LOOKING AHEAD: Week of November 30, 2009

The official holiday shopping season is underway…and thus far, it’s underwhelming. Should investors care? Analysis and views from JPMorgan Funds, Gluskin Sheff, Research Affiliates and more…

 

GAUGING THE STRENGTH OF THE RECOVERY, From David Kelly, chief market strategist, JPMorgan Funds

In Washington, Ben Bernanke will face a grilling from Senators on his nomination for another four years as head of the Federal Reserve. His confirmation really isn’t in doubt. However, it will be important for the Chairman to assert the independence of the Federal Reserve following two years in which it has been forced to coordinate its actions with those of both Administrations and foreign central banks to an extent not seen in recent decades.
 
The economy, thankfully, continues to show signs of recovery. The ISM index of manufacturing activity and the pending home sales index should be consistent with a recovery in the very cyclical manufacturing and housing sectors. Light vehicle sales could rise from 10.4 million units annualized in October to 10.6 million units in November.

The most important economic report of the week, however, will be the jobs report due out on Friday. On the upside, a reading of less than 100,000 payroll jobs lost for November is possible. On the downside, the US labor force has fallen by 1.1 million workers over the past five months and the return of some of these workers to an active job search could contribute to a jump in the unemployment rate.
 
Markets will have to deal with all of this along with the ramifications of Dubai’s decision to delay debt payments owed by Dubai World, its flagship holding company. In theory, the money involved should not be a serious problem for either the global banking system or the global economy. But like a well-fed diner at a Thanksgiving table, markets have had a lot to digest in 2009, and at this stage it might not take a lot to upset them.

 

A VERY BLACK FRIDAY, From David A. Rosenberg, chief economist and strategist, Gluskin Sheff

Despite all the promotional activity and gimmicks, the best the National Retail Federation could deliver was a paltry +0.5% post-Thanksgiving sales growth year-over-year. Considering that this is compared to an alleged “end-of-the-world” level a year ago, the flat sales trend makes this year feel very similar. The number of shoppers rose to 195 million from 172 million a year ago, so this 0.5% result says something about the secular trend toward frugality.

Online surveys show that the average consumer spent $343.31 (including online sales) versus $372.57 last year, when shoppers were reportedly comatose. This 8% slide is symptomatic of a deflationary state insofar as it pertains to the items that go into the CPI (gold, copper and crude not included).

 

HEADWINDS FOR INVESTORS, From Robert Arnott, chairman, Research Affiliates

Too often in investing we concentrate on the little decisions—the “trees”—that may impact the portfolio for the next quarter, year, or even three years. The “trees” of security and manager selection receive the bulk of our investment management resources, while the “forests”—the big issues that will affect our portfolios for potentially decades—receive scant attention. Such long-term thinking is difficult amidst the barrage of daily economic news and the steady flow of quarterly peer group rankings.

But the forests will inevitably have the greatest impact on our future, and ultimately on the way we should allocate assets. Three critical long-horizon issues— the deficit, the national debt, and demographics—create a disturbing structural headwind that will impede the real returns we can expect from financial assets in the years ahead. The coming quarter century will be very, very different from the past quarter century; the lessons we’ve learned in the past generation may lead us astray in the coming generation.

The average increase in our national debt, including unfunded obligations and GSEs, is 9.8% of GDP for the past 25 years. The latest 12 months saw our public debt and unfunded obligations grow by 18% of GDP! Adding federal, state, local, and GSEs, the total public debt is now at 141% of GDP. That puts the United States in some elite company— only Japan, Lebanon, and Zimbabwe are higher. Add in household debt (highest in the world at 99% of GDP) and corporate debt (highest in the world at 317% of GDP, not even counting off-balance sheet swaps and derivatives), and our total debt is 557% of GDP. Less than three years ago, our total indebtedness crossed 500% of GDP for the first time.