Economic Outlook - Denver 11-09

Economic & Market Update Denver November 2009

The investments described herein are: NOT FDIC INSURED • NOT BANK GUARANTEED • MAY LOSE VALUE • NOT A DEPOSIT NOT INSURED BY ANY FEDERAL OR STATE GOVERNMENT AGENCY

Looking back “Perhaps the worst “financial earthquake” since the 1930’s.”

The “Great Recession”

  

The financial system on the brink of collapse The economy in a nose dive Public panic

So far, 2009:

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Economic recovery taking hold A large government stimulus package But long-term problems that continue to overhang the economy and the markets

Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations contained herein are subject to change without notice and are not intended as individual investment advice.

The stages of economic recovery “Like the wall of water released by a dam burst, economic growth tends to surge early in economic recovery.”

Stage 1: The recession ends

 

The economy gradually stabilizes Pessimism remains high

Currently between Stage 1 and Stage 2

Stage 2: A initial growth surge

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“Catch up” consumer spending is unleashed Inventories are replenished, productive capacity restored Pessimism wanes

Stage 3: Sustainable growth

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Growth settles back to the “sustainable” rate Optimism takes hold

Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations contained herein are subject to change without notice and are not intended as individual investment advice.

Areas that drive economic activity “The health of the economy depends upon the health of its parts.”

Consumers Businesses Exports Government

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Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations contained herein are subject to change without notice and are not intended as individual investment advice.

Consumers “Even a slowly flowing stream releases a surge of water when a dam is removed.”

Do consumers have the confidence to spend?



Consumer confidence has lagged economic recovery in the past

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Consumer confidence has improved but remains low The economy continues to show improvement Business confidence, which is a better predictor, has improved sharply

Do consumers have “spendable” reserves?

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Credit remains constrained for many spenders Spending remains high relative to personal income 90% of the public retain their jobs

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Many of the “still employed” have curtailed spending Unemployment likely will continue to increase

How much growth can consumer spending drive longer term? Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations contained herein are subject to change without notice and are not intended as individual investment advice.

Businesses “The foundation for improved business activity has been laid. Businesses just need to see improving sales.”

Business surveys: Expectations for the future have improved



A good indicator of an improving economy

Businesses are exceptionally “lean”

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Inventories have been pared substantially Employment: hour reductions versus layoffs

Lingering concerns

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Sales need to improve Competition remains fierce: Little pricing flexibility Margin pressure: Energy and other commodity costs Uncertainty about healthcare and energy policy

Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations contained herein are subject to change without notice and are not intended as individual investment advice.

Exports “Overseas economies have typically lagged U.S. recovery by about six months.”

Emerging markets

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Remain a strong source of global growth Activity has pulled back a bit, but growth seems likely to resume

Developed markets

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Some countries are recovering faster than the United States Could provide earlier support for the U.S. economy

A declining dollar could help drive exports

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The dollar normally declines after a global recession Overseas fears of the large U.S. deficits may also push the dollar lower

Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations contained herein are subject to change without notice and are not intended as individual investment advice.

Longer-term problems “The “sustainable” growth rate may be lower over the next few years.”

Consumer spending relative to income Employment Deficits and Inflation

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Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations contained herein are subject to change without notice and are not intended as individual investment advice.

Spending relative to Income “Spending, relative to income, is still high.” Monthly Data 1/31/1959 - 8/31/2009 (Log Scale)

P e rso n a lC o n s u m p tio nR e la tiv etoP e rso n a lIn c o m e

2005

84.99

84.99

84.48

84.48

83.98

83.98

83.48

83.48

82.98 82.49

82.98

1960

82.49

82.00

82.00

81.51

81.51

81.03

81.03

80.55

80.55

80.07

80.07

79.59

79.59

79.12

79.12

78.65

78.65

78.18

78.18

1998

77.72

77.72

77.26

77.26

76.80

76.80

76.34

76.34

75.89

75.89

75.44

75.44

74.99

74.99

74.54

74.54

74.10

74.10

1960

KCP75

1965

1970

1975

1980

1982

1985

1990

1995

2000

C o p y rig h t2 0 0 9N e dD a visR e se a rch ,In c .F u rth e rd istrib u tio np ro h ib ite dw ith o u tp rio rp e rm issio n .A llR ig h tsR e s e rve d . S e eN D R D isc la im e ra t w w w .n d r.co m /co p yrig h t.h tm l .F o rd a tav e n d o rd isc la im e rsre fe rto

9

Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations contained herein are subject to change without notice and are not intended as individual investment advice.

2005

w w w .n d r.co m /ve n d o rin fo /

.

Employment “Michael Jordan (at 46), versus LeBron James (at 24): Economies, like people, also age.” Monthly Data 12/31/2000- 9/30/2010

P e rfo rm a n c e o fN o n -F a rm P a y ro lls v s1 9 9 1 a n d A v e ra g e o fL a s tF iv e E x p a n s io n s 122

122 * D a te s u s e d fo r d e te rm in in g a re th o s e d e s ig n a te d b y th e N a tio n a lB u re a u o f E c o n o m ic R e s e a rc h .T h e d a ta h a s b e e n a d ju s te d fo re a s e o fc o m p a ris o n w ith th e c u rre n tc y c le . E x p a n s io n s ta rtin g d a te s u s e d :N o v e m b e r1 9 7 0 , M a rc h 1 9 7 5 ,J u ly 1 9 8 0 ,N o v e m b e r1 9 8 2 ,a n d M a rc h 1 9 9 1 .

121 120 119 118

e c o n o m ic

e x p a n s io n s

121 120 119 118

117

117

116

116

115

Average of the last five expansions

R e c e s s io n e n d e d

114

115

1991 Expansion

in N o v e m b e r2 0 0 1 .

114

113

113

112

112

111

A v e ra g e o f L a s t P o s tW o rld W a rIIE x p a n s io n s ( )

110

111

F iv e

110

E n d o f

109

109

e x p a n s io n

108

1 9 9 1

107

108

E x p a n s io n ( )

107

106

106

2001 expansion

105

105

104

104

103

103

102

C u rre n t (

101

102

E x p a n s io n )

101

100

100

(BL29453x01)

M

2001

J

S

D

M

2002

J

S

D

M

2003

J

S

D

M

2004

J

S

D

M

2005

J

S

D

M

2006

J

S

D

M

2007

J

ÓC o p y rig h t2 0 0 9 N e d D a v isR e s e a rc h ,In c .F u rth e rd is trib u tio n p ro h ib ite d w ith o u tp rio rp e rm is s io n .A llR ig h ts R e s e rv e d . S e e N D R D is c la im e ra t w w w .n d r.c o m /c o p y rig h t.h tm l

10

S

D

M

2008

J

S

D

M

2009

J

.F o rd a ta v e n d o rd is c la im e rs re fe rto

Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations contained herein are subject to change without notice and are not intended as individual investment advice.

S

D

M

2010

J

w w w .n d r.c o m /v e n d o rin fo /

S

.

When do government deficits cause inflation? “When deficits grow faster than the economy, eventually it damages the economy.”

Pressure on the dollar

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Government debt rises as a percentage of GDP Interest costs absorb an ever larger share of the budget Lenders become concerned

Interest rates rise significantly

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Lenders require a “risk premium” to invest Other investment projects get “crowded out”

Borrowing cannot cover the deficits

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The government must reduce spending or print money Inflation erodes the value of the debt – and the currency Economic growth suffers

Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations contained herein are subject to change without notice and are not intended as individual investment advice.

Denver longer term: Growth focus “Denver Employment Growth over the past 5 yrs has averaged 1.6% vs. 1.1% for the US.

Industries that drove Denver’s faster growth

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Manufacturing – avg. decline at -0.4% vs. -1.5% for US, 0.6x exposure

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Prof. & Tech. – avg. growth at 4.1% vs. 3.5% for the US

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Drove 0.2% of 0.5% out-performance for DEN vs. the US DEN had a 1.4x exposure to the best performing industry in the US Of the 0.5% annual out-performance Prof. & Tech. drove 0.1%

Population growth per year for DEN of 1.7% was above the US at 0.9%. Relative to pop. growth, DEN employment growth inline with US.

Industries that partially offset faster growth

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Info. – decline of -2.3% vs. -1.2% for US, 1.7x concentration Mining & Cons. – Growth of 1.2% vs. 1.9% for US Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations contained herein are subject to change without notice and are not intended as individual investment advice.

Denver Employment Outlook Employment Growth / Decline

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Decline in DEN Employment more severe than US US Leading Economic Indicators bottomed in March 2009 US Employment lagged the trough in LEIs by:  Bottom: 1991 – 6 mos. 2001 – 11 mos.  Renewed Growth 1991 – 15 mos. 2001 – 33 mos. DEN Employment lagged the trough in LEIs by:  Bottomed: 1991 – NA 2001 – 10 mos.  Renewed Growth 1991 – NA 2001 – 35 mos.

Factors affecting the employment outlook

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Exposures to materials could benefit from secular growth in China and other emerging economies but at the cost of volatility. Important to maintain high quality of life that has attracted strong net migration and led to dynamic population and employment growth. Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations contained herein are subject to change without notice and are not intended as individual investment advice.

Stockmarket outlook “We may be in the latter innings of the equities rally, but it should have more to go.”

Reasons the rally should continue

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Continuing economic improvement – but with continuing skepticism Estimates of company earnings are still low Many investors still seem to be on the sidelines

After the rally plays out

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We may not see a sharp selloff

Overseas markets may also have brighter prospects

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Economic growth may be stronger Inflation fears about the U.S. could also drive gains for foreign stocks

Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations contained herein are subject to change without notice and are not intended as individual investment advice.

Key Private Bank Investment Recommendations Asset Classes Stocks

Bonds

Emphasize

Deemphasize

Geographic Region Cash Deemphasize

United States

International

Deemphasize

Developed Emphasize

Emerging

Emphasize

Market Sectors Basic Materials

Emphasize

Consumer Cyclicals

Emphasize

Energy

Emphasize

Industrials

Emphasize

Technology

Emphasize

Financials

Neutral

Consumer Staples

Deemphasize

Health Care

Deemphasize

Utilities

Deemphasize

Market Capitalization

Investment Style Value

Growth

Large Cap

Neutral

Neutral

Mid-Cap

Deemphasize

Emphasize

Small Cap

Deemphasize

Emphasize

Alternative Investments Commodities

Emphasize November 2009

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Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations contained herein are subject to change without notice and are not intended as individual investment advice.

Disclosures Key Private Bank is part of KeyBank National Association. Trust services provided by KeyBank National Association. Investments are: NOT FDIC INSURED • NOT BANK GUARANTEED • MAY LOSE VALUE • NOT A DEPOSIT NOT INSURED BY ANY FEDERAL OR STATE GOVERNMENT AGENCY

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