Objects in the Rear View Mirror

Objects in the Rear View Mirror

Objects in the Rear View Mirror

Tim Phillips, CEO Phillips & Company, Portland Oregon.

2010 retail sales were up 7.9% vs. 2009 putting them 13.5% above the bottom and 0.2% over the pre-recession peak in November 2007. The consumer has returned.

A recent quote from the San Francisco Fed:

"The economic expansion appears to be building steam. After increasing 2.8% in 2010, we expect real GDP to grow nearly 4% this year and for growth to pick up to about 4% in 2012. Pent-up demand for durable goods and eventually housing, and improving confidence are contributing to a steady improvement in the economy." (http://bit.ly/iekylK)

Job creation remains slow. Pent up demand could help drive an inventory driven job growth increase.

With 14.5 million Americans out of work and another 8.9 million underemployed (http://bit.ly/4zoS3A); it's hard to imagine increases in consumption. It appears that those working are spending and also those not working are still consuming. Many may be receiving unemployment benefits and not paying their mortgages, spending the free cash flow and aiding consumption numbers.

The question is will consumption lead to employment creation? This will be one of the key tests for our economy and equity markets in the months to come. Bespoke did a terrific job with a 2010 year end summary. I want to highlight a few key themes from their 128 page report.

1) On average, analyst forecast a modest gain in the S&P 500 from 2010 to 2011 of 9.02%.

2) The trailing P/E on the S&P 500 was 15.92 compared to a historical average of 15.37 marked over an 80 year period. While we are roughly at fair value, we are anticipating significant earnings growth this year and perhaps an expansion in the multiple. Remember, things tend to move above and below the mean, and I expect the same with the 2011 trailing P/E ratio.

3) As seen from the data compiled by Bespoke, historically if the first two years of a president's term saw strong market performance, the third year also showed higher than average returns. While I don't place a lot of merit on this type of data points, I hope to see this as a repeatable pattern.

Sometimes objects in the rear view mirror are exactly as they appear. It's the ordinary that most investors overlook and overcomplicate.

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