OUTLOOK FOR THE U.S. ECONOMY AND FINANCIAL MARKETS

Transcription

1 OUTLOOK FOR THE U.S. ECONOMY AND FINANCIAL MARKETS GIC/PCBE Luncheon Philadelphia February, A Presentation by: Martin H. Barnes Managing Editor The Bank Credit Analyst mbarnes@bcaresearch.com Sherbrooke St. W. Suite, Montreal, Quebec, HA L TEL FAX

2 - Unusual Times REAL HOUSE PRICES* - AFTER-TAX CORPORATE PROFITS 9 AS A OF NATIONAL INCOME $/Bbl REAL** WTI CRUDE OIL PRICE MEAN (955-5) STANDARD DEVIATIONS $/Bbl PERSONAL SAVING RATE TRADE DEFICIT ON GOODS AND SERVICES AS A OF GDP BCA Research *SOURCE: NATIONAL ASSOCIATION OF REALTORS; SMOOTHED AND DEFLATED BY THE CONSUMER PRICE INDEX **DEFLATED BY THE CONSUMER PRICE INDEX editors@bcaresearch.com February BCA RESEARCH

3 Inflation Pressures Have Peaked CORE* PPI CRUDE GOODS CORE* PCE INFLATION CORE* PPI INTERMEDIATE GOODS. CORE* CPI GOODS BCA PIPELINE INFLATION PRESSURE INDEX CORE* CPI SERVICES. NFIB PLANNED PRICE HIKES** EMPLOYMENT COST INDEX: WAGES & SALARIES IMPORT PRICE INFLATION FROM ASIA** BCA Research.5 BCA Research *CORE EXCLUDES FOOD AND ENERGY **SOURCE: NATIONAL FEDERATION OF INDEPENDENT BUSINESS *CORE EXCLUDES FOOD AND ENERGY **INCLUDES HONG KONG, SINGAPORE, SOUTH KOREA AND TAIWAN BCA RESEARCH editors@bcaresearch.com February

4 Global Inflation Is Low.5 CORE* CPI.5 CHINA**. EMU ASIA EX. CHINA*** -.. CORE* CPI U.K JAPAN.5.5 BCA Research - BCA Research - 99 *EXCLUDES FOOD AND ENERGY 99 *EXCLUDES FOOD AND ENERGY **NON-FOOD CPI ***KOREA, TAIWAN AND THAILAND Inflation Rates For Selected High-Frequency Spending Items Change in consumer prices: December to December 5 Gas and electricity 7. Tax and accounting services. Gasoline. Vehicle repair. Delivery services 9.9 Movies and theatre tickets.5 Repair of household items. Legal services. College tuition. Cable and satellite. Sporting tickets. Hotels. Cigarettes 5.9 Physician services. Dental services 5.7 Personal Care Services.7 Child care and nursery 5.5 Food. Intracity transport 5. Laundry services. Parking.9 Newspapers and magazines.7 Veterinary services.9 Alcohol. Prescription Drugs. Telephone services. editors@bcaresearch.com February BCA RESEARCH

5 9 Corporate Profitability Is Excellent TOTAL ADJUSTED* AFTER-TAX PROFITS AS A OF NATIONAL INCOME NON-FINANCIAL CORPORATE SECTOR PROFITS BEFORE INTEREST AND TAXES AS A OF GDP 5 5 BCA Research *ADJUSTMENTS INCLUDE INVENTORY VALUATION AND DEPRECIATION A Different Kind Of Cycle REAL* EBIT NON-FINANCIAL CORPORATE SECTOR PRICE INDEX REAL GDP CURRENT CYCLE AVERAGE OF PAST CYCLES** 9 5 CURRENT CYCLE AVERAGE OF PAST CYCLES* NON-FINANCIAL CORPORATE SECTOR PRODUCTIVITY BCA Research BCA Research 95 *ADJUSTED BY THE NON-FINANCIAL CORPORATE SECTOR DEFLATOR **SERIES ARE ALIGNED AT THE START OF EXPANSION REPRESENTED BY 5THE VERTICAL LINE *SERIES ARE ALIGNED AT THE START OF EXPANSION REPRESENTED BY THE VERTICAL LINE BCA RESEARCH editors@bcaresearch.com February 5

6 Balance Sheets Are Strong NON-FINANCIAL CORPORATE SECTOR: NET WORTH AS A OF GDP AS A OF GDP: 9 DEBT (LS) ASSETS (RS) 7 5 SHORT-TERM ASSETS AS A OF LIABILITIES DEBT AS A OF EQUITY INTEREST COSTS AS A OF EBIT* BCA Research *EARNINGS BEFORE INTEREST AND TAXES editors@bcaresearch.com February BCA RESEARCH

7 Good Support For Corporate Spending NON-FINANCIAL CORPORATE SECTOR: WEIGHTED AVERAGE REAL COST OF CAPITAL AVERAGE RETURN ON CAPITAL NON-FINANCIAL CORPORATE SECTOR GAP BETWEEN RETURN AND COST OF CAPITAL* (LS) NON-RESIDENTIAL FIXED INVESTMENT* (RS) - RATIO OF NON-RESIDENTIAL FIXED INVESTMENT TO NON-FINANCIAL CORPORATE SECTOR CASH FLOW BCA Research *SERIES ARE SHOWN AS -QUARTER MOVING AVERAGES 7 BCA RESEARCH editors@bcaresearch.com February 7

8 Consumers Set To Retrench The Impact Of Housing And Oil CONSUMER CONFIDENCE* (LS) REAL WAGES AND SALARIES** (RS) of Disp. Income HOME EQUITY EXTRACTION: TOTAL CASH RAISED (ANNUAL CHANGE) of Disp. Income CONSUMER CONFIDENCE* (LS) HOUSE PRICES*** (RS) of Disp. Income CONSUMER SPENDING ON ENERGY* (ANNUAL CHANGE) of Disp. Income PAYROLL GROWTH BCA PAYROLL EMPLOYMENT MODEL**** -. of Disp. Income NET STIMULUS/DRAG: HOUSING MINUS ENERGY -. of Disp. Income PERSONAL SAVING RATE (-MONTH M.A.) CONSUMER SPENDING ON ENERGY* AS A OF PERSONAL DISPOSABLE INCOME 5 5 BCA Research BCA Research *SOURCE: THE CONFERENCE BOARD **ADJUSTED BY THE PCE DEFLATOR ***SOURCE: NATIONAL ASSOCIATION OF REALTORS; SMOOTHED ****BASED ON HELP-WANTED ADS, NFIB HIRING PLANS AND TEMPORARY EMPLOYMENT *INCLUDES GASOLINE, FUEL OIL, NATURAL GAS, AND ELECTRICITY NOTE: 5 IS BCA ESTIMATE FOR ALL SERIES editors@bcaresearch.com February BCA RESEARCH

9 Consumer Finances Are O.K. HOUSEHOLD DEBT AS A OF PERSONAL DISPOSABLE INCOME. BANK LOAN DELINQUENCY RATES:... No Sign Of Debt Stress RESIDENTIAL REAL ESTATE LOANS HOME MORTGAGES AS A OF CREDIT MARKET DEBT OTHER CONSUMER LOANS HOUSEHOLD NET WORTH AS A OF PERSONAL DISPOSABLE INCOME EFFECTIVE CONSUMER BORROWING RATES: HOMEOWNER RENTER COMPOSITE* BCA Research *A COMPOSITE OF MORTGAGE, CREDIT CARD, AUTO, AND OTHER DEBT, WEIGHTED BY THE AMOUNTS OUTSTANDING BCA Research Consumer short term debt is approaching a historical turning point. Having risen at an abnormally fast rate for ten years, it must soon adjust itself to the nation s capacity for going into hock which is not limitless. Whether the rate of growth in consumer debt will slow down is no longer the question it must slow down. Fortune Magazine March 95 Federal Reserve Chairman G. William Miller said the average American buyer is getting dangerously deep in debt, and warned that the trend could have serious consequences Several of the nation s business leaders said they share Miller s alarm over the level to which consumer debts have climbed. Washington Post October 97 9 BCA RESEARCH editors@bcaresearch.com February 9

10 A Different Kind Of A Flat Yield Curve -YEAR TREASURY YIELD MINUS -MONTH TREASURY BILL RATE REAL* -MONTH TREASURY BILL RATE High real rates High real rates Low real rates - BCA Research *ADJUSTED BY THE CONSUMER PRICE INDEX - Still A Large Monetary Overhang MZM AS A OF GDP 55 Monetary overhang BCA Research editors@bcaresearch.com February BCA RESEARCH

11 U.S. Treasurys: A Return To Stability -YEAR TREASURY YIELD BCA Research Real Yields: It Is Different This Time 7 REAL U.S. -YEAR TREASURY YIELD* AVERAGE OF PAST 5 CYCLES (LS) CURRENT CYCLE (RS) BCA Research 5 NOTE: PREVIOUS CYCLES ALIGNED TO FIRST RATE HIKE OF TIGHTENING CYCLE, DENOTED BY VERTICAL LINE *SHADING DENOTES RANGE OF REAL -YEAR YIELD DURING PREVIOUS TIGHTENING CYCLES BCA RESEARCH editors@bcaresearch.com February

12 Global Real Yields: Converging At A Low Level Excess Global Savings REAL* -YEAR BOND YIELDS: EMU Bn US$ ASIAN* TRADE BALANCE Bn US$ 5 5 U.K Bn US$ TRADE BALANCE: LATAM** PLUS EURO AREA Bn US$ JAPAN Bn US$ RUSSIAN TRADE BALANCE Bn US$ CANADA Bn US$ OPEC TRADE BALANCE Bn US$ G-7 ex. U.S. U.S. BCA Research BCA Research 99 *ADJUSTED BY THE BCA ESTIMATE OF LONG-TERM INFLATION EXPECTATIONS *INCLUDES JAPAN **INCLUDES MEXICO, BRAZIL, CHILE, ARGENTINA, VENEZUELA AND COLOMBIA editors@bcaresearch.com February BCA RESEARCH

13 The Bull Market In Perspective S&P 5 INDEX CURRENT CYCLE AVERAGE OF PAST POST-BEAR MARKET RALLIES st year nd year rd year th year BCA Research 5 NOTE: INDEXED TO AT THE STOCK MARKET TROUGH Tighter Money Leads To Lower Equity Multiples S&P 5 P/E RATIO BASED ON OPERATING EARNINGS FED FUNDS RATE BCA Research NOTE: SHADING DENOTES PERIODS OF RISING FED FUNDS RATE BCA RESEARCH editors@bcaresearch.com February

14 Measures Of Equity Valuation 5 S&P 5 P/E BASED ON OPERATING EARNINGS S&P 5 P/E BASED ON OPERATING EARNINGS PLUS LONG-TERM GOVERNMENT BOND YIELD MEAN NON-FINANCIAL CORPORATE SECTOR EQUITIES TO REPLACEMENT COST BOOK VALUE REAL* -YEAR TREASURY MINUS S&P 5 EARNINGS YIELD BCA Research *ADJUSTED BY THE BCA ESTIMATE OF LONG-TERM INFLATION EXPECTATIONS editors@bcaresearch.com February BCA RESEARCH

15 S&P 5 Earnings Growth Set To Slow S&P 5 PROFIT GROWTH BCA EARNINGS MODEL* - - BCA Research 99 *BASED ON THE YIELD CURVE, DOLLAR, OIL PRICES, REAL CORPORATE BOND YIELDS AND A CORPORATE PROFIT MARGIN PROXY Decomposing Equity Market Returns Historical Average Bubble Years 99- Average Annual Change Bear Market - Optimistic Scenario* 5-5 Mean- Reversion Scenario** 5-5 Bear Scenario*** 5-5 Nominal GDP Earnings Valuation change Growth in S&P Reinvested dividends = Total equity returns Inflation (CPI) Real returns * Assumes that the forward price-earnings ratio to over the period. ** Assumes that the price-earnings ratio remains at its current level near 5. *** Assumes that the price-earnings ratio falls to over the period. 5 BCA RESEARCH editors@bcaresearch.com February 5

16 Dollar Bear Market In Perspective Dollar Versus Regional Trade Imbalances REAL TRADE-WEIGHTED DOLLAR* REAL TRADE-WEIGHTED DOLLAR (LS) TRADE DEFICIT/GDP (RS) TOTAL REAL TRADE-WEIGHTED DOLLAR: MAJOR CURRENCIES* MAJOR TRADING PARTNERS 9 CURRENT CYCLE (LS) 95 CYCLE (RS) REAL TRADE-WEIGHTED DOLLAR: OTHER IMPORTANT TRADING PARTNERS* OTHER IMPORTANT TRADING PARTNERS BCA Research 9 BCA Research YEARS FROM THE PEAK *SOURCE: THE FEDERAL RESERVE NOTE: ALL SERIES ARE REBASED TO AT THE PEAK IN THE REAL TRADE-WEIGHTED DOLLAR REPRESENTED BY THE VERTICAL LINE editors@bcaresearch.com February BCA RESEARCH