Weekly Economic Commentary

Does Economic Momentum Exist?

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

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

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

Economic Momentum Is Rare

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

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

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

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

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

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

Momentum Turned in Late 2011

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

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

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

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

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

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

_________________________________________

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

Stock investing involves risk including loss of principal.

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

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

This research material has been prepared by LPL Financial.

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

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

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

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

Weekly Economic Commentary

Hitting the Ground Running

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

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

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

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

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

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

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

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

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

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

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

Communication Clarification from the Fed?

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

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

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

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

_____________________________________________

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

Stock investing involves risk including loss of principal.

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

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

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

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

This research material has been prepared by LPL Financial.

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

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

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

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

Weekly Economic Commentary

Bucking the Trend

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

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

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

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

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

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

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

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

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

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

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

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

_________________________________________________

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

Stock investing involves risk including loss of principal.

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

This research material has been prepared by LPL Financial.

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

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

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

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

The Investment Tax Landscape: Countdown to 2013

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

The can won't stay kicked down the road forever

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

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

Capital gains and dividends

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

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

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

Taxable vs. tax-free bonds

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

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

2013 and beyond

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

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2011

College Costs Keep On Climbing

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Weekly Economic Commentary

The Labor Market Continues Its Long Climb Back

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

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

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

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

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

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

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

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

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

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

________________________________________________

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

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 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.

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

This research material has been prepared by LPL Financial.

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

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

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

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

Weekly Economic Commentary

A November To Remember for the Economy?

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

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

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

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

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

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

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

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

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

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

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

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

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

______________________________________________________

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

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

This research material has been prepared by LPL Financial.

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

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

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

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