Weekly Economic Commentary

Hard Data Versus Soft Sentiment: The Sequel

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

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

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

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

·         How many homes were sold?

·         How much revenue did a company generate?

·         What were a company’s earnings after expenses?

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

·         How many cars were produced and sold?

·         How many jet engines were exported overseas?

·         How many new orders for business equipment were placed?

·         How many jobs were created (or lost)?

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

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

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

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

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

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

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

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

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

·         Producer Price Index (PPI)

·         Consumer Price Index (CPI)

·         Housing starts

·         Building permits

·         Existing home sales

·         Initial claims for unemployment insurance

·         Weekly retail sales

·         Weekly mortgage applications and

·         Weekly car and light truck production

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

·         The National Association of Homebuilders Sentiment Index

·         The Fed’s Beige Book

·         The Philadelphia Fed Index

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

_______________________________________

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

Stock investing involves risk including loss of principal.

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

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

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

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

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

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

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

This research material has been prepared by LPL Financial.

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

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

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

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

Weekly Economic Commentary

The Next Two Million Jobs: An Update

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

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

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

The Next Two Million Jobs: An Update

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

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

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

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

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

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

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

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

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

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

·         The debt ceiling debate in July and early August.

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

·         The effects of Hurricane Irene.

·         Further declines in both consumer and business confidence.

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

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

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

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

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

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

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

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

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

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

___________________________________________________

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

Stock investing involves risk including loss of principal.

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

The 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.

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

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

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

This research material has been prepared by LPL Financial.

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

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

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

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

Weekly Economic Commentary

Does Data Matter?

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

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

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

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

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

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

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

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

Does Data Matter?

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

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

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

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

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

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

_________________________________________

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

Stock investing involves risk including loss of principal.

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

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

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

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

This research material has been prepared by LPL Financial.

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

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

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

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

Weekly Economic Commentary

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)