Weekly Economic Commentary

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.

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, 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, due to a rebound in auto production and auto sales.

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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.

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.

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 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.

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

 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.

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.

Stock investing involves risk including loss of principal.

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.

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

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.

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.

Stock investing involves risk including loss of principal.

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.

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.

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.

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

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.

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)