U.S. Expansion Poised for Longevity – Bloomberg 06-09-13

Salient to Investors:

The economic expansion shows signs of lasting almost twice as long as average, with few of the excesses that often presage the start of contractions – inflation is slowing, not quickening, household debt is shrinking, not expanding, and the labor market is slack, not tight.

Robert Gordon at Northwestern University said the expansion last another 4 to 5 years.  (Which would make it the second longest on record, behind the 1990s and versus the average since the end of WWII of 58 months.) Gordon said the cyclical outlook is bright, but the US will be hampered longer term by an aging population, a plateauing of educational achievement, and increased inequality. Gordon said past expansions often were cut short by Fed tightening credit – in 1957, 1960, 1980, 1981 and 1990 – while many previous cycles ended because of too much exuberance in both residential and nonresidential construction – a major cause of the 1929-33 Depression and in 2007-08. Gordon said fortunately during 2008-13, the US is ‘constructing fewer homes and cars than replacement needs.

Allen Sinai at Decision Economics said the S&P 500 may rise to 1,750 in 2013 and 2,000 in 2015.

Goldman Sachs expects economic growth of 2.9 percent in 2014 and 3.2 percent in 2015 versus 1.9 percent in 2013. Jan Hatzius at Goldman said we could see a good growth environment for a long time.

Mark Zandi at Moody’s Analytics said there are no significant imbalances in the private economy, which is in good shape, though possible shocks could knock the recovery off course, including a collapse of the stock market, a sudden spike in long-term interest rates, or a military confrontation between the U.S. and Iran that drives up oil prices. Zandi said policy makers would be hard-pressed to cope with the fallout of a sudden shift because short-term interest rates already are near zero and the budget deficit is still high by historical standards.

Robert Hall at Stanford said the labor market is still very weak so we have a long way to go before any excess will appear in that most important of all markets.

Itay Michaeli at Citigroup recommends auto shares because consumers have been deferring purchases and we are still very early in the auto-sales cycle – he forecasts sales of cars and light-duty trucks will rise to 16.5 million in 2015 from 14.5 million in 2012.

Maury Harris at UBS Securities said younger adults have the most ability to spend after some delayed striking out on their own by living with parents or friends, so housing starts could rise to 1.1 million units in 2013 and 1.35 million units in 2014 versus 781,000 in 2012.

Joseph Carson at AllianceBernstein see many positives and expects another 3 to 4 years of economic growth at least.

Read the full article at http://www.bloomberg.com/news/2013-06-09/u-s-expansion-poised-for-longevity.html

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Americans Absorb Payroll-Tax Rise to Keep Spending: Economy – Bloomberg 03-11-13

Salient to Investors:

Brian Jones at Societe Generale said many things are going the right way – more people working means more people spending, which to some extent neutralizes higher taxes.

Dean Maki at Barclays expects GDP will rise at a 2 percent annual average pace in half2 from a 1.5 percent rate in half1 2013, saying the economy can now handle fiscal tightening without screeching to a halt.

 JPMorgan Chase expect growth to pick up in half2 2013 as the fallout from the budget cuts dissipates, paving the way for even stronger spending by businesses and consumers.

Joe Carson at AllianceBernstein predicts household net worth will climb to a record this quarter.

Allen Sinai at Decision Economics said further market gains are likely, and S&P500 at 1,600 later in 2013 is possible, while households and companies are in better shape to ride out the sequestration – businesses have fortress balance sheets.

UBS Securities said one reason purchases are likely to hold up in the face of higher taxes is that affluent consumers – a disproportionately large share of spending – tend to trim savings rather than consumption when faced with such constraints. UBS estimates the top 1 percent of income earners put 51 cents of each dollar toward savings, allowing plenty of leeway to keep spending.

Drew Matus at UBS said manufacturers rebuilding inventories, and farms stockpiling after last year’s drought, will add 0.6 percent to half1 economic growth – people are ignoring the positives and never count out the U.S. consumer.

In January, incomes dropped by the most in 20 years, pushing the saving rate to a 5-yr low.

S&P 500 earnings will exceed $120 a share in 2014 versus $100.75 a share in 2012 and $60.43 in 2008.

Warren Buffett said he will almost certainly set still another record for capital expenditures in 2013 as opportunities abound in America.

Read the full article at http://www.bloomberg.com/news/2013-03-11/americans-take-payroll-tax-increase-in-stride-to-keep-spending.html

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Economy Set for Better Times Whether Obama or Romney Wins – BLoomberg 11-04-12

Salient to Investors:

Economic growth will accelerate in the next four years as the headwinds become tailwinds.

  • Consumers are spending more and saving less after reducing household debt to the lowest since 2003.
  • Home prices are rebounding after falling more than 30 percent from their 2006 highs.
  • Banks are increasing lending after boosting equity capital by more than $300 billion since 2009.

Mark Zandi at Moody’s Analytics said the die is cast for a much stronger recovery – 2 percent in 2012 and 2013, and 4 percent in 2014 and 2015 – and financial institutions are very well capitalized and slowly lowering their lending standards. Zandi and Ray Fair at Yale said the big proviso will be shrinking the federal-budget deficit.

Eric Green at Penn Capital Mgmt said:

  • The economy will strengthen by mid-2013 as GDP surprises to the upside – 3 to 4 percent rate over the next couple of years.
  • Manufacturers, materials producers, energy and tech stocks should rise, while defensive stocks, including REITs, health- care providers and consumer staples, won’t perform as well.
  • The US should benefit in 2013 from a global rebound in the rest of the world as China is bottoming.

Allen Sinai at Decision Economics said the contracting euro area can’t be in a recession forever. Sinai expects a gradual pick up only during the next few years, rising to a just over 3 percent in 2015, held back by deficits and debt.

Mohamed El-Erian at Pimco sees 2 percent growth as the downside risks are greater than the upside risks, and the US must tackle deep-seated problems including youth and long-term unemployment and a broken housing-finance system. El-Erian said there is less leeway to use fiscal and monetary policies.

Peter Hooper at Deutsche Bank Securities said pent-up demand, more than presidential policies, will drive expansion – households are starting to buy amid rising optimism.

Easier credit terms are contributing to the rise in consumer spending. Banks reported that they continued to ease standards on auto loans and credit cards last quarter, according to a Fed survey of senior lending officers.

Dean Maki at Barclays said housing typically adds 1 to 2 percentage points in a recovery, so as distressed properties are cleared housing may give a bigger kick in 2015 and 2016.

Read the full article at http://www.bloomberg.com/news/2012-11-05/economy-set-for-better-times-whether-obama-or-romney-wins.html

Grantham Calls Corporate Profits Freakish – Bloomberg 11-27-11

Salient to Investors:

Jeremy Grantham at GMO said high profit margins are not connected to reality and an aberration, propped up by a great surge in government spending that fueled consumption, and will send stock markets tumbling when they eventually revert to their mean. Grantham said lower margins are the great threat to market performance, and as political pressures force the US to cut its budget deficit, the economy will suffer and margins will drop.

Ben Inker at GMO said earnings are unsustainably high. GMO sees fair value of the S&P 500 at between 950 and 1,000 and expects US large-caps to return 1.8 percent a year above inflation over the next 7 years.

Bob Doll at BlackRock said low labor costs and cost-saving technology show no sign of reversing and will allow companies to maintain their profitability, so they do not have to fall. Doll said with job growth likely to remain sluggish and low interest rates, rising costs are no threat to profits – we did not need a strong economy to get margins high, so we do not need a strong one to keep them high.

Moody’s Analytics said margins at non-financial US companies reached 15 percent in Q3, the highest level since 1969 and versus 8.7 percent when the recession ended in Q2, 2009.  Wages and salaries as a share of national income fell to 49.4 percent in Q3, the lowest since the government began collecting the numbers in 1948.

Mark Zandi at Moody’s said businesses have done a marvelous job of reducing costs, and the globalization of the workforce and a US jobless rate of 9 percent have given management the upper hand.

William Stromberg at T. Rowe Price said American multinationals are now much less dependent on developed-market economies.

Chris Christopher at IHS Global Insight said profit margins have been trending higher since the mid 1980s. Moody’s said quarterly margins peaked at 11.9 percent in the 1980s, 13.6 percent in the 1990s and 14.5 percent in 2000s.

The S&P 500 returned an annual 20 percent over 5 years after margins peaked in Q2, 1984; fell an annual 1.6 percent over 5 years after margins hit a high in Q3, 1997, and declined 1.2 percent a year after margins peaked in Q3,  2006.

Dennis Bryan at the FPA Capital Fund said firms may be reaching their limit in wringing out costs, after two years of rising margins, and in cutting millions more Americans out of the workforce. Bryan expects much profit disappointment, saying sales growth may slow as economies around the world lose steam – when margins peaked in the past, they typically fell over the following 5 years.

Allen Sinai at Decision Economics said high margins are here to stay – things like cloud computing is the latest tool to keep costs in check.

The average analyst expects sales growth for S&P 500 companies to climb 3.9 percent in 2012 and 11 percent in 2011.

Read the full article at http://www.bloomberg.com/news/2011-11-28/grantham-calls-margins-freakishly-high-that-doll-says-are-here-to-stay.html

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