Current

 Macro  Environment  –  
Investment  Considera4ons  
8  March  2009  
Arthur  O’Keefe  
US  Employment  and  Infla4on  Trends  
(hint:  they’re  related)  
 Credit  con4nues  to  contract  –    
demand  and  not  supply  driven  

Source:  St.  Louis  Fed,  March  2010  Monetary  Trends  

 …No  one  wants  to  borrow  

Source:  St.  Louis  Fed,  March  2010  Monetary  Trends  

Not  surprising  since  there  are  no  jobs…  
Unemployment  probably  peaking  
here,  but  it’s  a  high  peak  
And  the  unemployment  numbers  mask  
under-­‐employed  people…  
…And  people  who  have  just  given  up  
looking  
Could  take  a  decade  to  absorb…  
Deleveraging  Period  =  Slow  Growth…  
…5+  Years  of  Slow  Growth  Ahead  

Source:  St.  Louis  Fed,  March  2010  Monetary  Trends  

 Good  luck  ge]ng  infla4on  in  this  
environment  

Source:  St.  Louis  Fed,  March  2010  Monetary  Trends  

CPI  star4ng  from  a  low  base  
US  Savings  Trends  
A^er  being  burned  twice,  people  have  
been  dumping  equi4es  

Source:  GS  
But  they  are  s4ll  saving  –  even  more  so  now  
So  the  money  has  flowed  into  bonds  

Source:  GS  
US  Business  Trends  
With  increased  savings  and  high  unemployment,  
capacity  u4liza4on  is  lower  

Source:  GS  
But  business  trends  are  stabilizing  

Source:  JPM  
Businesses  adjusted  much  faster  than  
the  consumer  in  raising  cash  

Source:  GS  
 …and  de-­‐levering  
SPX  NET_DEBT_TO_EBITDA  
6  

5  

4  

3  

2  

1  

0  

NET_DEBT_TO_EBITDA  

Source:  Bloomberg  
 Valua4ons  got  crushed  and  bounced  
back  a  bit  
PE_RATIO  
35  

30  

25  

20  

15  

10  

5  

0  

PE_RATIO  

Source:  Bloomberg  
 But  so  did  earnings:  result  is  EV  to  
EBITDA’s  are  s4ll  at  historic  lows  
SPX  EV_TO_T12M_EBITDA  
16  

14  

12  

10  

8  

6  

4  

2  

0  

EV_TO_T12M_EBITDA  

Source:  Bloomberg  
Valua4ons  s4ll  don’t  reflect  the  lower  leverage,  
lower  risk  of  companies:  Cash  flow  is  cheap  
SPX  PX_TO_CASH_FLOW  
25  

20  

15  

10  

5  

0  

PX_TO_CASH_FLOW  

Source:  Bloomberg  
Other  Considera4ons  
China  increasingly  struggling  to  
maintain  growth  
Investment  Conclusions  
 Consumer  spending  weak,  excess  
capacity  =  defla4on  

Source:  Dave  Rosenberg,  Gluskin  Sheff  

US  Deficit  is  not  a  problem:  With  business  cap-­‐ex  remaining  low  
and  Asia  and  Europe  pushing  to  maintain  exports,  the  only  way  
to  absorb  savings  is  to  run  a  deficit  

Source:  GS  
Rates  will  stay  low  for  a  long  4me  

Source:  GS  
Savers  will  start  to  reach  for  yield  again  modera4ng  any  
weakness  in  Bonds  and  suppor4ng  equi4es  

Source:  GS  
And  vola4lity  will  con4nue  to  decline  
as  companies  de-­‐lever  more    

Source:  GS  
 Leading  to  high  quality  equi4es  
recovering  

Source:  GS  
 US  Dollar  in  this  environment  
•  In  an  environment  like  today  the  US  Dollar  is  
largely  valued  off  of  confidence  
•  As  long  as  other  countries  remain  in  worse  
condi4ons,  there  will  be  a  bid  for  dollars  
•  Defla4on  will  cause  debt  to  be  bid  and  be  
absorbed  domes4cally  
–  Essen4ally  the  government  is  giving  savings  to  people  
by  consuming  for  them  
•  Addi4onally  Asian  countries  will  con4nue  to  buy  
dollars  to  maintain  exports