. Reports on Chinese industrial production, retail sales, exports and imports, and perhaps money supply and new loans are likely to be released this week, as market participants continue to debate whether or not Chinese authorities can guide China’s economy, the world’s second largest, to a soft landing. Although fears continue to swirl in the marketplace about a so-called “hard landing” — a sharp and unwanted slowdown in economic growth in China to around 5 or 6% from the current growth rate around 9% — our view remains that China can achieve soft-landing growth of 7 to 8%, and that Chinese authorities are close to taking steps to stimulate the Chinese economy. In our view, fears of a hard landing in China (and related issues like China’s banking system and property market) are waiting in the wings to replace Europe and the U.S. fiscal situation as the financial market’s concern du jour.

The JOLTS Data and the Labor Market

One report due out this week that we like to watch, but one the market seems to ignore, is the job openings and labor turnover (JOLTS) report. The JOLTS report does not get a lot of attention, mainly because it is dated (the report due this week is for September), and the market already has plenty of information on the labor market in October. However, the JOLTS data provides more insight into the inner workings of the labor market than the monthly employment report does.

JOLTS provides data on:

· The number of job openings (there were just over three million open jobs at the end of August)

· The number of new hires in a given month (four million positions were filled in August)

· Job separations (just under four million people left jobs in August)

The data is conveniently broken down by industry group and by region as well. On the surface, the data reveals just how dynamic the U.S. labor market is, demonstrating how the economy creates (and destroys) tens of millions of jobs a year. Digging a little deeper, one of our favorite components of the JOLTS data can be found within the data on job separations.

People are separated from their jobs either voluntarily (they retire or quit to take another job) or involuntarily (they are laid off or fired from their jobs). As noted above, just under four million positions were eliminated in August. About half of these (two million) came as a result of people leaving their current positions voluntarily. While not quite back to “normal” — during the mid-2000s economic expansion in the United States, roughly 55% of job separations were the result of workers voluntarily quitting their jobs — the percentage of job quitters in August was far above the recession lows. In early 2009, during the worst of the Great Recession, only 37% of separations were voluntary, suggesting that layoffs and downsizing accounted for nearly two-thirds of job separations. The steady climb higher in recent months of the number of job separations that are voluntary suggests that the labor market is healing, albeit slowly, as individuals are becoming more and more confident in the labor market. After all, you would not likely leave a job in today’s environment unless another job was waiting for you.

As noted in last week’s employment report for October, the labor market is healing, but still has a long way to go. The data further undercuts the notion that the economy is in, or about to enter, a recession, although it does suggest only sluggish growth (2.0 to 2.5% GDP growth). The economy created 80,000 jobs in the month (expectations were for an increase of 125,000), but the job count in the prior two months was revised up by a combined 102,000, taking some of the sting out of the below-consensus October reading. The private sector created 104,000 jobs in October, as state and local governments shed another 22,000 jobs.

Over the past three months, the private sector has added an average of 122,000 jobs per month; good, but not great. The private sector economy shed 8.8 million jobs between December 2007 and February 2010, but has added just 2.8 million of those jobs back since then, creating jobs in each of the past 20 months in the process. The increase in the number of private sector jobs over the past 20 months is in line with the pace of job creation seen during recoveries from the last two recessions (1990 – 91 and 2001). The payroll job count data is culled from a survey of 440,000 business establishments across the country.

The unemployment rate, calculated from a survey of 60,000 households across the country — a huge sample size for a national survey given that most polling on national elections survey only a few thousand people at most — dipped 0.1% to 9.0% in October. The unemployment rate is calculated by dividing the number of unemployed persons (about 14 million) by the total number of people at work or looking for work (about 154 million). The details of this household survey were solid, as the survey's count of employment increased by 277,000, the third consecutive sizeable gain (275,000+). The number of persons in the labor force (at work or looking for work) increased for the third consecutive month as well.

On balance, the labor market remains stuck in neutral. The economy is growing just enough to produce some job growth, but not quickly enough to substantially lower the unemployment rate or the number of people filing for new unemployment benefits each week. In short, the economic and policy uncertainty that is restraining the rest of the economy is still clearly being felt in the labor market, and only a resolution of that uncertainty will lead to an improved labor market in the months and quarters ahead.

_________________________________________________

IMPORTANT DISCLOSURES The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

Job Openings and Labor Turnover Survey (JOLTS) is a survey done by the United States Bureau of Labor Statistics to help measure job vacancies. It collects data from employers including retailers, manufacturers and different offices each month. Respondents to the survey answer quantitative and qualitative questions about their businesses' employment, job openings, recruitment, hires and separations. The JOLTS data is published monthly and by region and industry.

This research material has been prepared by LPL Financial.

The LPL Financial family of affiliated companies includes LPL Financial and UVEST Financial Services Group, Inc., each of which is a member of FINRA/SIPC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity.

Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

Tracking #1-021222 (Exp. 11/12)

Weekly Economic Commentary

2011-11-01T09:58:00.001-07:00

What a Surprise

As is often the case during the first week of the month, this week is an extremely busy one for economic data. But the data, which includes key reports on ISM, chain store sales and the labor market in October, may be reduced to a side show, given all of the other potentially market moving events on tap this week. Last week’s batch of economic data — including the third quarter gross domestic product (GDP) report-marked yet another week that the economic data in the United States surprised to the upside. How much longer can the data continue this pattern?

This week (October 31 through November 3) is chock full of key economic reports in the United States. But the data itself may only be a side show given the myriad of policy and corporate events also competing for the market’s attention this week. The key reports this week include the Institute of Supply Management’s (ISM) report on manufacturing for October, the chain store sales data for October and of course the October employment report. However, there are several other potentially market moving events on tap, including:

· Vehicle sales for October

· Challenger layoff announcements for October

· ADP employment change for October

· Initial claims for unemployment insurance for the week ending October 29

· Weekly retail sales for the week ending October 29

· The ISM’s non-manufacturing survey for October

In addition, the October ISM report for China is set to be released late Monday night, October 31, as fears continue to swirl in the marketplace about a so called “hard landing”— a sharp and unwanted slowdown in economic growth in China to around 5 or 6% from the current growth rate around 9%. Our view remains that China can achieve a soft landing, and that Chinese authorities are close to taking steps to stimulate the Chinese economy.

The ISM report in the United States is expected to show that manufacturing sentiment improved slightly in October, but remained well below its early 2011 peak. The ISM peaked above 60 (a reading above 50 suggests that the manufacturing sector is expanding, while a reading below 50 suggests that the manufacturing sector is contracting) in early 2011. But the ISM almost never stays above 60 for very long. In fact, during the middle part of expansions (mid-1980s, mid-1990s and mid-2000s) the ISM often dips below 50 for a month or two without signaling a recession. Historically, a reading on the ISM below 42.5 is consistent with a recession in the United States.

The consensus for the October ISM report (based largely on the October readings from the various regional Fed manufacturing surveys that have already been released) is for the ISM in October to move slightly higher to 52.0 from 51.6 in September. The low estimate (among the 82 estimates compiled by Bloomberg) is 50.5 while the high estimate is 53.7. Thus, it would likely take a reading below 50 or above 54 to substantially move markets when the data are released at 10 AM eastern time on Tuesday, November 1. The market will also want to pay close attention to the new orders and employment components of the ISM report. The new orders component is a solid indicator of future manufacturing activity, and the employment reading can provide some insight into the labor market in the manufacturing sector. The employment reading within the ISM has been above 50 in each of the past 24 months dating back to October 2009.

Jobs remain a key concern for markets, and the October employment report will provide a comprehensive look at the labor market in the month. Our view remains that the labor market is stuck in neutral. The economy is growing just enough to produce some job growth, but not quickly enough to substantially lower the unemployment rate or the number of people filing for new unemployment benefits each week. In short, the economic, policy and regulatory uncertainty that is restraining the rest of the economy is still clearly being felt in the labor market, and only a resolution of that uncertainty will lead to an improved labor market in the months and quarters ahead.

The unemployment rate — which is derived from a survey of 60,000 households — is expected to remain at 9.1% in October. The unemployment rate is calculated by dividing the number of unemployed persons seeking work (about 14 million) by the number of people in the labor force (about 154 million). A 9.1% reading in October would mark the fourth consecutive month at 9.1%, demonstrating some stability in the labor market, but no improvement. The unemployment rate peaked at 10.1% in October 2009, but was as low as 4.4% as recently as early 2007.

The monthly job count is derived from a survey of businesses (140,000 businesses representing more than 400,000 worksites) and has been conducted each month for more than 60 years. The market is expecting an increase of 125,000 private sector jobs in October, a slight deceleration from the 137,000 private sector jobs created in September. Year-to-date through September, the economy has created an average of 150,000 private sector jobs per month. This is about the same pace at which the labor force increases each month, which helps to explain why the unemployment rate has remained around 9.0% this year. While the private sector is expected to have added about 125,000 jobs in October, the public sector (federal, state, and local governments) is expected to see another drop in jobs. In particular, the state and local government sector has shed jobs in eight of the nine months in 2011 and in 30 of the past 38 months. In all, state and local governments have shed 597,000 jobs since mid-2008, an average of about 15,000 per month. We expect this pace of downsizing in the state and local government sector to persist for the foreseeable future as they struggle to realign costs with revenues.

This week also features a Federal Open Market Committee (FOMC) meeting — accompanied by a press conference and a new economic forecast by Federal Reserve (Fed) Chairman Bernanke, and central bank meetings in Australia, Iceland, and in Europe. The market is expecting a rate cut in Australia, and the European Central Bank (ECB) under the new leadership of Mario Draghi, may also cut rates. The G-20 is set to meet this week, where the details of the European rescue plan are likely to be discussed, and 116 other earnings reports and outlooks from S&P 500 companies are scheduled for this week.

Lowered Expectations Opened the Door for the Economic Data to Beat Expectations

Last week’s batch of data in the United States — which included third quarter gross domestic product (GDP), along with data on housing, consumer spending and sentiment — marked another week in which the economic data in the United States surprised to the upside. How much longer can the data continue this pattern? If the past three years are any guide, we may only have a few more weeks of better-than-expected economic data, as economic expectations continue to move higher.

The Citigroup Economic Surprise Index (CESI) measures whether or not incoming economic data are beating economists’ expectations. There have been three distinct periods since 2008 in which the United States economic data has exceeded expectations, including the current period. The first came as the market first priced in (and then priced out) another Great Depression in late 2008 and early 2009. This episode of better than expected data lasted 23 weeks.

The next wave of better than expected economic data came in late 2010 through early 2011, just after market fears of a European debt crisis-induced double-dip recession pushed economic expectations sharply lower in the spring and summer of 2010. This wave of good news (relative to lowered expectations) began just after Fed Chairman Bernanke hinted at another round of quantitative easing — Fed purchases of Treasuries in the open market — in late August 2010, and lasted until just prior to the Japanese earthquake in mid-March 2011. This episode lasted about 28 weeks.

According to the CESI, the current run of better-than-expected economic data in the United States began in early June 2011, as economic expectations washed out after a post-Japanese earthquake improvement in the United States economic data fizzled and fears of a European debt contagion increased. This prelude was remarkably similar to (and caused by the some of the same fears) as the period just before economic expectations began to rebound in late 2010.

Since early June 2011, more often than not, the United States economic data has surpassed these lowered expectations. But now 19 weeks into this run of better than expected data, we are closing in on the average of the prior two episodes of better-than-expected economic data. Thus, if the past three years are any guide, we may only have another few weeks of better-than-expected economic data, as market participants continue to revise up their economic forecasts, after revising them down while pricing in a recession between the Japanese earthquake in March 2011 and early June 2011.

Our view remains that the United States economy will avoid recession, but that growth is likely to remain tepid, at best, over the next year or so, with the economy growing near its long term growth rate of around 2.0 to 2.5%. This pace of growth would be enough to avoid recession, but not enough to push the unemployment rate meaningfully lower.

__________________________________________________

IMPORTANT DISCLOSURES The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

Citigroup Economic Surprise Index (CESI) measures the variation in the gap between the expectations and the real economic data.

The ISM index is based on surveys of more than 300 manufacturing firms by the Institute of Supply Management. The ISM Manufacturing Index monitors employment, production inventories, new orders, and supplier deliveries. A composite diffusion index is created that monitors conditions in national manufacturing based on the data from these surveys.

Purchasing Managers Index (PMI) is an indicator of the economic health of the manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.

The Group of Twenty (G-20) Finance Ministers and Central Bank Governors is the premier forum for our international economic development that promotes open and constructive discussion between industrial and emerging-market countries on key issues related to global economic stability. By contributing to the strengthening of the international financial architecture and providing opportunities for dialogue on national policies, international co-operation, and international financial institutions, the G-20 helps to support growth and development across the globe.

This research material has been prepared by LPL Financial.

The LPL Financial family of affiliated companies includes LPL Financial and UVEST Financial Services Group, Inc., each of which is a member of FINRA/SIPC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity.

Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

Tracking #1-018727 (Exp. 10/12)

Weekly Economic Commentary

2011-10-18T10:34:00.000-07:00

Hard Data Versus Soft Sentiment: The Sequel

This week is a busy one for financial market participants, with corporate earnings reports, economic data and policy all competing for the market’s attention. The European fiscal situation remains at the top of the list of worries for markets, as policymakers scramble to hit a self-imposed early November deadline to have a grand plan in place to address Greece and European banks’ exposure to Greek and other troubled sovereign debt. As we have noted in several of our recent commentaries, markets are still crying out for bold, coordinated policy actions here and abroad. Markets in the past week or so have become increasingly confident that such actions will be taken — although the devil is in the details.

But this week, a barrage of third-quarter corporate results (including guidance for the fourth quarter and next year), key data on housing, inflation and manufacturing in the United States, as well as several speeches from Federal Reserve officials (including Ben Bernanke) will all also compete for the market’s attention. The most closely watched report of the week is likely to be the Fed’s Beige Book, a qualitative assessment of business and banking conditions in each of the 12 Federal Reserve districts (Boston, Richmond, Dallas, Kansas City, Cleveland, etc.), compiled eight times a year prior to each of the Federal Open Market Committee (FOMC) meetings. China completes the release of its September and third-quarter data early in the week, with the third-quarter report on gross domestic product, as well as the September reports on industrial production and retail sales.

The Sentiment Data Versus the “Hard Data”: The Debate Continues

We have written extensively over the past several months about the conflicting messages being sent by the “hard” data on the economy, and the “soft”, or sentiment, data on the economy. Hard data statistically measures what consumers or businesses are doing, for example:

· How many homes were sold?

· How much revenue did a company generate?

· What were a company’s earnings after expenses?

· How much did consumers spend on groceries, or computers or television sets?

· How many cars were produced and sold?

· How many jet engines were exported overseas?

· How many new orders for business equipment were placed?

· How many jobs were created (or lost)?

· How much oil or gasoline was produced and/or consumed?

On the other hand, the “soft” data are reports that measure sentiment, and do not actually measure anything other than how people or businesses feel.

The mood of consumers or businesses is, of course, greatly influenced by what they see around them every day. It is also impacted by what they see on television, in newspapers, on the Internet, on talk radio or from friends, neighbors and colleagues. And of course, lately, the media has been full of bad news on virtually every topic. However, the media itself is thriving on the bad news with some of the highest ratings, readers and listeners in history.

In recent months, the hard data has painted a stronger picture of the U.S. economy than that reflected by the sentiment data. But at times, the opposite is true, and the sentiment runs far ahead of the actual data, as was the case in 1999 and 2000 at the peak of the tech bubble and in the mid- 2000s as the housing bubble was just about to burst.

We expect, however, that the trend of the hard data painting a better picture of the economy than the soft data will continue this week. Ultimately, it is the hard data — not the sentiment (or soft) data — that will tell us whether or not we have re-entered a recession, have started to shed jobs again, or seen an uptick in inflation. However, poor sentiment (in both the consumer and business oriented segments of the economy) can feed on itself, and lead to a pullback in spending, which would then begin to negatively impact the hard data. We have not seen that yet, but those in the marketplace calling for a recession believe that the transition from poor sentiment to poor data is inevitable. We do not, and continue to place the odds of recession in the near term at about one in three.

As this report was being prepared, we received hard data for September (industrial production) and sentiment for October (the Empire State Manufacturing Index). Often, the sentiment data has the benefit (from the market’s perspective) of being timelier. For example, for the most part, this week’s hard data on the economy references September, but the week’s sentiment-based data is measuring sentiment in October.

True to recent form, the industrial production data revealed that overall industrial output (factories, utilities, and mining) increased by a modest 0.2% between August and September, and that output of factories alone increased by 0.4%. Industrial production, a key gauge of whether or not the economy is in or out of recession, is up nearly 4% from a year ago and continues to push higher. Overall, industrial production in the manufacturing sector has increased in 24 of the past 27 months since the end of the Great Recession in June 2009.

On the other hand, the Empire State Manufacturing Index, which measures how manufacturing contacts in New York state feel about their overall business (as well as employment, shipments, orders, etc.), remained below zero in October, indicating that manufacturing in the New York state region contracted for the fifth consecutive month. The good news here is that the contraction has not picked up momentum.

The other examples of hard data (mainly for September and early to mid- October) due out this week include:

· Producer Price Index (PPI)

· Consumer Price Index (CPI)

· Housing starts

· Building permits

· Existing home sales

· Initial claims for unemployment insurance

· Weekly retail sales

· Weekly mortgage applications and

· Weekly car and light truck production

This rest of the week’s sentiment based data (for September and October) includes:

· The National Association of Homebuilders Sentiment Index

· The Fed’s Beige Book

· The Philadelphia Fed Index

In addition, the index of leading economic indicators (LEI) for September is due out at the end of the week. The index is a compilation of ten data series. Seven of the components of the LEI are hard data, with two being sentiment based. The final component of the LEI is the stock market (as measured by the S&P 500 Index), which is hard data of course, but is often driven over short periods of time by sentiment. The LEI is expected to increase by 0.3% month-over-month in September, which would leave the index a robust 6.0% above its year-ago reading, a clear sign that despite the negative sentiment, the economy continues to grow, albeit modestly.

_______________________________________

IMPORTANT DISCLOSURES The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

Stock investing involves risk including loss of principal.

Manufacturing Sector: Companies engaged in chemical, mechanical, or physical transformation of materials, substances, or components into consumer or industrial goods.

International investing involves special risks, such as currency fluctuation and political instability, and may not be suitable for all investors.

The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.

The Producer Price Index (PPI) program measures the average change over time in the selling prices received by domestic producers for their output. The prices included in the PPI are from the first commercial transaction for many products and some services.

Empire State Manufacturing Survey is a monthly survey of manufacturers in New York State conducted by the Federal Reserve Bank of New York.

The Philadelphia Fed Survey is a business outlook survey used to construct an index that tracks manufacturing conditions in the Philadelphia Federal Reserve district. The Philadelphia Fed survey is an indicator of trends in the manufacturing sector, and is correlated with the Institute for Supply Management (ISM) manufacturing index, as well as the industrial production index.

The Industrial Production Index (IPI) is an economic indicator that is released monthly by the Federal Reserve Board. The indicator measures the amount of output from the manufacturing, mining, electric and gas industries. The reference year for the index is 2002 and a level of 100.

This research material has been prepared by LPL Financial.

The LPL Financial family of affiliated companies includes LPL Financial and UVEST Financial Services Group, Inc., each of which is a member of FINRA/SIPC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity.

Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

Tracking #1-013906 (Exp. 10/12)

Weekly Economic Commentary

2011-10-11T10:14:00.000-07:00

The Next Two Million Jobs: An Update

The light calendar for U.S. economic data this week will allow market participants to focus on corporate data (the unofficial start of the third quarter earnings reporting season for S&P 500 companies is this week), Chinese economic data, and monetary policy here and abroad. However, the scramble to shore up the European banking system by European officials remains the market’s utmost concern. As we have noted in several of our recent commentaries, markets are still calling out for bold, coordinated policy actions here and abroad, and markets in the past week or so have become increasingly confident that such actions will be taken — although the devil is in the details.

The market-moving economic data reports released in the United States this week are: the September retail sales report, weekly readings on retail sales, mortgage applications, and initial claims for unemployment insurance. In addition, the full slate of Chinese economic data for September is set to be released this week: money supply, new loans, imports, exports and, most importantly, the producer and consumer price data. Market participants continue to try to gauge the impact of the global economic slowdown on both the Chinese economy and Chinese inflation. The next policy move by the Chinese central bank, the People’s Bank of China (PBOC), could very well be more important for markets than the next move by either the Federal Reserve (Fed) or the European Central Bank (ECB). If the September inflation readings in China continue to show that inflation peaked in July 2011, it may clear the way for a rate cut by the PBOC. On the other hand, a reacceleration of inflation in September might push the PBOC to tighten. Clearly, the market would prefer the former outcome rather than the latter. We continue to expect the next move by the PBOC will be to signal that it is finished raising rates for this cycle, but any rate cut may not occur until late in the year.

Outside of China, there are several key ECB and Fed officials slated to make public appearances this week. Notably, outgoing ECB President Jean Claude Trichet is scheduled to make three public appearances this week, while the man who is set to replace Trichet as ECB President at the end of the month (Italy’s Mario Draghi) is also on the docket. This week’s contingent of Fed speakers is clearly skewed to the “hawkish” (more concerned about inflation than growth) side of the Fed, so we would not be surprised to see several headlines in the popular press this week citing Fed officials worried about too much monetary policy stimulus in the United States. Our view here remains that Fed Chairman Bernanke, Vice Chair Janet Yellen and New York Fed President Bill Dudley form the center of gravity at the Fed, and any move by these three to signal less stimulus from the Fed would be significant.

The Next Two Million Jobs: An Update

The private sector economy added 137,000 jobs in September, beating expectations (+90,000) and accelerating from the 42,000 jobs added in August. The report was all the more encouraging given the simply horrendous policy and sentiment backdrop during the month of September here in the United States and overseas. Some of the bounce in jobs in September can be attributed to the return of 45,000 Verizon workers who went on strike in August. Looking at the past three months to smooth out the Verizon impact, the economy added around 120,000 jobs per month. Year-to-date, private payrolls have grown an average of 149,000 per month. While not a booming number, it is not a recessionary number either, and confirms our view that while employers are not doing much hiring, they are not laying off workers as they did in 2007, 2008, and 2009.

The monthly job count culled from a survey of 440,000 businesses across the nation, was not spectacular in September, but was solid and the details were modestly encouraging.

· First, the prior two months' employment readings were revised up by a total of 99,000.

· Second, Hurricane Irene and severe flooding as a result of the remnants of Hurricane Lee likely held the job count down by around 25,000 in September. These jobs are likely to return in October.

· Finally, the September report noted the third consecutive increase in temporary help employment. This category is a very good leading indicator of future job gains.

On the downside, there was yet another loss (33,000) in state and local government jobs in September, the tenth time in the past 12 months that state and local governments shed jobs. Since August 2008, state and local governments have shed 615,000 jobs, as states and municipalities continue to struggle to align costs with revenues.

The nation's unemployment rate, culled from a survey of 60,000 households, found that the unemployment rate remained at 9.1% in September. The unemployment rate is defined as the number of unemployed persons (totaling about 14 million) as a percentage of the labor force (totaling about 154 million). In order for the unemployment rate to fall steadily, the economy must grow above its long-term potential growth rate of around 2.5%. Currently, the economy is growing, but only by around 2.0% or so.

The July 5, 2011 edition of the Weekly Economic Commentary was entitled: “The Next Two Million Jobs.” In that report, we noted that the economy had created over two million private sector jobs in the 14 months between February 2010 and April 2011, and outlined a bull, base and bear case for how long the economy would take to create the next two million jobs.

Since then, of course, the U.S. economy has hit another soft patch amid a torrent of bad news at home that included:

· The lingering impact of the Japanese earthquake on the global supply chain.

· The debt ceiling debate in July and early August.

· The downgrade of the United States’ AAA-credit rating in early August.

· The effects of Hurricane Irene.

· Further declines in both consumer and business confidence.

· The near 20% decline in the equity market, as measured by the S&P 500, between late July and early October.

Abroad, conditions also deteriorated with yet another flare-up of the European sovereign debt crisis that has dominated the landscape since mid-July.

During this period (May – September 2011), the private sector economy created another 526,000 jobs, or an average of just over 100,000 per month. While, the September employment report (released last Friday, October 7) was a relief to financial market participants who were expecting another dour report on the nation’s labor market, the September jobs report (and the revisions to prior months’ data) leave the nation’s job creation engine tracking much closer to our bear case than to our base case for creating the next two million jobs.

Setting aside the robust employment recoveries from the recessions in the mid-1970s and the early-1980s, we can compare how quickly the next two million jobs were created in the so-called “jobless recoveries” in the early 1990s and early 2000s. After the private sector economy created two million jobs in the aftermath of the 1990-91 recession, it took the private sector economy only another eight months to create the next two million jobs. Over this eight-month period (mid-1993 through early 1994), the economy created around 250,000 jobs per month as the Fed remained on hold and the economy reacted to an increase in tax rates in mid-1993.

After the private sector created roughly two million jobs in the aftermath of the mild 2001 recession, it took another ten months to create the next two million jobs. Over this ten-month period in 2005, the economy created around 200,000 jobs per month as the Federal Reserve raised interest rates by 175 basis points, the housing market boomed and fiscal policy in the United States tightened somewhat.

Using the prior two recoveries as a baseline, a goal of creating the next two million jobs in the ensuing eight to 12 months is consistent with monthly job growth of between 200,000 and 250,000 jobs per month, which has been our forecast since the beginning of 2011. At this pace of job growth, it would take another two and a half years (early 2014) for the economy to recoup all the jobs lost in the Great Recession. Under this scenario, the unemployment rate would likely decline modestly, the Fed would remain on hold until mid-2013, and the overall economy would probably grow at around 3.0%, just slightly above its long-term average.

A faster pace of job growth (around 300,000 to 350,000 per month) would create the next two million jobs by early 2012, and that outcome would certainly push down the unemployment rate, speed up the Fed’s exit from quantitative easing, and ease concerns about the durability of the recovery. At this pace, it would take around two years (mid-2013) to recoup all the jobs lost during the Great Recession. The economy would grow at around 3.5 to 4.0% under this scenario.

Unfortunately for the still nearly 14 million unemployed workers, neither our bull case nor our base case for “the next two million jobs” is unfolding so far. As noted, the private sector economy is creating around 100,000 jobs per month over the past three months. At this pace, it would take until late 2012 for the economy to create the next two million jobs, and would leave the unemployment rate about where it is now (9.1%). At this pace of private sector job creation, it would take five more years (late 2016) before the economy recoups all the private jobs lost in the Great Recession. Under this scenario, the economy would continue to struggle to grow at around 2.0% per year.

This outcome has already prompted the Fed to enact more stimulative monetary policy (committing in August 2011 to keep rates low until mid- 2013 and embarking on “Operation Twist” in September 2011) and could prompt more monetary stimulus from the Fed if the slow pace of job creation persists. The slow pace of job growth has already led to continuous talk about a “double-dip” recession, and that talk is likely to persist until the pace of job creation picks up.

While we expect the pace of job creation to reaccelerate back toward our base case (200,000 to 250,000 jobs per month) in the coming months and quarters as the factors restraining hiring fade, we continue to expect that the labor market will remain relatively subdued by historical standards, but grow just enough to promote near trend-like GDP growth in the quarters ahead.

___________________________________________________

IMPORTANT DISCLOSURES The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

Stock investing involves risk including loss of principal.

An obligation rated 'AAA' has the highest rating assigned by Standard & Poor's. The obligor's capacity to meet its financial commitment on the obligation is extremely strong.

International investing involves special risks, such as currency fluctuation and political instability, and may not be suitable for all investors.

This research material has been prepared by LPL Financial.

The LPL Financial family of affiliated companies includes LPL Financial and UVEST Financial Services Group, Inc., each of which is a member of FINRA/SIPC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity.

Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

Tracking #1-013906 (Exp. 10/12)

Weekly Economic Commentary

2011-10-04T10:22:00.000-07:00

Does Data Matter?

Since the mid-summer 2011 debate over the debt ceiling in the United States, policy at home and abroad (both fiscal and monetary) has dominated the investment landscape. During that time, financial markets here in the United States and across the globe have largely priced in a recession, with equity prices (as measured by the S&P 500 Index) down 15% since mid-July. While policy remains key (markets are still calling out for bold, coordinated policy actions here and abroad), economic and corporate data are likely to dominate the headlines this week, although there are plenty of policy events on tap as well.

As we have noted in our recent commentaries, the U.S. economy remains fragile and vulnerable to an exogenous shock (i.e. an oil price spike, a massive natural disaster, large-scale terror attack, 2008-style credit crunch, a trade war, etc.) and to policy mistakes, both at home and abroad. However, our forecast remains that the economy will continue to sputter along, with growth in the third quarter better than the second quarter, in part, due to a rebound in auto production and auto sales. Our view remains that real gross domestic product (GDP) growth in the recently completed third quarter of 2011 will be between 2.0 and 2.5%, more than double the meager 0.8% annualized growth rate seen in the first half of 2011. Consumer spending, business capital spending, construction of nonresidential buildings and exports should help to boost GDP in the third quarter. Construction of housing and state and local government spending will continue to be drags on growth in the third quarter.

Last week’s (September 26 – 30) relatively favorable economic and corporate data in the United States supported our view of slow growth but no recession and 14% year-over-year gains in profits in the third quarter. The S&P 500 Index was unchanged on the week, and was on course for a decent weekly gain until the last few hours of trading on Friday, September 30, the last trading day of the tumultuous third quarter of 2011.

Over the next week, financial markets will digest key reports for September on consumer spending (vehicles sales, chain store sales), manufacturing (ISM), the service sector (non-manufacturing ISM), housing and construction, and the labor market (ADP, Challenger and the government's job report). With the market having already priced in a recession, the bar is relatively low for this set of data.

Although data is likely to dominate this week, policy is not going away as a potentially market moving force. On the monetary policy front, Fed Chairman Bernanke is set to deliver testimony before the Joint Economic Committee of Congress on Tuesday, October 4, the very same day that Congressman Ron Paul of Texas, who chairs the committee in the House of Representatives that oversees the Fed, will hold a hearing entitled “Auditing the Fed.” In addition, there are six other public appearances by Fed officials on the docket this week. The Fed will release the minutes of its September 20 – 21 Federal Open Market Committee (FOMC) meeting next Tuesday, October 11. The next Beige Book, a qualitative assessment of business and banking conditions conducted in each of the 12 regional Federal Reserve districts prior to every FOMC meeting, is due out on October 19. The next FOMC meeting is on November 2.

It is also a busy week for monetary policy outside the United States. The Reserve Bank of Australia (RBA), the Bank of England (BOE), the European Central Bank (ECB), the Bank of Japan (BOJ) and the central banks of Peru, Poland, Serbia, Kenya and Ghana all meet this week to set policy. Of these, only Serbia is expected by market participants to cut rates, but bold coordinated policy action (unexpected rate cuts, more quantitative easing, etc.) from the BOE, BOJ and ECB would be embraced by market participants.

As we have noted for several weeks in the Weekly Economic Commentary, central banks that have been tightening policy over the past two years have either stopped raising rates, or begun to cut rates, as inflation risks fade amid a sharp slowdown in economic activity and prospects for future growth wane. Examples in this group include the central banks in Brazil, Russia, New Zealand, Israel and Australia, as well as the ECB. Most notably, China’s central bank has hinted in recent weeks that it is close to the end of its rate hike regime. China’s central bank does not meet on a set schedule, and a change in policy direction by the Peoples Bank of China (PBOC), China’s central bank, could come at any time. Meanwhile, central banks that have been cutting rates are looking to do more. Examples here include the Fed, the BOE and the BOJ. Two of these three central banks meet this week.

Fiscal policy remains at the heart of the ongoing market turmoil. Despite a vote in the German legislature last week to approve the European Financial Stability Fund — essentially a European version of the Troubled Asset Relief Program (TARP) — that will be used to recapitalize banks in Europe and help to forestall a default in Greece, financial markets remained worried. News over the weekend that rating agency Standard and Poor’s has reaffirmed the United Kingdom’s AAA rating will likely increase calls here in the United States for more budget cuts. Although the Greek government passed another round of budget cuts over the weekend of October 1 – 2, it also said that the cuts were not enough to effectively reduce the deficit to the level required by the European Central Bank, the European Union and the International Monetary Authority, known as “the troika”, so that Greece could secure its troika-led aid payout and avoid default. We expect that worries surrounding European debt will continue to weigh on market and economic sentiment for many months.

Does Data Matter?

As previously noted, this week is chock full of key economic data in the United States for September. The two most important reports, the September Institute of Supply Management report on manufacturing (ISM) and the September employment report, bookend the week.

As this report was being prepared one of the many key economic reports due out this week was released. The September ISM reading was 51.6, an improvement from the August reading of 50.6, and well above the consensus estimate of 50.5. In fact, only 10 of the 82 economists surveyed by Bloomberg News expected the ISM to be above 51.5. As a reminder, a reading above 50 on the ISM report indicates that the manufacturing sector is expanding, while a reading above 42.0 indicates that the overall economy is expanding. Year to date, the ISM has averaged 56.2, consistent with GDP growth of 4.8%. All of the key components of the report (employment, new orders, production, and export orders) were also solid, suggesting further growth in the manufacturing sector in the months ahead and, importantly, no recession.

The other key report due this week is the monthly labor market report from the United States Bureau of Labor Statistics (BLS). This report is due out on Friday, October 7. Proceeding that report the market will also digest September reports on private sector employment from ADP and layoff announcements from outplacement firm Challenger, Gray and Christmas.

The BLS report is actually two reports in one. A survey of households is used to calculate the nation’s unemployment rate, which stood at 9.1% in August. The consensus expects that the unemployment rate will remain at 9.1% in September. The unemployment rate is calculated by dividing the number of people who are unemployed (roughly 14 million) by the number of workers (153 million). The high unemployment rate intensifies the spotlight on the Fed, Congress and the Obama administration to enact policy and/or remove regulatory constraints to help foster a better backdrop for job creation.

While the unemployment rate data is culled from a survey of households, the monthly job count is calculated from a survey of 140,000 businesses and government agencies representing approximately 410,000 worksites throughout the United States. Recall that the private sector created just 17,000 jobs in August, below the consensus estimate of a 95,000 gain. In addition, a strike at Verizon (which has since settled) subtracted 46,000 jobs in August, meaning the August result was more like +63,000, still a deceleration from the +156,000 gain in July. The consensus for the September report is that the private sector economy created 90,000 jobs in September, with about half of the gain coming as a result of the end of the strike at Verizon. The low end of the consensus range calls for a 20,000 gain in jobs.

While the returning workers at Verizon are likely to add to the private sector job count in September, the overall payroll count (public and private sector) will again be weighed down by hiring (or lack thereof) at state and local governments, and more specifically, teachers. On balance, the recent data on employment — hours worked, initial claims for unemployment insurance, the employment readings of the various regional Federal Reserve surveys and the employment component of the September ISM report — continue to suggest that the labor market remains stagnant, but is not falling off a cliff as it did in 2008 and 2009. The bottom line is that the labor market is stalled out, a hostage to a great deal of economic and policy uncertainty both in the United States and overseas, leaving the labor market vulnerable to further shocks.

_________________________________________

IMPORTANT DISCLOSURES The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

Stock investing involves risk including loss of principal.

An obligation rated 'AAA' has the highest rating assigned by Standard & Poor's. The obligor's capacity to meet its financial commitment on the obligation is extremely strong.

Challenger, Gray & Christmas is the oldest executive outplacement firm in the United States. The firm conducts regular surveys and issues reports on the state of the economy, employment, job-seeking, layoffs, and executive compensation.

International investing involves special risks, such as currency fluctuation and political instability, and may not be suitable for all investors.

This research material has been prepared by LPL Financial.

The LPL Financial family of affiliated companies includes LPL Financial and UVEST Financial Services Group, Inc., each of which is a member of FINRA/SIPC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity.

Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

Tracking #1-011912 (Exp. 10/12)

Weekly Economic Commentary

2011-09-27T10:41:00.001-07:00

Hard Data Versus Soft Sentiment

Markets across the globe are still calling out for bold, coordinated policy actions here and abroad as participants await earnings results and guidance from Corporate America and another set of economic data for August and September in the United States. On the plus side, policymakers in Europe seem to be getting the market’s message, and there were signs over the weekend of September 23 – 25 that some type of bold response from Europe was in the works. In addition, the European Central Bank (ECB) hinted last week that it may cut rates at its next meeting in early October. Also, euro-zone officials are talking openly about recapitalizing European banks most exposed to the debt of Greece and other troubled peripheral European nations, similar to the United States’ Troubled Asset Relief Program (TARP). On the downside, Congress continues to bicker over funding the government for fiscal year 2012 (which begins on Saturday, October 1), the incoming economic data remains tepid, and despite the talk of coordinated policy action on Europe, none has been taken.

Policy Likely To Trump Corporate and Economic Data Again This Week

While there are a number of key economic reports due out in the United States and overseas this week, policy (or lack thereof) is likely to continue to dominate the headlines and drive financial markets. Although no key developed or emerging market central banks are scheduled to meet this week to discuss policy, there are a number of central bankers on the docket this week, including Federal Reserve (Fed) Chairman Ben Bernanke. Bernanke is slated to deliver a speech in Cleveland, OH, and there ten other speeches by Fed officials this week. Central officials from the ECB, Bank of England (BOE) and Bank of Canada are all slated to make speeches this week as well.

As we have been noting for several weeks in the Weekly Economic Commentary, central banks that had been tightening policy over the past two years or so have either stopped raising rates, or begun to cut rates, as inflation risks fade amid a sharp slowdown in economic activity and prospects for future growth wane. Examples in this group include the central banks in Brazil, Russia, New Zealand, and Australia, as well as the ECB. Israel, which has been raising rates since mid-2009, unexpectedly cut its overnight lending rate on Monday, September 26. Most notably, China’s central bank has hinted in recent weeks that it is close to the end of its rate hike regime. Meanwhile, central banks that have been cutting rates are looking to do more. Examples here include the Fed, the BOE and the Bank of Japan.

Both corporate and economic data will compete with policy for the market’s attention this week. The corporate earnings preannouncement season remains in full swing as company managements continue to quantify the impact of the ongoing uncertainty in the global economy on corporate sales and earnings. Thus far, corporate managements have not guided Wall Street analysts’ expectations down much despite the sizeable drop in stock prices. That may change in the coming weeks and months, as companies report their earnings for the third quarter of 2011, and provide outlooks for the fourth quarter of 2011 and beyond. These preannouncements are likely to garner less attention than the ongoing policy wrangling, but are likely to move markets more than this week’s batch of economic data.

Given the recent financial market and policy turmoil at home and across the globe, we continue to prefer using actual data (the number of vehicles produced, the tons of steel manufactured, the number of homes sold, the amount of new orders for capital goods, how many dollars consumers spent, what actions central banks are taking, etc.) rather than sentiment data (that measures how consumers or business owners feel about the current situation or the prospects for future activity). The September 6, 2011 edition of the Weekly Market Commentary explores this difference in depth.

This week's economic reports are roughly split between sentiment indicators (September reports on consumer sentiment and several regional Federal Reserve manufacturing reports for September) and “hard data” indicators (initial claims, weekly retail sales, durable goods orders and shipments, new home sales and personal income and spending).

Despite the nation’s dour mood and unprecedented turmoil and volatility in financial markets, the sentiment data released thus far in September including the:

· Philadelphia Fed Manufacturing Index,

· Dallas Fed Manufacturing Index,

· Empire State Manufacturing Index,

· University of Michigan’ Consumer sentiment,

· National Federation of Independent Business’ Small Business Optimism Index

· National Association of Homebuilders Sentiment Index

have painted a picture of an economy that is weakening, but not dramatically so. Nearly all of the indicators in the list above remain solidly above their 2007 – 2009 Great Recession lows, although several are flashing recessionary signals.

On the other hand, much of the hard data we have seen for August and September continues to suggest that the economy can avoid a recession, but that slow growth is the most likely outcome.

Initial claims for unemployment insurance remain near 400,000 per week, a level that historically has suggested slow, but positive job growth.

· Industrial production in the United States increased by 0.2% month-over-month in August and was running 3.4% ahead of year-ago readings. Although industrial production remains below its pre-recession peaks, it was at a three-year high in August.

· At 231,557 units, auto and light truck production in the latest week (September 19 – 23) was the highest for any week since mid-2008, before the onset of the worst of the Great Recession in the fall of 2008 following the collapse of Lehman Brothers.

· Weekly retail sales, a component of the LPL Financial Research Current Conditions Index, was running 3.4% ahead of a year-ago in the week ending September 17, a level consistent with the pace of economic growth and consumer spending seen during the 2002-2007 economic recovery in the United States.

· At 1.9 million tons, steel production in the latest week was nearly 10% above year-ago levels. While still below the two million tons per week average seen in the 2002 – 2007 economic recovery, steel production is at its highest level since mid-2008.

· Production of lumber (479,000 board feet) was running 34% above year-ago levels last week and, while not yet back to pre-recession levels, is at its highest level since mid-2008.

· Total demand for petroleum products (gasoline for auto and truck use, diesel fuel for heavy truck and railroad use, and jet fuel for passenger and cargo jet traffic use), as measured in the U.S. Energy Department’s Weekly Petroleum Status Report, was running at more than 19 million barrels per day. That reading is little changed from the demand seen a year ago, and more than two million barrels per day more than in late 2008/early 2009, the worst of the 2007 – 2009 Great Recession.

The sentiment and data continue to tell two different stories about the economy. The sentiment is flashing “recession” and worse, while the data continues to tell a story of a struggling economy, but one that is growing slowly, not collapsing.

_____________________________________________

IMPORTANT DISCLOSURES The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

Stock investing involves risk including loss of principal.

Philadelphia Federal Index is a regional federal-reserve-bank index measuring changes in business growth. The index is constructed from a survey of participants who voluntarily answer questions regarding the direction of change in their overall business activities. The survey is a measure of regional manufacturing growth. When the index is above 0 it indicates factory-sector growth, and when below 0 indicates contraction.

The NY Empire State Index is a seasonally-adjusted index that tracks the results of the Empire State Manufacturing Survey. The survey is distributed to roughly 175 manufacturing executives and asks questions intended to gauge both the current sentiment of the executives and their six-month outlook on the sector.

The Texas Leading Index is a single summary statistic that sheds light on the future of the state's economy. It is designed to signal the likelihood of the Texas economy’s transition from expansion to recession or vise versa. The index is a composite of eight leading indicators—those that tend to change direction before the overall economy does. These indicators include: Texas Value of the Dollar, U.S. Leading Index, Real oil prices, Well permits, Initial claims for unemployment insurance, Texas Stock Index, Help-wanted advertising, Average weekly hours worked in manufacturing.

The fast price swings in commodities and currencies will result in significant volatility in an investor's holdings.

International investing involves special risks, such as currency fluctuation and political instability, and may not be suitable for all investors.

The small business optimism index is compiled from a survey that is conducted each month by the National Federation of Independent Business (NFIB) of its members. The index is a composite of ten seasonally adjusted components based on questions on the following: plans to increase employment, plans to make capital outlays, plans to increase inventories, expect economy to improve, expect real sales higher, current inventory, current job opening, expected credit conditions, now a good time to expand, and earnings trend.

National Association of Homebuilders Sentiment Index is an index of more than 300 home building companies measuring demand for the construction of new homes. The housing market index goes from 0 to 100, with a measure over 50 meaning that demand for new homes is rising.

This research material has been prepared by LPL Financial.

The LPL Financial family of affiliated companies includes LPL Financial and UVEST Financial Services Group, Inc., each of which is a member of FINRA/SIPC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity.

Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

Tracking #1-009999 (Exp. 09/12)

Weekly Economic Commentary

2011-09-20T09:39:00.000-07:00

Costs and Benefits

Last week (September 12 – 16) was chock full of U.S. economic data for August and September which, on balance, painted a picture of an economy that was stagnant, but not rapidly deteriorating to the downside as it did in 2008. Still, the U.S. economy remains fragile and vulnerable to an exogenous shock (i.e. an oil price spike, a massive natural disaster, 2008 – style credit crunch, etc.) and to policy mistakes, both at home and abroad. Our forecast remains that the economy will continue to sputter along, with growth in the third quarter better than the second quarter, due to a rebound in auto production and auto sales.

There is a scattering of economic data for August due this week, including:

· The National Association of Homebuilders sentiment index for September.

· Leading indicators, housing starts, and existing home sales for August.

· The mid-September weekly readings on chain store sales, mortgage applications and initial claims for unemployment insurance.

However, the key for markets will be policy, both fiscal and monetary, at home and abroad.

Policy Prescriptions

In the United States, as this publication was being prepared, President Obama released his plan to help pay for the $500 billion jobs and infrastructure package he proposed in early September. The plan adds to the mix of fiscal policy prescriptions being debated in Washington at the moment. In the near term, Congress has to settle on a way to fund the operation of the federal government beyond September 30, which marks the end of fiscal year 2011. Failure to do so would likely lead to a government shutdown, but not have any meaningful market implications, as the Treasury’s borrowing authority (which was at risk during the debt ceiling debate in July and early August 2011) is not at stake here.

Neither market participants nor the public is prepared for another round of partisan wrangling over the budget, and most market participants expect that the end of fiscal year 2011 will not be a repeat of the confidence destroying rancor over the debt ceiling debate in July and early August 2011, from which consumer and investor confidence has not recovered.

The President’s proposal is really aimed at the congressional “super-committee” charged with finding $1.5 trillion of savings over the next 10 years as part of the debt ceiling deal that was hammered out in early August. The super-committee can take the President’s plan under advisement, come up with its own plan to save $1.5 trillion over the next 10 years, or do nothing. If it does nothing (which is increasingly likely), the $1.5 trillion in savings would come via sequestration, meaning across the board cuts to federal spending. Tax rates would not change as a result of sequestration. The deadline for the super-committee to report back to Congress with legislation to enact the $1.5 trillion in savings is mid-November, and if the legislation is not signed by late December, the aforementioned sequestration would kick in. However, October 14 is the date by which the various congressional committees (Agriculture, Ways and Means, Defense, etc.) must submit recommendations to the super-committee. Time is running out.

Of course, monetary and fiscal policy in Europe continues to drive the headlines (and the financial markets) as the U.S. fiscal situation simmers in the background. A much anticipated meeting of euro-zone finance ministers in Poland over the weekend of September 16 – 18 failed to produce the bold and decisive actions the financial markets demand. In our view, ongoing policy and economic uncertainty in Europe remains the biggest threat to both financial markets and the fragile U.S. economy.

Monetary policy will vie for, and no doubt get, a ton of attention from financial market participants this week. Most of the action on this front is in the United States, although central banks in Hong Kong, Norway, Turkey, Iceland and South Africa all meet to set policy this week. For the most part, central banks that had been tightening policy over the past two years or so have either stopped raising rates, or begun to cut rates. Examples include the central banks in Brazil, Russia and Australia, as well as the European Central Bank (ECB). Most notably, China’s central bank has hinted that it is close to the end of its rate hike regime. Meanwhile, central banks that have been cutting rates are looking to do more. Examples here include the Bank of England and the Bank of Japan. One of the central banks looking to do more, of course, is the United States’ central bank, the Federal Reserve (Fed).

At its Federal Open Market Committee (FOMC) meeting this week, the Fed is widely expected to embark on "Operation Twist" in an attempt to keep longer-dated Treasury yields lower for longer, as financial market participants continue to demand bold policy actions from both fiscal and monetary policymakers across the globe. Although it remains in the Fed's toolbox, another round of outright Treasury purchases (QE3) by the Fed — which would be viewed as a bold policy action by market participants — is not likely to be announced this week. However, we do not expect the Fed to rule out the future use of more Treasury purchases either. In addition, the Fed has also publicly stated that it is considering lowering the rate it pays on banks that hold excess reserves at the Fed. We view this option as the least likely to be implemented at this week’s meeting.

The Fed may also be weighing some type of involvement in the mortgage market, as Fed Chairman Bernanke has discussed the housing market at length in several of his recent public appearances. Although this option has not been previously mentioned by the Fed as a policy path, a move into the housing market by the Fed would also be considered a “bold” move by market participants. However, such a move is fraught with the same type of political opposition (both inside and outside the Fed) as another round of asset purchases (QE3) would be.

The economic and market impact of the Fed’s expected “Operation Twist” will be vigorously debated at this week’s FOMC meeting, which was extended from a one-day to a two-day meeting so that Fed policymakers could discuss the costs and benefits of further action on monetary policy by the Fed. Market participants have been debating the outcome of this week’s FOMC meeting for weeks now, although most now think the Fed will implement “Operation Twist.”

The keys for the market will be how the Fed approaches this operation, the size of the operation, and the timing. In addition, the market will want to know what, if any, metrics are tied to measuring the success of the operation. Key for the Fed, and its bosses in Congress, is that “Operation Twist” does not require the Fed to purchase any additional Treasury securities in the open market. We have maintained for many months that the hurdle for the Fed to buy more Treasuries was high, and while the economic and market hurdles have been lowered, the political hurdles have probably moved even higher.

What the Fed is likely to do is to use the proceeds of maturing issues, which would be a passive way to implement the operation, to fund the purchase of longer-dated Treasuries in the open market. A more active approach would see the Fed selling some of its shorter-term Treasury securities to fund the purchase of the longer-dated Treasuries. The market would also welcome increased transparency on the timing:

· When will it begin?

· How often will the purchases/sales be made?

· When will it end?

And the goals:

· Lower the 10-year rate by a certain amount

· Lower the unemployment rate by a certain amount

· Increase GDP by a certain amount

At the moment, Fed Chairman Bernanke sees the Fed as the “only game in town” in terms of bold, pro-growth policy actions in Washington, and his recent track record suggests that he takes this role very seriously.

______________________________________________

IMPORTANT DISCLOSURES The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

Stock investing involves risk including loss of principal.

This research material has been prepared by LPL Financial.

The LPL Financial family of affiliated companies includes LPL Financial and UVEST Financial Services Group, Inc., each of which is a member of FINRA/SIPC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity.

Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

Tracking #1-008093 (Exp. 09/12)

Weekly Economic Commentary

2011-09-13T09:53:00.000-07:00

Certainty in an Uncertain World

Economic decision makers (consumers, businesses, policymakers) and financial market participants dislike uncertainty, but as we head into the middle of September, uncertainty seems to be widespread, especially in Europe. This week, a mix of policy and data will drive markets as they seek shelter from the uncertainty that is surrounding Europe, and to a lesser extent the outlook for the U.S. economy.

After a relatively quiet week for data (September 5 – 9), the U.S. economic calendar is chock full of reports this week, with data on retail sales, industrial production, consumer prices and producer prices for August, the Empire State Manufacturing Index for September, as well as the regular weekly readings on retail sales, initial claims and mortgage applications. On the policy front, Federal Reserve (Fed) officials are largely ignoring the traditional "quiet period" ahead of the September 20 – 21 FOMC meeting, as several Fed officials, including Fed Chairman Ben Bernanke, are scheduled to deliver speeches this week.

Overseas, the Central Bank of India, the Reserve Bank of New Zealand and several emerging market central banks meet to set policy. After raising rates for most of the past 21 months many central banks in emerging markets and in commodity-rich nations have begun to reevaluate their monetary policy stance in light of the uncertainty in Europe and elsewhere. This trend is a potential policy catalyst that could begin to remove some policy related uncertainty.

Against this uncertain policy backdrop, the Group of Seven (G-7) finance ministers met this past weekend (September 9 – 10), but concluded the meeting without the bold policy steps the market has been calling for. Next weekend (September 16 – 18), the financial ministers from the European Union (EU) will meet again to debate and discuss what, if any, policy actions can be taken to arrest the fears over Europe’s debt problem.

Uncertain Times

On Wednesday, September 7, the Fed released its Beige Book, a qualitative assessment of economic activity in each of the 12 regional Federal Reserve districts (Boston, New York, Philadelphia, Richmond, Dallas, etc.) as reported by bankers and business owners in each of the districts. The report is prepared eight times a year several weeks prior to each of the eight Federal Open Market Committee (FOMC) meetings held each year.

The word “uncertainty” appeared in the Beige Book 33 times, as business owners and lenders described what they saw during August, a period that saw a great deal of financial market turmoil accompanied by the partisan battle in Congress over the U.S. debt ceiling, and the downgrade of the U.S. credit rating by S&P in early August. Not all of the uncertainty was attributed to financial markets and the battle over the debt ceiling, as several economic decision makers cited the ongoing supply chain disruptions due to the aftermath of the Japanese earthquake. Still, it is clear that the certainty craved by businesses, consumers and policymakers is sorely lacking, and events thus far in September suggest that the word “uncertain” will make several appearances in the next Beige Book (due out in mid-October 2011) as well.

We want to make it clear that not all periods of uncertainty are resolved the same way. At times, the uncertainty can clear up quickly in response to an economic event, policy action, or series of policy actions, and the clarity this provides to economic agents often leads to better results for financial markets and economies. An example of this type of uncertainty was the initial flare-up of the concerns surrounding European peripheral debt during the spring and summer of 2010. This flare-up coincided with a spike higher in the number of times the word “uncertain” showed up in the Beige Book over the summer and early fall of 2010. This heightened level of uncertainty led to a 15% peak to trough drop in S&P 500 Index over the late spring and summer months of 2010, and took four or five months to resolve. Low expectations for the economy, bold policy action (the announcement and enactment of QE2), and a series of better-than-expected results for global economies and companies helped to end that spate of uncertainty.

Our base case remains that the current environment of elevated uncertainty will be resolved in much the same way the uncertainty in 2010 was:

· With bold policy action from policymakers around the globe.

· Better-than-expected economic data (currently the U.S. economy in the nearly completed third quarter is on pace to accelerate from the second quarter’s meager 1.0% pace) as expectations remain low.

· Solid corporate earnings, which ultimately drive equity prices.

Until then, uncertainty is likely to dominate the economic and investment landscape, and financial markets and economic decision makers will continue to call out for certainty in an uncertain world.

___________________________________________________

IMPORTANT DISCLOSURES The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

Stock investing involves risk including loss of principal.

The Empire State Manufacturing Index is a seasonally-adjusted index that tracks the results of the Empire State Manufacturing Survey. The survey is distributed to roughly 175 manufacturing executives and asks questions intended to gauge both the current sentiment of the executives and their six-month outlook on the sector.

An obligation rated 'AAA' has the highest rating assigned by Standard & Poor's. The obligor's capacity to meet its financial commitment on the obligation is extremely strong.

International investing involves special risks, such as currency fluctuation and political instability, and may not be suitable for all investors.

This research material has been prepared by LPL Financial.

The LPL Financial family of affiliated companies includes LPL Financial and UVEST Financial Services Group, Inc., each of which is a member of FINRA/SIPC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity.

Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

Tracking #1-006001 (Exp. 09/12)

Weekly Economic Commentary

2011-08-30T11:17:00.000-07:00

Good Night, Irene

Federal Reserve (Fed) Chairman Ben Bernanke’s widely anticipated speech in Jackson Hole, WY last Friday (August 26) apparently struck just the right tone for markets. The speech allowed market participants to look ahead to several key economic and policy events this week, including the impact of Hurricane Irene in the economy and markets, the August reports on ISM manufacturing, chain store sales, vehicle sales and most importantly, employment, as well as key data on China (August ISM) and Japan (July industrial production, retail sales, and vehicle production).

On the policy front this week, the Fed will release the minutes of the August 9 FOMC meeting, and perhaps more importantly, German Chancellor Angela Merkel holds a key policy conference with her own caucus as the market continues to wait for a policy response from Europe . Japan’s ruling party will choose a new Prime Minister from its own ranks, after the current Prime Minister resigned on Friday, August 26. As with elsewhere around the globe, the path of future fiscal and monetary policy in Japan is crucial to the outlook for the global economy.

Further out on the horizon for markets on the policy front is the now two-day long September Federal Open Market Committee (FOMC) meeting on September 20 and 21, some type of policy actions in Europe, a jobs proposal from President Obama, and ongoing work by the so-called congressional “super committee” tasked with finding at least $1.5 trillion in budget savings by the end of this year.

Potential Economic Impact from Hurricane Irene

Another, shorter term concern for markets is Hurricane Irene, which made its way up the East Coast over the weekend of August 27 – 28. As of Monday morning, August 29, damage estimates were in the $5 to $10 billion range. Although the damage from Irene was less than feared, it caused major disruptions in a very heavily populated area of the country, keeping businesses closed and consumers at home for several days in the key back-to-school shopping season. The high frequency economic data (i.e. initial claims, shipping and rail traffic, weekly retail sales, consumer confidence, auto production, etc.) we, other market participants, and policymakers track may be difficult to interpret for a few weeks due to the impact of the storm. This potential lack of clarity on the underlying health of the economy arrives at a particularly inopportune time, as markets and policymakers try to gauge the true underlying strength of the economy and the risk of recession.

Although several major public transportation systems from the Metro in D.C., to the MBTA in Boston were closed for all or part of the weekend of August 27 – 28 (and some remain partially closed as of Monday morning, August 29), it appears that most of the other major economic infrastructure (ports, roads, airports, railways, refineries, utilities, etc.) related assets in the path of the storm were largely spared. Flooding remains the largest concern in the aftermath of the storm, especially in New Jersey, New York, and Vermont. If authorities take longer than now expected to repair the infrastructure, the hurricane may have a longer lasting impact on the economy in the region, and would push the United States economy closer to recession. Prior to the storm, we placed the odds of recession at around one-in-three, up from a few weeks ago, but well below the odds financial markets seem to be placing on a recession.

As previously noted, very preliminary estimates put the economic cost of Irene at between $5 and $10 billion. In terms of economic damage (adjusted for inflation), at $108 billion, Katrina (2005) was the costliest hurricane ever to hit the United States. Andrew (1992) at $45 billion was next costliest, followed by Ike (2008), Wilma (2005), Ivan (2004), Charley (2004), Hugo (1989), Rita (2004) and Agnes (1972). These storms (again in 2010 dollars) caused between $10 and $20 billion in damage. Irene may end up in the lower end of that $10 to $20 billion category in terms of economic cost, although the true cost of the storm may not be known for weeks. Three storms that took the same track as Irene — up the East Coast — and were roughly the same magnitude as Irene: Floyd (1999), Bob (1991) and Gloria (1985) were the 14th, 30th, and 30+ most costly storms in history. For perspective, the size of the United States economy is around $15 trillion dollars.

A Key Week for Economic Data

Although the week is chock full of economic data in the United States and abroad, the key reports are likely to be the ISM report on manufacturing for August (Thursday, September 1) and the August employment report (Friday, September 2).

Based on weakness in various regional ISM and Federal Reserve manufacturing sentiment surveys already released for August (Philly Fed, Empire State manufacturing, Richmond Fed, Dallas Fed), the consensus expects the August reading on the ISM to dip below 50 (to 48.5), from the 50.9 reading in July. The so-called “whisper number” among traders (who often informally have their own forecasts for key economic data and events that differs from the consensus estimate culled from economists) is probably closer to 44.0 or 45.0. Thus, expectations for ISM are quite low. A reading below 50 on the ISM has historically corresponded with contraction in the manufacturing sector, while a reading about 50 suggests an expanding manufacturing sector. The last time the ISM was below 50 was in July 2009, the first month of the current economic recovery.

It is not unusual to see the ISM to approach, and dip below, 50 in the midst of an economic expansion. The index dipped below 50 in the middle of the long 1982 – 1990 expansion and did several round trips above and below 50 in the 1991 – 2001 recovery, notably in 1995 and again in 1998. In the 2001 – 2007 expansion, the ISM dipped back toward the 50 level in 2004, before reaccelerating in 2005. More recently, we point out that manufacturing activity/output — vehicle production, industrial production, durable goods shipments and orders, manufacturing employment etc., have held up much better than measures of manufacturing sentiment like the ISM and the regional Federal Reserve manufacturing indices.

A sustained reading of 42 or below indicates recession, and the ISM did get to that level in both the 1991 and 2001 recessions. It got as low as 33.3 at the worst of the 2007 – 2009 Great Recession.

Some of the components of ISM bear close scrutiny, given the composition of the economic recovery thus far. The new orders index — which dipped below 50 in July for the first time since June 2009 is a decent leading indicator of future readings on the overall ISM. Some stabilization in the orders component near 50 would be welcome, although a sustained dip below 50 does not necessarily indicate recession.

Exports helped to lead the economy out of recession in 2009 and 2010, as signaled by the surge in the new export orders index to above 60 in 2009 and 2010, and the sustained stay above 55. The reading was 54.0 in August 2011, and although no formal consensus estimate is available for this component, the best bet is that the market is looking for this index to stay around 50 in August. The new export orders series does dip below 50 in recessions, but rarely gets below 50 during an expansion. The index did temporarily dip below 50 in 1998 due to the Asian financial crisis. One could argue that the turmoil in Europe might also push the export index lower as well.

Inventory restocking by businesses (and especially manufacturers) also played a big role in the economic recovery in 2009 and 2010. As noted in the nearby chart, the inventory component of ISM spends most of its time below 50, and dips well below 40 during recessions. It got as low as 31.3 in June 2009, the final month of the 2007-2009 Great Recession. The inventory component of ISM has spent much of the past two years above 50 as businesses have restocked inventories to meet increased final demand. It dipped to 49.3 in August 2011 however. A reading above 43 on this component of ISM suggests that the economy is still expanding.

The other key report due this week is of course the August employment report. The employment report is actually two reports in one. One part of the report surveys 60,000 households on their employment status, generating the widely cited unemployment rate figure, calculated as the number of people unemployed and looking for work as a percentage of all the people in the labor force. The other side of the report surveys 140,000 businesses, and generates the number of workers on payrolls, their wage rates, hours worked etc. Both surveys have huge nationwide sample sizes-far greater than the survey sizes (typically 1000 people) used in polling for national political races — and have been conducted for more than half a century. Although jobs are a lagging indicator of the economy (and the economy itself lags financial markets), the monthly jobs report is perceived by markets and the media as the most important economic report of the month.

The market is looking for the economy to create 103,000 private sector jobs in August, a deceleration from the 154,000 jobs created in July. As is the case with the “whisper number” for the August ISM report, at between zero and 25,000 jobs, the whisper number for the private sector job count is probably a lot lower than the published consensus. So, as is the case with the August ISM report, expectations are quite low for the employment report. State and local governments, which have shed nearly 600,000 jobs over the past three years, are expected to shed another 25,000 in August, so the overall economy (private sector and government) is expected to have added only 75,000 jobs in August. The whisper number here is well below zero, again suggesting that even an outright decline in overall jobs between July and August is somewhat priced in.

Weather, strikes, and other “one time” events often impact the monthly jobs report, and the August report is no exception. A strike at Verizon that impacted 45,000 workers will negatively impact the August job count, although the market should take this into account. The supply chain disruptions caused by the Japanese earthquake and the early (June instead of July) shutdown of auto plants for summer vacations may also wreak havoc with the August job count. Most importantly however, the dour mood that descended on the country in late July and early August as the debt ceiling debate raged, followed by a further dip in consumer, business and market confidence after S&P downgraded the U.S. debt rating on August 5 almost certainly curtailed hiring in the month. In addition, tightening financial market conditions (and very elevated readings on market volatility) also likely weighed on businesses decisions to hire in August.

Our Take on Fed Chairman Bernanke’s Jackson Hole Speech

Fed Chairman Bernanke’s speech in Jackson Hole on Friday, August 26 struck just the right tone for investors. As we expected, Fed Chairman Ben Bernanke did not hint at any new, immediate actions by the FOMC in the speech. Instead, Bernanke sounded relatively optimistic about the economy, especially in the long-term. In the short-term, Bernanke did note that the upcoming FOMC meeting (mid-September) has been changed to a two day meeting from a one day meeting. In our view, the extra day would provide the FOMC the additional time to:

A. Further refine the policies it has been discussing: extending the maturity of its Treasury holdings, lowering the rate it pays on excess reserves, or buying more Treasuries (QE3).

B. Come up with a completely different policy approach to address slow growth in the U.S. economy.

Bernanke also noted that the sovereign debt issues in Europe, as well as the fiscal situation in the United States were at the top of the list of FOMC concerns. Bernanke was unusually blunt in his criticism of Congress (his bosses) and its ability to make prudent fiscal decisions. Bernanke also reiterated his view that Congress should take into account the “fragility” of the economy when considering additional spending cuts as part of the debate to further address the long term budget issues faced by the United States.

Bernanke, a Republican first appointed by President George W. Bush, noted, “Fortunately, the two goals of achieving fiscal sustainability — which is the result of responsible policies set in place for the longer term — and avoiding the creation of fiscal headwinds for the current recovery are not incompatible. Acting now to put in place a credible plan for reducing future deficits over the longer term, while being attentive to the implications of fiscal choices for the recovery in the near term, can help serve both objectives.”

___________________________________________

IMPORTANT DISCLOSURES The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

Stock investing involves risk including loss of principal.

Empire State Manufacturing Survey is a monthly survey of manufacturers in New York State conducted by the Federal Reserve Bank of New York.

This research material has been prepared by LPL Financial.

The LPL Financial family of affiliated companies includes LPL Financial and UVEST Financial Services Group, Inc., each of which is a member of FINRA/SIPC. To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity.

Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

Tracking #1-003249 (Exp. 08/12)