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Brighton Financial Planning, Inc. 2nd Quarter Review
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Brighton FinancialPlanning, Inc.Brighton FinancialPlanning, Inc.
Brighton Financial Planning, Inc.
Economic and Financial Market Review2nd Quarter 2009
John P. Middleton, CFA, CAIA
www.brightonfinancial.com
www.brightonperspective.typepad.com
Brighton FinancialPlanning, Inc.
U.S. Economy
2
Data Current Year Over Year Notes
Consumer Price Index (CPI) (as of June 17)
+0.1% -1.3% Largest annual decline in inflation rate since 1950
Unemployment rate (as of July 2 for June)
9.5% +4% Up from 7.2% at the end of 2008 and 5.5% a year ago
Gross Domestic Product (GDP) (June 25 for Q1)
-5.5% Better than Q4 2008's -6.3%, and slightly better than previous estimate of -5.7%
As of June 30, 1 euro equaled:
$1.40 Dollar weaker than March's $1.32
As of June 30, $1 equaled: ¥95.55 Dollar weaker than March's ¥97.29
Data Review
Source: Forefield, Inc.
Brighton FinancialPlanning, Inc.
Brighton Financial Planning, Inc.
• U.S. Economy
– GDP growth likely to remain negative for the 2nd quarter
• Key negative driver for last 2 quarters has been Corporate Investment
• Personal consumption still accounts for 70% of GDP
• Consumers are struggling to maintain current income
3
-6.00%
-4.00%
-2.00%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
19
47
-I
19
49
-I
19
51
-I
19
53
-I
19
55
-I
19
57
-I
19
59
-I
19
61
-I
19
63
-I
19
65
-I
19
67
-I
19
69
-I
19
71
-I
19
73
-I
19
75
-I
19
77
-I
19
79
-I
19
81
-I
19
83
-I
19
85
-I
19
87
-I
19
89
-I
19
91
-I
19
93
-I
19
95
-I
19
97
-I
19
99
-I
20
01
-I
20
03
-I
20
05
-I
20
07
-I
Rolling 12 month change in Personal Income
Rolling 12 month change in Personal Income
Source: Bureau of Economic Analysis
Brighton FinancialPlanning, Inc.
U.S. Economy
• Consumers and Corporations are not spending
• Consumers and Corporations are de-leveraging their balance sheets
– Result is higher savings and less spending
– Which leads to decline in GDP
– Government spending is up significantly but is not wealth-creating long-term
4
0500
1000150020002500
19
47
-I
19
49
-III
19
52
-I
19
54
-III
19
57
-I
19
59
-III
19
62
-I
19
64
-III
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67
-I
19
69
-III
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72
-I
19
74
-III
19
77
-I
19
79
-III
19
82
-I
19
84
-III
19
87
-I
19
89
-III
19
92
-I
19
94
-III
19
97
-I
19
99
-III
20
02
-I
20
04
-III
20
07
-I
Gross Private Domestic Investment (in billions)
Gross Private Domestic Investment
Source: Bureau of Economic Analysis
Brighton FinancialPlanning, Inc.
U.S. Economy
• Conclusions
– GDP growth should continue to be anemic for the near future
• 2/3rds of GDP is consumer driven and consumers are not spending
– Unemployment remains high with most growth in government jobs
– High leverage + unemployment is not good
– Consumers know this and are cutting back spending and paying down debt
• Corporations are not investing in capital
– Recovery should be driven by new capital spending
– As companies invest in new capital, employment will pick up
• Government is attempting to pick up the slack
– Not success yet and questionable as to whether it will be at all
– Can create other issues such as inflation
– Inflation and higher tax risks remains
• Government spending can be inflationary
– Unlikely to be curtailed as economy recovers
– Increase in money supply and velocity + devalued dollar create inflationary pressures
– Higher spending needs means higher income needs
5
Source: Bureau of Economic Analysis
Brighton FinancialPlanning, Inc.
Global Economy
• Global economy very dependent on U.S. economy
– U.S. is leading consumer of global supply
– However, emerging markets have suffered less than developed markets
– And, the IMF forecasts continued improvement in emerging markets
– But, decline in U.S. consumption must be offset somewhere
• Either higher consumption x U.S.
• Or reduction in supply
6
0.00
20,000.00
40,000.00
60,000.00
80,000.00
100,000.00
19
91
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97
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99
20
00
20
01
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02
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03
20
04
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05
20
06
20
07
20
08
20
09
est
20
10
est
20
11
est
20
12
est
20
13
est
20
14
est
GDP (PPP adjusted)
World Advanced economies Emerging and developing economies
Source: Bureau of Economic Analysis
Brighton FinancialPlanning, Inc.
Global Economy
• Developed Markets have struggled much like the U.S.
• U.S. and EU (primary components of Advanced Economies)
– Ran government net deficits for much of the last 15 years
– Have increased government expenditures to combat global recession
• Emerging Markets ran surplus during early part of this decade
– Have increased spending but only deficit forecast to remain under 4%
– Suggests economic improvement will be easier and more quickly achieved
7
-10
-5
0
5
19
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03
20
04
20
05
20
06
20
07
20
08
20
09
est
20
10
est
General Government Balance % of GDP
Advanced economies
European Union
Newly industrialized Asian economies
Source: Bureau of Economic Analysis
Brighton FinancialPlanning, Inc.
Global Economy
• Developed Markets also track U.S. savings
• Aggregate saving is declining and is expected to continue
– Government and private sector
• Rapid increase in government spending completely offseting private savings
• Emerging markets savings increasing rapidly since 2001
– Slight dip forecast in 09 as gov’t spending increases
8
010203040
19
91
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92
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99
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00
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01
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03
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05
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06
20
07
20
08
20
09
est
20
10
est
Savings as a % of GDP
World
Advanced economies
Emerging and developing economies
Source: Bureau of Economic Analysis
Brighton FinancialPlanning, Inc.
Global Economy
• Developed markets investment flat
• Investment is key contributor to GDP improvement
– Private investment, particularly corporate capital spending will drive growth
• Emerging markets investment has improved steadily over last 6 years
– And is forecast to continue to remain well above developed markets
9
010203040
19
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07
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08
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09
est
20
10
est
Investment as % of GDP
World
Advanced economies
Emerging and developing economies
Source: Bureau of Economic Analysis
Brighton FinancialPlanning, Inc.
Global Economy
• Conclusions
– Developed markets are struggling just as much as U.S.
• Are highly dependent on U.S. for goods and services
• Must replace U.S. demand and/or services
• Many don’t have the infrastructure to quickly offset that decline
– Emerging markets are also weak, BUT
• Had healthier balance sheets entering the recession
• Haven’t increased government spending above investment and savings
• Are more dependent on commodities consumption
– Driven by China and India currently
• Should recover more quickly than developed markets (including U.S)
10
Brighton FinancialPlanning, Inc.
Financial Markets Performance
11
Market/Index June 30 Quarterly Change
Year Over Year
DJIA 8447.00 +11.0% -25.6%
NASDAQ 1835.04 +20.0% -20.0%
S&P 500 919.32 +15.2% -28.2%
Russell 2000 508.28 +20.2% -26.3%
Global Dow 1629.31 +20.9% -34.0%
Fed. Funds .25% 0 -175 bps
2-year Treasuries 1.11% +30 bps -152 bps
10-year Treasuries
3.53% +82 bps -46 bps
Crude Oil (per barrel)
$69.82 +44% -50.1%
Spot Gold (per oz.)
$928.50 +.8% +.4%
• Equity markets rallied strongly
• Smaller cap, lower quality stocks led
• International equity participated
• All remain significantly down for 12 mos.
• Fed Funds cut sharply to combat
recession
• Short-term Treasuries have been the safe
haven for investors
• Oil rallied but well off last summer’s highs
• Gold and other precious metals have held
value
Source: Forefield, Inc.
Brighton FinancialPlanning, Inc.
Equity Markets
• Earnings continue to deteriorate
– S&P is now forecasting a trailing twelve month loss for period ending 9/30
– Trailing “As Reported” P/E at all-time high
12
0.00
10.00
20.00
30.00
40.00
50.00
60.00
70.00
12
/31
/19
36
9/3
0/1
94
0
6/3
0/1
94
4
3/3
1/1
94
8
12
/31
/19
51
09
/30
/19
55
06
/30
/19
59
03
/31
/19
63
12
/31
/19
66
09
/30
/19
70
06
/30
/19
74
03
/31
/19
78
12
/31
/19
81
09
/30
/19
85
06
/30
/19
89
03
/31
/19
93
12
/31
/19
96
09
/30
/20
00
06
/30
/20
04
03
/31
/20
08
12 MO P/E
Historic Average P/E
Rolling 5YR Ave P/E
Brighton FinancialPlanning, Inc.
Equity Markets
• Conclusions
– P/E ratios tend to trend higher as the economy emerges from recession
– S&P forecasts 2009 earnings at $29.97 per share
– Applying a P/E of 30 (trend forecast) suggests ending S&P 500 Index value of 899.10
– S&P forecasts 2010 earnings at $37.26 per share
– Applying the same P/E suggests ending S&P 500 Index value of 1,117.80
– However, P/E tends to peak 6 to 9 months after recession end
– Thus, more likely to be around 24, so S&P 500 at end of 2010 forecast = 908
13
Brighton FinancialPlanning, Inc.
Looking Ahead
• Weak U.S. economy will gradually improve over the next 18 months
• Global economy will track U.S. but with stronger recovery in EM
• Inflation remains a risk as stimulus spending enters an improving economy
• Equity markets remain flat to slightly positive as lack of leverage suggests any improvement will match earnings growth
• Fixed income markets offer mixed bag – higher inflation is not good but credit dislocation beginning in 2008 hasn’t completely resolved itself
– Inflation hedges – TIPS, Bank Loans may offer opportunities
• Emerging markets and commodities may offer better returns over next 2 years
– EM equity and fixed income
– Commodities producers, oil and gas (MLPs)
14