Weekly Economic Commentary

Most Asked Fed Question May Go Unanswered

This week marks the first anniversary of the latest round of increased transparency by the Federal Reserve (Fed) as Fed Chairman Ben Bernanke will kick off a second year of post-Federal Open Market Committee (FOMC) meeting press conferences on Wednesday, April 25. Bernanke’s first post- FOMC press conference was held on April 27, 2011. Bernanke also held press conferences after the FOMC meetings that ended on June 22, 2011, November 2, 2011, and January 25, 2012. While the media is likely to put most of the focus on Bernanke’s press conference and on the statement released after the FOMC meeting, market participants will likely be primarily focused on the FOMC’s latest forecast of the economy and the path of interest rates and how those forecasts compare to the FOMC’s judgment of “normal” or trend growth in the economy. By the end of the week, the market would like to be able to more clearly assess the odds of more monetary stimulus from the FOMC when the current round of stimulus — Operation Twist — ends at the end of June 2012. In our view, despite all the information flowing from the Fed this week, that question might go largely unanswered, leaving the timing of or the decision to implement another round of easing up to the flow of economic data and events over the next few months.

Fed Issues

The issues at hand for Chairman Bernanke at the conclusion of the meeting include deciding on the fate of Operation Twist, or as it is officially called the Maturity Extension Program, which ends on June 30, 2012. Operation Twist was hinted at by Bernanke in August 2011 and was implemented following the September 21, 2011 FOMC meeting. Its goal was to keep long-term rates, used by financial institutions to set rates for consumer and business borrowers, lower than they would have otherwise been by selling some of the Fed’s existing holdings of shorter dated Treasury holdings and buying longer dated Treasuries in the open market. While some market participants continue to debate the effectiveness of Operation Twist, the market’s real concern is likely to be what happens next.

What the FOMC decides to do once Operation Twist ends, if anything, will largely be determined by how economic (Gross Domestic Product [GDP] growth and the unemployment rate) data along with inflation excluding food and energy prices (core inflation) behave in absolute terms, and also relative to the FOMC’s projections for these metrics. As part of the increased transparency, the FOMC began publishing its forecast four times a year following each of the two-day FOMC meetings, in April 2011. Prior to that, the FOMC published its projections for key economic variables, but with a lag, including the forecasts in the minutes of the FOMC meeting, which are released three weeks after the conclusion of the meetings.

Fed Forecasts

The forecasts made at the January 24 – 25, 2012 FOMC meeting saw a slightly lower path for GDP growth in 2012 and 2013 (versus the forecast made in November 2011), but also a slightly lower (better) unemployment rate forecast than was made in November 2011. The FOMC’s projections for inflation in 2012 and 2013 were little changed between the November 2011 forecast and the January 2012 forecast.

The forecasts released by the FOMC this week will likely show slightly stronger GDP growth for 2012 than the forecast made at the January 2012 FOMC meeting, and a slightly lower (better) unemployment rate forecast. The inflation forecast is likely to be little changed.

These forecasts are best viewed in comparison to the FOMC’s projections of the “long run” forecast for each of the variables. The forecast for real GDP growth over the long run (a good proxy for where the FOMC thinks the “normal rate” of economic growth is) made in January 2012 pegged GDP growth at around 2.5%, the “normal” unemployment rate at 5.6%, and overall inflation near 2.0%. Over the past few years, the FOMC’s view of the long-term potential growth rate of the economy has moved down a bit, while its forecast of the “normal” unemployment rate has crept up a bit. Its forecast of what the “normal” rate of inflation is over the long term hasn’t budged much.

Fed Policy Firming

Also of interest to market participants will be any shift in the FOMC’s view on when the first “policy firming” (or what we used to call a rate hike) by the FOMC is likely to occur. Again in the spirit of increased transparency — which has been a hallmark of the Bernanke Fed, especially since the onset of the worst of the Great Recession and financial crisis in early 2009 — the FOMC began publishing the forecasts of its own policy actions at the conclusion of the January 2012 FOMC meeting. At that meeting, well more than half (11 of 17) FOMC members expected the FOMC’s first policy tightening in 2014 or later. Five of the 17 members of the FOMC expected the FOMC’s first “policy firming” to occur in 2015, but notably, two of the FOMC’s more “dovish” (those who favor the employment portion of the Fed’s dual mandate to promote full employment and low and stable inflation) members didn’t see any policy firming until 2016! At the other end of the spectrum, three of the more “hawkish” (members who favor the low and stable inflation side of the Fed’s dual mandate) saw the FOMC first firming policy this year. This time around, we could see a few of the four ‘15ers join the five ‘14ers, given the somewhat better tone to the economic data (until the last few weeks) since the January 2012 FOMC meeting.

Putting It All Together

In short, this week’s FOMC meeting, the accompanying policy statement, the Bernanke press conference, the FOMC statement, and the accompanying economic and policy projections are likely to provide plenty of fodder for financial markets in an already busy week for corporate earnings and economic data. However, the key question the market wants answered this week: Will the Fed embark on another round of quantitative easing (QE3) once Operation Twist ends, may go unanswered.

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

The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

Stock investing involves risk including loss of principal.

The Federal Open Market Committee (FOMC), a committee within the Federal Reserve System, is charged under the United States law with overseeing the nation’s open market operations (i.e., the Fed’s buying and selling of United States Treasure securities).

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.

This research material has been prepared by LPL Financial.

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/NCUA Insured | Not Bank/Credit Union Guaranteed | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

Tracking #1-063134 (Exp. 04/13)

Weekly Economic Commentary

March Job Report Disappoints, but Labor Market Continues to Heal

The March employment report, released on Friday, April 6, 2012, was a disappointment relative to both expectations and the labor market data in recent months. Some of the disappointment in March 2012 may have been “payback” for a much warmer-than-usual winter. On balance, however, the report and its underlying details suggest that the labor market continues to heal, but it still has a long way to go to get back to normal. The lackluster March jobs report also puts another round of quantitative easing (QE) back on the table for the Federal Reserve (Fed).

The March employment report revealed that the economy added 121,000 private sector jobs in March, far fewer than the consensus expectation of 215,000, and well below the 250,000 jobs created on average in the three months ending in February 2012. In fact, the result was below the lower end of the range of consensus expectations (+185,000 to +265,000). This has happened in just nine of the 63 months since early 2007. Despite the disappointment, there were some bright spots in the report, including the drop in the unemployment rate to 8.2% from 8.3% in February. The financial markets initially reacted poorly to the data. However, the March jobs report does little to change our view that the U.S. labor market is healing, albeit slowly, but still has a long way to go to recoup all of the jobs lost during the Great Recession.

Behind the unambiguously disappointing headline job count, there were several bright spots in the March jobs report.

·        With the 120,000 gain in March, the economy has now added jobs in each of the past 25 months, the longest such streak since mid-2005 through mid-2007.

·        The diffusion index — the number of industries adding workers less the number of industries shedding workers — stood at a robust 67.9% in March, and averaged 68% in the first quarter of 2012, one of the highest readings in 20 years.

·        The manufacturing sector added 37,000 jobs in March 2012, the 16th time in the last 17 months that manufacturing jobs have increased. Q1 marked the third best quarter (Q3 1987 and Q4 1997) for manufacturing employment since the middle of 1984.

·         State and local government employment, which has been a significant drag on overall employment for almost four years, may be stabilizing. State and local government employment fell just 1,000 between February and March 2012, but actually increased by 14,000 in the first quarter of 2012, the first quarterly gain in nearly four years. In 2011, state and local governments shed more than 20,000 jobs per month, and shed more than 650,000 jobs since August 2008, as they struggled to align costs with reduced revenues. Looking ahead, the recent data from this report, as well as from state and local government budgets and from surveys of layoffs in state and local governments, all suggest that the worst may be over for job losses at the state and local government level.

·        The private sector economy created more jobs (635,000) in the first quarter of 2012 — or 212,000 per month — than in any quarter since the first quarter of 2006, when the economy, as measured by real Gross Domestic Product (GDP), was growing at 5.1%. While some of the increase in jobs was likely due to warmer-than-usual weather during the quarter, the vast majority of the jobs created recently likely represent actual economic activity. Weather-sensitive jobs excluding construction (Retail, Transportation & Warehousing, Services to Buildings and Dwellings, and Leisure & Hospitality) rose just 24,000 in March 2012 after the 26,000 gain in February. This metric posted an average gain of over 100,000 per month in the three months ended in January 2012. In short, the 212,000 jobs created on average, per month, in the first quarter is probably closer to the underlying trend of job growth than the 250,000 or so jobs added in the three months ending in February 2012, which were likely boosted by the warmer-than-usual winter.

Between February 2008 and February 2010 — during and immediately after the Great Recession — the economy shed 8.9 million private sector jobs. Since February 2010, the economy has added 4.1 million private sector jobs. Thus, the economy still needs to add 4.8 million jobs to recoup all the jobs lost during the Great Recession. If the economy creates private sector jobs at the pace it did during the first quarter (210,000 per month), it would take until the beginning of 2014 (another 22 months) for the economy to get back to peak employment. As we have noted in previous commentaries, many of the jobs lost during the downturn (Construction, Financial Services, and Real Estate) may never come back. But as of the end of January 2012, there were over 3.4 million open jobs in the economy (Please see the April 3, 2012 Weekly Economic Commentary for more details).

We often get asked about the “quality” of the jobs being added each month. What are the workers being paid? Are the jobs full-time or part-time? Our answer to that question is simply that the best gauge of the labor market may not be the jobs report at all, but rather the personal income and personal spending report that comes out three weeks after the monthly jobs report is released. In that report (the March 2012 personal income and spending report is due out on April 30, 2012) the personal income data, which basically adds up all the income made throughout the economy, is key. Personal income — which includes income from wages and salaries, but also from rental income, interest received and transfer payments (social security, unemployment insurance, Medicare payments, etc.) from the government — provides the buying power for personal spending, which in turn accounts for two-thirds of GDP.

Recently, personal income growth has been running about 3% above its year-ago levels, a big improvement versus the 3 – 4% year-over-year declines during the Great Recession, but still far below the “normal” pace of income gains (5 – 7%). Compensation of employees, which accounts for about two-thirds of personal income, and is a good proxy for employment growth, is running about 4% above year-ago levels. This takes into account that in recent months, about 19% of the jobs in the economy are part-time jobs. During the 2001 – 2007 economic expansion, only 17 – 18% of jobs in the economy were part-time jobs. Presented another way, in March 2012, 81% of the jobs in the economy were full-time jobs, and just 19% were part-time jobs. The economy has added 2.7 million full-time jobs over the past year, and shed 233,000 part-time jobs. As recently as June 2012, the economy was still shedding full-time jobs (621,000 in the 12 months ending in June 2011), and adding part-time jobs (878,000 in the 12 months ending June 2011). Thus, despite the disappointment in March 2012 relative to expectations, the labor market today is far stronger than it was in the middle of 2011, but still not booming.

While Fed policymakers are likely to take note of all of these crosscurrents in the latest employment report, their key takeaway is likely to be similar to ours: the labor market is healing and is probably in better shape than it was last summer, but the economy is probably not growing quickly enough to generate more than 200,000 – 225,000 jobs per month. Is job growth at that pace enough to convince Fed policymakers that the economy does not need another round of QE? In our view, probably not, and the conversation in the marketplace about QE3 will likely heat up in the coming weeks. Although we do not expect the Fed to announce QE3 at the next Federal Open Market Committee (FOMC) meeting (April 25), it is likely to be discussed, and it could be introduced as soon as the FOMC meeting in late June. Please see our Weekly Economic Commentary from March 13, 2012 for our insights into what another round of quantitative easing from the Fed might look like.

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

The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

Stock investing involves risk including loss of principal.

The Federal Open Market Committee (FOMC), a committee within the Federal Reserve System, is charged under the United States law with overseeing the nation’s open market operations (i.e., the Fed’s buying and selling of United States Treasure securities).

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

This research material has been prepared by LPL Financial.

LPL Financial 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/NCUA Insured | Not Bank/Credit Union Guaranteed | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

Tracking #1-059464 (Exp. 04/13)

Weekly Economic Commentary

Jobs Looking for People

A number of key reports due out this week will tell market participants how many jobs were added in March 2012, in what industries the jobs were added, how much workers were paid, and why workers were unemployed. If the consensus is correct, the private sector economy will add more than 200,000 jobs for the fourth consecutive month, and the nation’s unemployment rate will stay at 8.3%. Each month, financial markets and the media turn the monthly jobs report into the most closely watched economic indicator on the calendar. A few days later, the same government agency — The Bureau of Labor Statistics within the Department of Labor — will release a report called the job openings and labor turnover (JOLTS) report with little fanfare from the financial markets or the financial media.

The JOLTS report does not get a lot of attention, mainly because it is dated (the next report due is for February), and by then, the market already has plenty of information on the labor market in March, including a reading on initial claims for unemployment insurance — a closely watched weekly metric on the labor market — for the week ending April 7. However, the JOLTS data provides more insight into the inner workings of the labor market than the monthly employment report does. One key takeaway from the JOLTS data is that small and medium-sized businesses in the South are looking for highly skilled workers.

JOLTS provides data on:

·         The number of job openings economy-wide, by firm size, and by region,

·         The number of new hires in a given month, and

·         Job separations.

On the surface, the data reveals just how dynamic the U.S. labor market is, demonstrating how the economy creates (and destroys) tens of millions of jobs a year. It can also help us answer questions we receive quite often in the LPL Financial Research Department like: Where are all the jobs coming from? What do those jobs pay? What kind of companies are hiring, and where are the jobs located?

At the end of January 2012 (the latest data available), there were 3.1 million job openings, up from 2.1 million open jobs at the start of the economic recovery in June 2009. However, the 3.1 million open jobs at the end of January 2012 was more than a million fewer than at the end of the 2001 – 2007 recovery. Thus, the JOLTS data tells a familiar story: The labor market is healing, but it still has a long way to go to get back to normal.

Where Are the Jobs?

The industry group that has seen the biggest percentage change (nearly 100%) in the number of open jobs since the start of the recovery is the professional and business services area, where there are currently 729,000 open jobs, nearly double the amount in June of 2009. Note that jobs in this category pay on average 15% more ($23 per hour versus $20 per hour) than the average job.

Jobs in this category include:

·         Legal services,

·         Accounting and bookkeeping,

·         Architectural and engineering services,

·         Computer systems design,

·         Management and technical consulting services, and

·         Temporary help services.

With the exception of temporary help services, which are a catch-all for temporary employment agencies, the vast majority of the jobs in the professional and business services area appear to be in professions that demand advanced education or training. Indeed, in recent Beige Books — qualitative assessments of banking and business conditions compiled for the Federal Reserve (Fed) by private sector business owners and bankers prior to each of the eight Federal Open Market Committee (FOMC) meetings a year — there have been scattered reports of labor shortages in certain industries. In addition, in recent public appearances, Fed Chairman Ben Bernanke has noted that a mismatch exists between skills and open jobs.

How Much Do They Pay?

Job openings have surged in the relatively low paying ($12 per hour on average) leisure and hospitality area (by 68%) and by 36% in retail ($14 per hour). But large increases in job openings since the beginning of the recovery have not been limited to low paying jobs. Manufacturing (by 54%) and construction (by 44%), which are among the highest paid jobs, have seen sizable increases in the number of open jobs. There has only been an 18% increase in open jobs in the health care and education area, as these sectors didn’t see many job cuts during the recession. Government job openings have increased by just 12%, with a decent gain in state and local openings almost entirely offset by a drop in job openings at the Federal level.

What Kinds of Companies Are Hiring?

Since the early 1990s, small businesses have created two-thirds of the jobs in the United States. The Bureau of Labor Statistics collects this data, but it lags the other data mentioned in this commentary, and the most recent report is from the middle of 2011. However, some private sector firms collect data on hiring by firm size, most notably, in the ADP employment report, which is also due out this week. The data shows that small businesses (under 499 employees) have done virtually all of the hiring in the last two years. Recent surveys do show an uptick in small business optimism, albeit from very low levels, helping to corroborate the hiring data. But returning to the JOLTS data, we find that the entire increase in open jobs since the start of the recovery, can be accounted for by firms between 1 and 249 employees. While larger firms have seen increases in open jobs, the vast majority of the increase in job openings over the past two-and-a-half years has come from small businesses. As of the fourth quarter of 2011, 75% of the job openings were at firms with less than 250 employees. This suggests that confidence and certainty in fiscal and monetary policy and in overall leadership in Washington will be keys to sustaining the gains made in the job market in recent months.

What Regions Have the Most Job Openings?

The region with the most openings (1.43 million) and the biggest increase in job openings since June 2009 is the South. On the other hand, the Northeast has seen the smallest increase in job openings in the past two-and-a-half years and also has the fewest open jobs right now. The Western region has fared a bit better than the Northeast, but still has seen the second-smallest increase in job openings and has the second lowest number of open jobs. One explanation for the lagging performance in these two regions is that both were hurt by: 1) the collapse in the real estate bubble (fewer construction jobs); and 2) the Northeast was also hurt by the collapse in the financial services sector due to the bursting of the real estate bubble. Looking around the country at open jobs by industry, firm size, and pay, it seems like a good time to be a highly skilled worker in the South looking for work in a small to medium-sized business.

In a speech to a group of business economists in late March, Bernanke noted that in order for the unemployment rate to drop further from here (it has moved down by nearly a full point since last summer to 8.3%), the economy needs to pick up steam. Our view remains that the labor market continues to heal at a modest pace. The economy has added 3.9 million private sector jobs since February 2010, after shedding 8.8 million jobs between early 2008 and early 2010. At 8.3% the unemployment rate is well below the recent peak (10.0% in late 2009), but nearly double the rate seen (4.4%) prior to the Great Recession. The broadest measure of unemployment, which includes those working part time, and those who have given up looking for work, stood at 14.9% in February, down from 15.1% in January and a recent peak of 17.2% in late 2009. This measure of slack in the labor force is still nearly double what it was (7.9%) prior to the onset of the Great Recession.

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

The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

Stock investing involves risk including loss of principal.

The Federal Open Market Committee (FOMC), a committee within the Federal Reserve System, is charged under the United States law with overseeing the nation’s open market operations (i.e., the Fed’s buying and selling of United States Treasure securities).

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 #1-057980 (Exp. 04/13)

Weekly Economic Commentary

The Long Road Home

This week brings a mix of policy and data, but the Supreme Court's consideration of the Affordable Care Act will likely draw most of the media's attention. This week's U.S. economic data is a mix of data on: 1) manufacturing in February (durable goods orders) and March (Richmond, Kansas City and Dallas Fed manufacturing indices along with the Chicago area Purchasing Managers Index-PMI); 2) housing (pending home sales in February); 3) and consumer sentiment for March. Markets will be looking for signs of slowdown in the United States after seeing the weaker data in Europe, the U.K. and China last week. The release of the German IFO index for March and the March PMI in China are the data highlights overseas. The real action, however, may be on the policy front this week, at home and abroad.

The U.S. Supreme Court will hear arguments this week on the Affordable Care Act. The hearings will get a lot of media attention, though a decision by the Supreme Court is not due until the end of June. While the Federal Reserve’s (Fed) next Federal Open Market Committee (FOMC) meeting is still five weeks away, the debate over whether or not the Fed will conduct another round of quantitative easing (QE3) will be in the news this week, as no fewer than 10 Fed officials make public appearances. There are more policy hawks (those favoring the low inflation side of the Fed’s dual mandate) than doves (those who favor the full employment side) on the docket, and so by the end of the week, the market may doubt that QE3 is still on the table. Our view remains that unless the economy accelerates noticeably in the next several months, the Fed is more likely than not to do another round of quantitative easing in the second half of the year. In addition to the Fed speakers, there are several key finance ministers’ meetings (and debt auctions) in Europe this week, and leaders of the BRIC nations (Brazil, Russia, India, China) will meet in India amid slowing growth in many emerging market economies.

Still on the Road to Recovery

Housing was in the news last week, and there are several housing-related reports due out this week as well. As we have noted in recent commentaries, the U.S. housing market is still in the process of recovering from the 2006 – 09 bust that followed the housing boom that began to show severe cracks in 2007 and collapsed in 2008. The collapse in housing, in turn, was a major contributor to the financial crisis and Great Recession of 2007 – 09. The housing market, along with many financial markets, and many economies around the globe are still feeling the after-effects of the housing collapse.

As the old saying goes, the real estate market is all about “location, location, location.” When we discuss the housing market, we do so from a national perspective: what is happening to the housing market on your street or in your neighborhood, town, city or state may be completely different (better or worse) than what is happening nationwide.

With that important caveat in mind, we can say that the housing market (sales, prices, construction, etc.) hit bottom in early 2009 and has been moving sideways to slightly higher since then. Housing construction (which is the most direct way housing impacts gross domestic product–GDP) has not been a significant, sustained contributor to economic growth (as measured by GDP) since 2005. The lack of participation from housing has been one of the main reasons (along with the severe cutbacks in state and local governments) behind the so far sluggish economic recovery. Looking ahead to the remainder of 2012, we see only a modest contribution to GDP growth from housing, as the positives slightly outweigh the negatives.

There are a number of direct (housing starts, housing sales, construction spending, home prices) and indirect (homebuilder sentiment, mortgage applications, foreclosures, inventories of unsold homes, mortgage rates, housing vacancies, lumber prices, prices of publicly traded homebuilders) ways to measure the health of the housing market. These data are collected and disseminated by both the U.S. government and by private sources. A quick recap of these various indicators is below.

Taking the Pulse

·        Near-record housing affordability. Housing affordability, the ability of a household with the median income to afford the payments on a median priced house at prevailing mortgage rates, is at an all-time high. Rising incomes, record-low mortgage rates, and the aftermath of the 20 – 30% drop in home prices nationwide account for the record level of affordability.

·        Homebuilder sentiment. At 28 (on a scale of 0 to 100, where zero is the worst and 100 is the best) the index of homebuilder sentiment has surged over the past nine months and now sits at a four-and-a-half-year high albeit still at a very low level. The homebuilder sentiment data is compiled by the private sector’s National Association of Home Builders.

·        Inventories of unsold homes are low. Despite a “shadow inventory”, homes in or close to foreclosures and homes still sitting on bank balance sheets, inventories of unsold existing homes are the lowest they have been since 2006 – 07. The official count of the inventory of unsold single family existing homes (from the National Association of Realtors) tells us that 2.1 million existing homes are for sale. Depending on the data source (there is no “official” number for shadow inventory) cited, the shadow inventory is in the range of 1.5 – 2.0 million. While still well above average, the shadow inventory has come down over the past few years as well. It may rise later this year as foreclosures ramp up again after the moratorium was lifted earlier this year.

·        Housing starts and building permits. Responding to less demand for housing, difficult credit conditions and a glut of unsold inventory, homebuilders drastically cut the number of new housing starts in recent years. Housing starts peaked at 2.4 million units in early 2006 and by early 2009 had dropped to under 500,000 units, an 80% drop. Since then, as inventories of unsold new and existing homes shrunk and the economy and financing conditions improved, starts have moved 50% higher. Despite the 50% move off the bottom, housing starts remain 70% below their all-time high. Both housing starts and building permits (a key leading indicator of starts) are collected by the U.S. Commerce Department.

·        Homebuilder stocks. Although they are not a perfect leading indicator of the health of the housing market, the S&P 500 Homebuilders Index has rallied by nearly 80% since October 2011. Despite that dramatic rally, homebuilding stocks are still 75% below the peak hit in mid-2005.

·        Lumber prices. Lumber is a key input to the homebuilding process. Lumber prices peaked in mid-2004 — a year or so before the housing market peaked — and declined by nearly 70% by early 2009. Since early 2009, lumber prices have increased (in fits and starts) by 75%, but remain more than 40% below their 2004 peak. Lumber prices are set in the open market, trading on several global commodity exchanges.

·        Supply and demand for housing credit, bank lending to consumers for mortgages. From the mid-1990s through late 2006, bank lending standards (down payment required, credit scores, work history, etc.) for residential mortgages were relatively easy. Coupled with low rates and rapid innovation in financial products backing residential mortgages, this easy credit helped to fuel the housing boom. The banking industry began tightening lending standards in early 2007, and continued to tighten for more than two years. Lending standards eased in 2009 and 2010, and have only recently returned to where they were in 2003. On the demand side of the equation, consumer demand for mortgages remains muted, as consumers are uncertain about prospects for home price appreciation and their own financial and labor market status in the years ahead. This data is compiled by the Federal Reserve in the Senior Loan Officer Survey, which is released quarterly.

·        Mortgage applications. Measured by the private sector’s Mortgage Bankers Association, the volume of mortgage applications has increased fourfold since late 2008, but remains well below its mid-2000s peak. Weekly mortgage applications are a key gauge of consumer demand for housing, and as we enter the key spring selling season — 40% of home sales occur between April and July — weekly mortgage applications will be a key metric to watch. Mortgage applications are a component of our weekly Current Conditions Index.

·        Foreclosure activity. After a de facto moratorium on new foreclosures was put into place in late 2010 as the United States and individual state governments sued mortgage processors and banks, the pace of new foreclosures slowed down. By early 2012, new foreclosures were at the lowest level since mid-2007. Now that the legal action has been settled,  there is a concern that the foreclosure pipeline will fill back up again. While we may see some spike higher in foreclosures and sales of foreclosed-on bank-owned properties in the coming months, it is important to note that the pipeline of new defaults and overall mortgage delinquencies are falling, aided by a better economy and job market. There are various public and private sources for foreclosure and delinquency data. On the private sector side, firms like RealtyTrak, Lender Processing Services and the Mortgage Bankers Association provide data. Freddie Mac, Fannie Mae, and the Federal Housing Finance Administration (FHFA) are among the government agencies that compile data on delinquencies and foreclosures.

·        Construction employment. As measured by the U.S. Department of Labor, construction employment increased by more than one million between the early 2000s and 2006 to nearly 3.5 million workers. Since then, workers employed in the construction of new homes has dropped by nearly 50%, bottoming out at just under 2 million in late 2010. Since then, construction employment has held steady, but has yet to make a decisive turn higher.

·        Construction already put into place. The value of new residential construction put into place peaked at $535 billion in early 2006. Since then, construction of new homes has plummeted, and by mid-2009, just $122 billion in new home construction was underway. This data series moved sideways for about 18 months, hitting another low ($120 billion) in late 2010. Since then, there has been a modest uptick in construction of new homes, but new home construction is still running 75% below its peak. This data is collected by the U.S. Commerce Department.

·        Home prices. There are a variety of sources for home prices from both the private sector — Case Shiller Home Price Index, CoreLogic, Zillow, RadarLogic, National Association of Realtors — and the U.S. Government — Freddie Mac, Fannie Mae, Federal Housing Finance Agency, etc. In general, these indices all suggest that home prices fell by between 20% and 30% between mid-2005 and early 2009, and are at best unchanged since then. Price changes before, during and after the bubble vary widely by region, price of home and type of property (single family versus condo, distressed and non-distressed, etc.).

·        Demand for housing. New household formation is running just under 1% per year. Contrast that against the 80% drop in new housing starts over the past five years. The gap between new household formation and new housing starts had never been wider, leading some analysts to suggest that we are quickly running out of houses. But, with so many vacant homes (18 million or so), and young people (and older relatives) living with other relatives, it is difficult to say just how quickly we will run out of housing. The U.S. Census Bureau collects the data on household formation and the housing vacancy data.

On balance, the housing market continues to struggle three years after hitting rock bottom, and in some cases seven years after it peaked. How quickly housing can recover from here will help to determine the pace of the overall economic recovery. Warmer and drier than usual weather this winter may help to explain some of the better housing data of late. Warmer weather generally means better housing data (sales, construction, showroom traffic, etc.), so it may be that the better tone to the housing market is purely a function of the weather. We need to see some more normal weather and get past the traditional spring selling season to be sure. Our best bet is that the slow recovery in housing will pick up some steam in 2012, but that it will still take several more years before the national housing market is back to normal.

_____________________________________________

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 economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

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.

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.

The Federal Open Market Committee (FOMC), a committee within the Federal Reserve System, is charged under the United States law with overseeing the nation’s open market operations (i.e., the Fed’s buying and selling of United States Treasure securities).

The Chicago Area Purchasing Manager Index that is read on a monthly basis to gauge how manufacturing activity is performing. This index is a true snapshot of how manufacturing and corresponding businesses are performing for a given month. A reading of 50 or above is considered a positive reading. Anything below 50 is considered to indicate a decline in activity. Readings of the index have the ability to shift the day's trading session one way or another based on the results.

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 #1-056167 (Exp. 03/13)

Weekly Economic Commentary

To QE or not to QE?

The Federal Reserve’s (Fed’s) policymaking arm, the Federal Open Market Committee (FOMC) highlights this week’s relative busy mid-month economic and policy calendar. We take a closer look at Fed policy in this week’s publication. Elsewhere, after larger-than-expected rate cuts last week by central banks in Brazil and India, rate setting meetings are scheduled this week in Mexico, Norway, Switzerland and Japan. This week’s economic calendar includes U.S. reports on manufacturing (Philly Fed and Empire State) for March, industrial production in February, and consumer and producer prices in February. Rising gasoline prices will grab the headlines in these reports. Markets will continue to digest last week’s economic reports for February in China, as well as a full docket of European economic reports for January and February. Japan will likely be in the news this week as the one-year anniversary of the earthquake, tsunami and nuclear disaster is recalled. There are several bond auctions in Europe this week, and European finance ministers will meet to discuss the €14.5 bond maturity Greece faces on March 20.

Will the Next Round of QE Be “Sterilized?”

Operation Twist — an effort by the Federal Reserve (Fed) to keep 10-year Treasury yields low by selling its short-term Treasury holdings and purchasing longer-term Treasuries in the open market — is set to end at the end of June 2012. Markets are now sizing up the likelihood of another round of monetary stimulus from the Fed, following quantitative easing 1 (QE1) (2008 – 2010), QE2 (2010 – 2011), and Operation Twist (2011 – 2012). Quantitative easing refers to large-scale bond purchases, consisting of Treasury or agency mortgage-backed securities (or both) by the Fed in the open market.

Our view is that another round of stimulus from the Fed, in whatever form it takes, is data dependent. We also think political hurdles — both inside the Fed and among the Fed’s bosses in Congress — have been the largest impediment to another dose of quantitative easing. Events last week (March 5 – 9) suggest that the Fed may have found a way to lower those political hurdles a bit.

In short, if we see robust economic growth (3 – 4%) between now and the end of June 2012, we would expect the Fed to hold off on another round of quantitative easing (QE). But the current pace of growth (2%) or slower growth would likely lead to another dose of stimulus.

Federal Reserve officials hinted in a well-placed and well-timed Wall Street Journal article last week that the next round of QE would be “sterilized.” This means that the Fed would immediately borrow back some of the cash it injects into the financial system as it purchases the securities in the open market. The Fed hopes to address one of the main political hurdles to another round of QE: the long-held fear that more monetary stimulus would trigger a surge in commodity prices and inflation. (We note that the WSJ article was published just a week before the upcoming March 13 Federal Open Market Committee [FOMC] meeting).

Politics Plays an Even Bigger Role in Policy in a Presidential Election Year

For many in the political class in Washington (and for the public at large), sterilized QE would not be regarded as inflationary, and the Fed would face less of a public relations battle should it decide to pursue that course of action. Of course, politics is nearly unavoidable in Washington, DC in any year. But in a presidential election year, politics often plays an even bigger role in policy — even when it comes to the Fed, which has been viewed in recent years (last 30) as a nonpolitical and independent organization.

For the record, the Fed has either raised or lowered (and in some cases both in the same year!) its short-term policy rate in every single presidential election year starting in 1968. In general, the Fed wants to avoid mingling in politics during an election year, and it may prefer to hold off on changing rates in the months just prior to the election in November. But when push came to shove over the past 40-plus years, the Fed acted to change policy as conditions warranted and is likely to do so again this year if conditions warrant.

Breaking Down the Fed’s Menu of Options

The Fed has two more FOMC meetings (this Tuesday, March 13 and the two-day meeting at the end of April) to discuss another round of stimulus before Operation Twist ends at the end of June. As it is only a one-day meeting, a decision is unlikely to be made at this week’s FOMC meeting. But if history is any guide a discussion of the full range of options open to the Fed is likely at this week’s meeting. The market will get a scrubbed version of the minutes of this week’s FOMC meeting in three weeks’ time, on April 3.

As it stands now: 1) doing nothing; 2) extending Operation Twist or embarking on QE3, but sterilizing the purchases; 3) or doing a non-sterilized version of QE3 seem to be on the menu of options. Last week’s WSJ article suggests that if the Fed does decide that the economy needs more QE, it will likely pursue sterilized QE.

By allowing Operation Twist to expire at the end of June, the Fed would probably be signaling that it is comfortable with a steady climb higher in longer dated Treasury yields, which in turn would push borrowing rates for consumers and businesses higher. We have noted in other LPL Financial Research publications that Operation Twist has been quite successful. We have highlighted that it is one of the key reasons why the 10-year note yield has remained near 2% in the past six months, despite less volatility in Europe, firmer U.S. economic activity and sizable gains in the U.S. equity markets.

Extending Operation Twist would help to keep the 10-year note yield (and likely consumer and business loan rates) lower than otherwise. However, there are some technical impediments, as the Fed (and Treasury) is running low on short dated debt to sell in order to fund purchases of longer dated Treasuries.

That leaves QE3 sterilized and QE3 non-sterilized as options. In either case, the Fed has hinted in recent months that the mortgage market would be a bigger target for QE3 than it was in QE2 (no MBS purchases) or in QE1 when the Fed bought both MBS and Treasuries in the open market.

Risks and Rewards of QE3 Are Being Carefully Considered

Questions remain (inside and outside the Fed) about the efficacy of doing another round of QE. Fed Chairman Ben Bernanke has made it clear that the FOMC carefully weighs the risk against the benefits of doing more QE. The risk/reward trade-off may be even less clear-cut when weighing sterilized QE3. Past examples of sterilized QE (Japan or Europe) have had mixed results at best. The Fed borrowing to buy safe assets from the private sector encourages private investors to take on more risk (which could potentially help the economy). The degree of market impact is potentially greater than with Operation Twist. Unlike with Operation Twist, sterilized QE doesn’t change the mix of assets already on the Fed’s balance sheet. It adds the new assets the Fed is purchasing, and the borrowing to fund those purchases gets added as liabilities. So the impact on the assets is the same as in an unsterilized QE.

Will the Fed do it? We believe the odds strongly favor a sterilized QE. A few months of weaker economic data would get the Fed there, since the economy will likely come in below Fed expectations (FOMC sees 2.5% GDP this year and 3.0% next year), and making it "sterilized" eases a political hurdle about future inflationary consequences. With oil prices high and economic data softening around the world, a modest dip in the data could prompt action.

___________________________________________

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 economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

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.

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.

The Federal Open Market Committee (FOMC), a committee within the Federal Reserve System, is charged under the United States law with overseeing the nation’s open market operations (i.e., the Fed’s buying and selling of United States Treasure securities).

Treasuries: A marketable, fixed-interest U.S. government debt security. Treasury bonds make interest payments semi-annually and the income that holders receive is only taxed at the federal level.

London Interbank Offered Rate (LIBOR): An interest rate at which banks can borrow funds, in marketable size, from other banks in the London interbank market. The LIBOR is fixed on a daily basis by the British Bankers' Association. The LIBOR is derived from a filtered average of the world's most creditworthy banks' interbank deposit rates for larger loans with maturities between overnight and one full year.

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 #1-052753 (Exp. 03/13)

Weekly Economic Commentary

Just Warming Up

The February employment report and the economic data for February in China are the highlights on this week’s economic and policy calendar. In addition, the February data on ADP employment, layoff announcements, and merchandise trade for January are due out in the United States. The week will likely be quiet for the Fed, as Fed officials observe the unofficial "quiet period" ahead of the next Federal Open Market Committee (FOMC) meeting on March 13. However, central banks outside the United States will be busy this week, with rate setting meetings in Brazil, Australia, New Zealand, Russia, South Korea, the Eurozone, the UK, Peru, Canada, Poland, Indonesia, and Malaysia. Of these, only Brazil is expected to cut rates. The rest of these central banks are on hold, for now. There are bond auctions in Austria, the Netherlands, Germany and Belgium, as investors await the March 8 deadline to swap out existing Greek debt for newly issued debt as part of the latest bailout.

The Chinese authorities will begin to release China's economic data for February later this week, with the key report being the Consumer Price Index (CPI) report. A deceleration in the CPI in February could pave the way for the China central bank to continue to ease monetary policy in the coming weeks and months. All of the Chinese economic reports for February will be impacted by the shift in the Lunar New Year to January this year versus February in 2011.

Warm Weather Impacting Economic Activity in Early 2012

On balance, the vast majority of the economic data in the United States released since early October 2011 has exceeded expectations. This trend reflects underlying improvement in the overall economy due to:

·         Less uncertainty surrounding the debt issues in Europe

·         A little less rancor (and a little more cooperation) out of Washington compared to this past summer

·         The improving job market as companies have reached the limit on productivity gains

·         A rebound in global economic activity following the global supply chain disruptions that resulted from the Japanese earthquake and tsunami in March 2011.

At least some of the improvement in the economic backdrop may be associated with the weather, which has been warmer and drier than usual since last autumn. In general, warmer (and drier) than normal weather tends to boost economic activity. We saw evidence of these trends in the details of the Federal Reserve’s (Fed) latest Beige Book — a qualitative assessment of business and banking conditions compiled via contacts in the private sector in each Fed district. On balance, the Beige Book was relatively upbeat, with all 12 districts reporting expanding (albeit modest) growth and improving conditions in the labor market, bank lending and credit conditions, and in residential and commercial real estate.

The Beige Book noted that the economic uncertainty that was pervasive in the economy in the summer and fall of 2011 continued to fade, as the word “uncertainty” was used just nine times, down from 33 mentions in the September 2011 Beige Book as, worries over the future of Europe and a greater-than-usual amount of discord in Washington dominated the headlines. There was just one mention of Thailand (and none of Japan), and just 14 mentions of Europe in this Beige Book, versus 16 in the January 2012 Beige Book. However the word “weather” appeared 29 times in the latest Beige Book, and the phrase “warm weather” appeared 12 times. In the January 2012 version of the Beige Book, the word weather appeared 13 times, with the phrase “warm weather” appearing just seven times.

It is not unusual for a Beige Book released in March of any year to cite weather as a factor impacting some aspect of economic activity around the nation, but it is unusual to see warm weather mentioned so often. For example, in the Beige Book released one year ago (in March 2011) the word weather was mentioned 36 times as the nation suffered through a very cold and snowy winter season. The word warm appeared just twice the March 2011 Beige Book. A year earlier, in the March 2010 edition of the Beige Book, the word weather appeared 41 times, but the word warm appeared just twice.

Thus, at least some of the improvement in the economic backdrop since last fall has likely been weather-related, although it is difficult to pinpoint exactly how much. Weather often has a bigger impact when there is a big change in pattern from a long stretch of colder and wetter-than-usual weather to warmer and drier weather. For the most part, since the harsh winter of 2010 – 2011 ended, 2011 was relatively warmer and drier than usual.

Still, the October 2011 through February 2012 period has been warmer than usual, with January 2012 being the fourth warmest January since 1921. This period has also been drier than usual, with the exception of November 2011. Taken together, these trends have added to economic activity. We again turn to the Beige Book for details.

Looking at the detail from Beige Books during recent warmer-than-usual winters (1997 – 98, 1998 – 99, 1999 – 2000, 2005 – 2006), we find that all else equal, the warm (and dry) temperatures will boost:

·         Overall consumer spending as consumers spend less on heating their homes

·         Construction activity (houses, office parks, high ways, public work projects, etc.)

·         Home sales

·         Apartment leasing activity

·         Mortgage originations

·         Auto sales

·         Non-clothing retail sales (hardware stores, gardening centers, sporting goods)

·         Energy and mining activity

·         Tourism (beach and golf)

·         Agriculture

·         Restaurants

·         Overall employment in the areas listed above, lowering initial jobless claims

·         On the other hand, warmer-than-usual weather this time of the year can:

·         Hurt sales of winter clothing and winter sports gear

·         Dampen output of natural gas and oil as consumers and businesses use less heat

·         Put a crimp in demand for hotel rooms and services around ski areas and other areas that cater to winter recreational activities

·         Hurt demand for feed supplies for livestock

On the price side, warmer-than-usual weather at this time of year can also increase the supply (and perhaps lower the cost) of fruits, vegetables, plants, and flowers. These products are also at risk of a late frost, which could reduce supply and cause rising prices later in the spring. Warmer weather can mean lower feed costs for dairy, cattle, and hog producers. Inventories can be altered as well, as too much winter clothing piles up on stores’ shelves, but not enough lumber or building materials are produced, leaving inventories lower than they would normally be.

Although warm weather this time of the year does not impact every area of the economy or even every area of the country, generally, the warmer weather can “pull forward” some purchases (like sporting goods, gardening supplies, spring clothing, and even autos and houses). These purchases may inflate the economic data in January, February, and March and depress activity in the spring if the weather returns to normal.

So here in March, we get reports mainly for February, which should be stronger than otherwise due to weather. Note that for retailers, March will likely be much stronger this year versus last year due to the earlier Easter holiday (April 8 versus April 24). March data gets reported in April. But looking further out into the year, if we have a return to “normal weather,” the data reported in April and May for March and April could look weak and cause markets to get concerned about another double-dip scare.

_____________________________________

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 economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

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.

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.

The Federal Open Market Committee (FOMC), a committee within the Federal Reserve System, is charged under the United States law with overseeing the nation’s open market operations (i.e., the Fed’s buying and selling of United States Treasure securities).

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 #1-050823 (Exp. 03/13)