In November, continuing claims declined by less than 200,000 and initial jobless claims fell to the lowest levels since September 2008. Figures for subsequent months are also being revised down. To counterbalance the incredible reduction in workforce, corporates were forced to become more efficient and streamlined. Cost cutting measures and reduction in expenses means that productivity rose to a 9.5% annual rate. The significance then, of a 3% growth in GDP in Q3 suddenly seems that much more significant. Should this continue, and all indications are that it will, corporates will have no choice but to employ people again. It may be bold to say, but I suggest we could almost see a reversal of employment trends before this year is out or early next year. After slashing seven million jobs in the last two years, companies may have little margin to cut further without threatening their capacity to ramp up production when the economy recovers. Expect this growth to come from the belly of America – its young and entrepreneurial. As per a study from Kauffman Foundation, companies less that five years old generated almost two-thirds of all new jobs in 2007, so no reason to believe the growth won’t come from this sector too.
Combine Buffet’s mantra of reduced unemployment as the key driver, with the fastest growing productivity in 40 years, an increase in personal spending and durable goods orders and rising home sales; and maybe there’s enough to indicate that our optimism in substantiated. The problem is though that the markets have already rallied and many think they may already be too frothy; after all, based on 2009 earnings, the S&P trades at 19x P/E – significantly higher than the 15x, which is the historical average. But basing valuations on 2009 data is not accurate; instead valuation must depend of future earnings and forward looking guidance. ‘Next year’s operating earnings for the S&P 500 companies are projected to average $74 a share, less than 15 times earnings, and early indications for 2011 are at $85 a share or 12.5x earnings.’ (Data from Jeremy Siegel’s research – he is a Professor of Finance at University of Pennsylvania and author of ‘Stocks for the Long Run’). Based on these measures stocks have room to run, especially when interest rates and inflation are factored in.
The US is still suffering deficits because of a reliance on Chinese imports and the low value of the yuan that keeps their exports so competitive. Though it seems that President Obama’s recent trip to China may have some impact on this situation, let’s remember that if the yuan does start a steady rise in 2010, it probably is because China is confident that the recovery in its own domestic economy is real and lasting and therefore can move away from export dependence. Either way, it’s a significant sign for the rest of the world.
There are a number of concerns going into 2010, each of which has the potential to escalate or combine to strangle the current rally. The removal of government stimulus packages, dollar devaluation, close to zero interest rates inspiring the ‘mother of all’ carry trades and unbridled inflation could all stifle the upward momentum. The uncertainty hanging over important geopolitical issues, such as nuclear development in Iran, the war in Afghanistan and threats of terrorism across the globe. These are all real and ominous threats that could derail our recovery. Across countries and sectors however, we continue to see pockets of inspiration as leading indicators suggest solid upturns. From the Indian GDP rate showing a 7.9% increase to the US weekly jobless claims now at a year low numbering below 500,000; from the rising house prices charting a returning strength in the property markets to AIG, Citi and Bank of America’s loan repayments pointing to stabilisation in the financial sector. There seems enough to be encouraged about- excited even! It is with tentative optimism then, that I hope to see green shoots growing in the cracks and feel that 2010 will be a year of great promise and recovery.
Combine Buffet’s mantra of reduced unemployment as the key driver, with the fastest growing productivity in 40 years, an increase in personal spending and durable goods orders and rising home sales; and maybe there’s enough to indicate that our optimism in substantiated. The problem is though that the markets have already rallied and many think they may already be too frothy; after all, based on 2009 earnings, the S&P trades at 19x P/E – significantly higher than the 15x, which is the historical average. But basing valuations on 2009 data is not accurate; instead valuation must depend of future earnings and forward looking guidance. ‘Next year’s operating earnings for the S&P 500 companies are projected to average $74 a share, less than 15 times earnings, and early indications for 2011 are at $85 a share or 12.5x earnings.’ (Data from Jeremy Siegel’s research – he is a Professor of Finance at University of Pennsylvania and author of ‘Stocks for the Long Run’). Based on these measures stocks have room to run, especially when interest rates and inflation are factored in.
The US is still suffering deficits because of a reliance on Chinese imports and the low value of the yuan that keeps their exports so competitive. Though it seems that President Obama’s recent trip to China may have some impact on this situation, let’s remember that if the yuan does start a steady rise in 2010, it probably is because China is confident that the recovery in its own domestic economy is real and lasting and therefore can move away from export dependence. Either way, it’s a significant sign for the rest of the world.
There are a number of concerns going into 2010, each of which has the potential to escalate or combine to strangle the current rally. The removal of government stimulus packages, dollar devaluation, close to zero interest rates inspiring the ‘mother of all’ carry trades and unbridled inflation could all stifle the upward momentum. The uncertainty hanging over important geopolitical issues, such as nuclear development in Iran, the war in Afghanistan and threats of terrorism across the globe. These are all real and ominous threats that could derail our recovery. Across countries and sectors however, we continue to see pockets of inspiration as leading indicators suggest solid upturns. From the Indian GDP rate showing a 7.9% increase to the US weekly jobless claims now at a year low numbering below 500,000; from the rising house prices charting a returning strength in the property markets to AIG, Citi and Bank of America’s loan repayments pointing to stabilisation in the financial sector. There seems enough to be encouraged about- excited even! It is with tentative optimism then, that I hope to see green shoots growing in the cracks and feel that 2010 will be a year of great promise and recovery.
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