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.

_____________________________________________

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)

Weekly Economic Commentary

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.”

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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.

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.

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.

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)

Weekly Market Commentary

Summer Roller Coaster

Summer is a time when many Americans seek out amusement parks for the thrills of riding a roller coaster. The climbs and drops at high speed deliver an exciting mix of fear and exhilaration. But knowing the extent of the highs and lows and when it is going to be over play a crucial role in the fun of riding a metal roller coaster. Riding a market roller coaster offers no such assurances and is no fun at all.

To say last week was volatile for the markets would be a major understatement. The stock market posted one of its most volatile weeks ever with swings of greater than 4% during each of the first four days of the week, changing direction with each day. This pattern of performance has never before been seen in the 83-year history of the S&P 500 index. By Friday, stock market turbulence slowed. For the week, the S&P 500 was down 1.6% adding to the losses that now total 13% since the recent peak on July 7.

While the U.S. debt downgrade in the week before last grabbed a lot of attention and added to the lingering pessimism heading into last week, one of the primary drivers of last week’s volatility was that eurozone leaders, while making some successful efforts, have not gone far enough to resolve the debt problems in the eurozone. Investors feared a downgrade to France, and another banking crisis stemming from some French banks noted by Moody’s, as at risk of a downgrade due to their exposure to troubled debt. Another key driver was the better-than-expected economic data on retail sales and the labor market along with the Fed confirming they intend to keep short-term interest rates low until mid-2013. This optimism that the U.S. economic soft spot was firming vied with the concern that the pace of economic growth in the United States may soften further as stimulus begins to fade.

While last week’s volatility is unprecedented, we can take some comfort that the overall moves and sentiment in the market this summer are familiar; they echo those of last summer.

·         At the low point of last week, the S&P 500 was down 17%, similar to last summer’s volatile 16% peak-to-trough decline.

·         The 10-year Treasury note yield has fallen 1.6 percentage points from the high of the year, similar to last summer’s 1.6 percentage point decline from the high of the year.

·         The drivers of the decline are similar to last summer, as well. Last year, Europe’s debt problems were a main cause of the market’s decline, as was an economic soft spot in the United States as stimulus began to fade when the Federal Reserve ended the QE1 bond buying program and state and local governments were cutting back on spending.

So, maybe we have been on this market roller coaster before, and, if so, we might be near the end. Last year, the roller coaster did not leave the track and the summer plunge turned into a steep climb as stock and bond yields rose to new post-recession highs. We continue to believe this summer’s drop will end with similar results and ultimately produce a modest single-digit gain for the S&P 500 in 2011. We believe the fundamental underpinnings of solid corporate earnings growth (up 19% year-over-year in the second quarter), low valuations (the price-to-earnings ratio fell to levels not seen since 1989 during the lows of last week), and firming economic data (as Japan’s economy rebounds from recession) will combine to support stocks, high-yield bonds, and other business cycle-sensitive investments.

However, there are factors we are watching to determine if this volatility is instead a precursor to a deeper and longer lasting bear market. In the next few weeks there are a number of potentially market-moving events that may continue some of the volatility that was so pronounced last week.

·         With all the attention on Europe’s sovereign debt problems, this week’s meeting between German Chancellor Angela Merkel and French President Nicolas Sarkozy will garner much attention. The market wants to know how much larger the European bailout fund is going to be and under what conditions it may be used, although this is unlikely to be determined for a number of weeks.

·         A lot of retailers report second quarter earnings this week. But the solid results will be tempered by an outlook clouded by the sharp decline in confidence seen in the widely-watched University of Michigan consumer sentiment index falling all the way back to the levels during the financial crisis. The question for markets is whether the stock market’s violent sell off has become such a negative for consumer and business confidence that it will impact the economy and profits.

·         In 2010, the Fed’s annual Jackson Hole meeting at the end of August hinted that QE2 may be coming and got the markets to acknowledge improving economic and profit data and rebound. The Jackson Hole meeting at the end of the month will be closely watched for indications of how the Fed may respond to further economic weakness. In the meantime, this week Dallas Fed President Richard Fisher will speak. Fisher is one of three Fed officials who dissented to the Fed’s statement that interest rates would remain low through mid-2013 and his comments may add to volatility.

·         U.S. economic growth has started to show signs of improving. This can be seen in a number of economic readings including the fall in initial jobless claims to a four-month low of 395,000 in the past week, retail sales running 4 – 5% above a year-ago levels, and signs that industrial production has increased. In the coming week, gloomy housing-related data is on tap, but stronger readings on manufacturing in the Philadelphia Fed survey along with leading economic indicators may provide positive data points.

Although we expect volatility to continue, we foresee a more muted level than last week’s market roller coaster ride and a climb over the months ahead. In general, we advise investors to do what they normally do on a roller coaster: hang on tightly, grit your teeth, scream if you need to, but do not jump off.

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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.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and are subject to availability and change in price.

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.

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.

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.

High yield/junk bonds (grade BB or below) are not investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors.

Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of a fund shares is not guaranteed and will fluctuate.

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 #753038 (Exp. 08/12)

Weekly Economic Commentary

Midsummer Madness

As if the debt ceiling debate was not enough madness for financial market participants to endure, this week’s economic and policy calendar is full of events that could drive markets mad. The week kicked off with the release of the Chinese PMI data for July, and will end with the July jobs report. In between, data on vehicle sales, personal income and consumer spending, factory orders, chain store sales, and layoff announcements for June and July will all vie for the market’s attention. This is the unofficial “quiet week” for Federal Reserve (Fed) officials, ahead of next week’s Federal Open Market Committee (FOMC) meeting. Overseas, the Bank of England, the European Central Bank, the Bank of Japan and the Reserve Bank of Australia meet to set rates. None of these central banks are expected to raise rates. Outside of the central bank activity, there are very few key overseas economic reports due this week. The Chinese data for July is set to be released next week, August 7 – 13.

Although the ink is not dry yet, the deal to raise the nation’s debt ceiling will help to lift some of the uncertainty that has hampered economic activity over the past few months. Of course, virtually all of the data due out this week references the period (June or July) during which the debt ceiling debate dominated the headlines. Thus, it may not be until mid-August that we get a “clean” set of data on the economy, free of any distortion from the debt ceiling debate.

Until then, however, markets have plenty to digest. As this report was being prepared for publication, the Institute of Supply Management’s (ISM) report on manufacturing for July was released. The report fell far short of expectations, was below the low end of the range of economists’ estimates, but most importantly suggested that manufacturing activity in July slowed to near stall speed. The closely watched report saw marked deceleration across all of its key components (new orders, production, and employment), and the drop in the new orders index below 50—a reading below 50 in the ISM report indicates contraction in the index or component—was particularly worrisome. July 2011 marked the first time in two years that the new orders index was below 50. In addition, the 50.9 reading on the overall ISM index for July was the lowest since the first month of the recovery (July 2009).

While it is not unusual to see the ISM slide back toward 50 at this point in the economic cycle, it is clear that the slowdown in China, the ongoing recovery in the global supply chain from the earthquake and tsunami in Japan, the turmoil in Europe and the uncertainty surrounding the debt ceiling all impacted manufacturing activity in July. A slower-than-expected ramp up in auto production in July also likely hurt manufacturers. Still, booming exports (50% of U.S. exports head to fast growing emerging market economies), a weak dollar, low financing rates, and a low inventory-to-sales ratio all continue to support the manufacturing sector. The key for markets now is when do the negative factors fade and allow the positives to drive the manufacturing sector higher.

The other key report this week is the July jobs report. The report is due out on Friday, August 5. The market is looking for a modest acceleration in private sector job creation in July and for the unemployment rate to remain stable at a still-elevated 9.2%. The consensus forecast in private sector jobs is for a gain of 120,000 following the disappointing 57,000 gain in June. The job count totals are derived from a survey of businesses. As previously noted, the unemployment rate—derived from a survey of households about their employment status—is expected to remain at 9.2%, unchanged from June’s 9.2% reading, but below the recent peak of over 10.0% hit in late 2009.

We continue to expect further losses in state and local government employment in July, even after this sector of the economy has shed nearly 600,000 jobs over the past three years. Teacher layoffs could be a big swing factor in July (most state and local government fiscal years begin in July), and the auto sector could see some movement as well, given the unusually early auto plant summer shutdowns this year, which occurred in June rather than July, as is typically the case.

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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.

Stock investing involves risk including loss of principal.

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 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.

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 #750422(Exp. 08/12)