Bfp 2 Q09 Outlook

Brighton FinancialPlanning, Inc.Brighton FinancialPlanning, Inc.

Brighton Financial Planning, Inc.

Economic and Financial Market Review2nd Quarter 2009

John P. Middleton, CFA, CAIA

[email protected]

www.brightonfinancial.com

www.brightonperspective.typepad.com

mailto:[email protected]

http://www.brightonfinancial.com/

Brighton FinancialPlanning, Inc.

U.S. Economy

2

Data Current Year Over Year Notes

Consumer Price Index (CPI) (as of June 17)

+0.1% -1.3% Largest annual decline in inflation rate since 1950

Unemployment rate (as of July 2 for June)

9.5% +4% Up from 7.2% at the end of 2008 and 5.5% a year ago

Gross Domestic Product (GDP) (June 25 for Q1)

-5.5% Better than Q4 2008's -6.3%, and slightly better than previous estimate of -5.7%

As of June 30, 1 euro equaled:

$1.40 Dollar weaker than March's $1.32

As of June 30, $1 equaled: ¥95.55 Dollar weaker than March's ¥97.29

Data Review

Source: Forefield, Inc.


Brighton Financial Planning, Inc.

• U.S. Economy

– GDP growth likely to remain negative for the 2nd quarter

• Key negative driver for last 2 quarters has been Corporate Investment

• Personal consumption still accounts for 70% of GDP

• Consumers are struggling to maintain current income

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-6.00%

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

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47

-I

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-I

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-I

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-I

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-I

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-I

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-I

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-I

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-I

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01

-I

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03

-I

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05

-I

20

07

-I

Rolling 12 month change in Personal Income

Rolling 12 month change in Personal Income

Source: Bureau of Economic Analysis


U.S. Economy

• Consumers and Corporations are not spending

• Consumers and Corporations are de-leveraging their balance sheets

– Result is higher savings and less spending

– Which leads to decline in GDP

– Government spending is up significantly but is not wealth-creating long-term

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0500

1000150020002500

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-III

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-I

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-III

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-III

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-I

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-III

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-I

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-III

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-I

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-III

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-I

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-III

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-I

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-III

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07

-I

Gross Private Domestic Investment (in billions)

Gross Private Domestic Investment



U.S. Economy

• Conclusions

– GDP growth should continue to be anemic for the near future

• 2/3rds of GDP is consumer driven and consumers are not spending

– Unemployment remains high with most growth in government jobs

– High leverage + unemployment is not good

– Consumers know this and are cutting back spending and paying down debt

• Corporations are not investing in capital

– Recovery should be driven by new capital spending

– As companies invest in new capital, employment will pick up

• Government is attempting to pick up the slack

– Not success yet and questionable as to whether it will be at all

– Can create other issues such as inflation

– Inflation and higher tax risks remains

• Government spending can be inflationary

– Unlikely to be curtailed as economy recovers

– Increase in money supply and velocity + devalued dollar create inflationary pressures

– Higher spending needs means higher income needs

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Global Economy

• Global economy very dependent on U.S. economy

– U.S. is leading consumer of global supply

– However, emerging markets have suffered less than developed markets

– And, the IMF forecasts continued improvement in emerging markets

– But, decline in U.S. consumption must be offset somewhere

• Either higher consumption x U.S.

• Or reduction in supply

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0.00

20,000.00

40,000.00

60,000.00

80,000.00

100,000.00

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est

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est

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est

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est

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14

est

GDP (PPP adjusted)

World Advanced economies Emerging and developing economies



Global Economy

• Developed Markets have struggled much like the U.S.

• U.S. and EU (primary components of Advanced Economies)

– Ran government net deficits for much of the last 15 years

– Have increased government expenditures to combat global recession

• Emerging Markets ran surplus during early part of this decade

– Have increased spending but only deficit forecast to remain under 4%

– Suggests economic improvement will be easier and more quickly achieved

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-10

-5

0

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est

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10

est

General Government Balance % of GDP

Advanced economies

European Union

Newly industrialized Asian economies



Global Economy

• Developed Markets also track U.S. savings

• Aggregate saving is declining and is expected to continue

– Government and private sector

• Rapid increase in government spending completely offseting private savings

• Emerging markets savings increasing rapidly since 2001

– Slight dip forecast in 09 as gov’t spending increases

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010203040

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est

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10

est

Savings as a % of GDP

World

Advanced economies

Emerging and developing economies



Global Economy

• Developed markets investment flat

• Investment is key contributor to GDP improvement

– Private investment, particularly corporate capital spending will drive growth

• Emerging markets investment has improved steadily over last 6 years

– And is forecast to continue to remain well above developed markets

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010203040

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est

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est

Investment as % of GDP

World

Advanced economies

Emerging and developing economies



Global Economy

• Conclusions

– Developed markets are struggling just as much as U.S.

• Are highly dependent on U.S. for goods and services

• Must replace U.S. demand and/or services

• Many don’t have the infrastructure to quickly offset that decline

– Emerging markets are also weak, BUT

• Had healthier balance sheets entering the recession

• Haven’t increased government spending above investment and savings

• Are more dependent on commodities consumption

– Driven by China and India currently

• Should recover more quickly than developed markets (including U.S)

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Financial Markets Performance

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Market/Index June 30 Quarterly Change

Year Over Year

DJIA 8447.00 +11.0% -25.6%

NASDAQ 1835.04 +20.0% -20.0%

S&P 500 919.32 +15.2% -28.2%

Russell 2000 508.28 +20.2% -26.3%

Global Dow 1629.31 +20.9% -34.0%

Fed. Funds .25% 0 -175 bps

2-year Treasuries 1.11% +30 bps -152 bps

10-year Treasuries

3.53% +82 bps -46 bps

Crude Oil (per barrel)

$69.82 +44% -50.1%

Spot Gold (per oz.)

$928.50 +.8% +.4%

• Equity markets rallied strongly

• Smaller cap, lower quality stocks led

• International equity participated

• All remain significantly down for 12 mos.

• Fed Funds cut sharply to combat

recession

• Short-term Treasuries have been the safe

haven for investors

• Oil rallied but well off last summer’s highs

• Gold and other precious metals have held

value

Source: Forefield, Inc.


Equity Markets

• Earnings continue to deteriorate

– S&P is now forecasting a trailing twelve month loss for period ending 9/30

– Trailing “As Reported” P/E at all-time high

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/31

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12 MO P/E

Historic Average P/E

Rolling 5YR Ave P/E


Equity Markets

• Conclusions

– P/E ratios tend to trend higher as the economy emerges from recession

– S&P forecasts 2009 earnings at $29.97 per share

– Applying a P/E of 30 (trend forecast) suggests ending S&P 500 Index value of 899.10

– S&P forecasts 2010 earnings at $37.26 per share

– Applying the same P/E suggests ending S&P 500 Index value of 1,117.80

– However, P/E tends to peak 6 to 9 months after recession end

– Thus, more likely to be around 24, so S&P 500 at end of 2010 forecast = 908

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Looking Ahead

• Weak U.S. economy will gradually improve over the next 18 months

• Global economy will track U.S. but with stronger recovery in EM

• Inflation remains a risk as stimulus spending enters an improving economy

• Equity markets remain flat to slightly positive as lack of leverage suggests any improvement will match earnings growth

• Fixed income markets offer mixed bag – higher inflation is not good but credit dislocation beginning in 2008 hasn’t completely resolved itself

– Inflation hedges – TIPS, Bank Loans may offer opportunities

• Emerging markets and commodities may offer better returns over next 2 years

– EM equity and fixed income

– Commodities producers, oil and gas (MLPs)

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Bfp 2 Q09 Outlook

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