Zacks Pro Stimulus Analysis

August, 2010

Zacks Strategy Report Dirk Van Dijk, CFA

Key Points

• Economy moves forward more slowly
Second quarter growth of 2.4% likely to be revised lower
First quarter revised up; 2007, 2008 and 2009 revised down sharply
Composition of growth improving: more investment, less inventory
Lower growth likely in 3Q as construction gains and S&L government contributions
will not last
Growth not fast enough to add significant numbers of jobs
• Unemployment Stays at 9.5%
Total jobs drop by 131K due to 143K decline in Census jobs; private sector adds
71K
Participation rate falls to 64.6%, Employment rate to 58.4%
Some progress on awful unemployment duration measures: median falls to 22.2
weeks from 25.5 weeks
Long-term unemployed numbers still extremely high
Job declines in the early part of this recovery far less than in last two downturns
• Stimulus Act and TARP probably key reasons we are in a recovery at all
Academic paper suggests things would have been much worse if no action were
taken
Payroll employment lower by 8.5 million, GDP 11.5% lower
ARRA alone raised GDP by 3.4% and saved/created 2.7 million jobs
Economy was far more leveraged and vulnerable in 2008 than it was in 1929, was
saved by fast (but too small) policy response
• Trade Trouble
Trade deficit jumps to $49.9 billion in June from $42.0 billion in May, $27.1 billion a
year ago
Increase mostly due to non-oil imports, but oil still a huge part of the problem
Weaker dollar would help on non-oil side, but reducing oil imports still required
• It is Getting Hotter
June 2010 was the hottest month on record worldwide
Record heat worldwide also in May, April and March
Arctic sea ice disappearing
• Housing Still Horrible
Total housing starts 7.9% lower than weak year-ago starts, single-family starts
13.6% lower, building permits also down
New and Existing Home Sales likely to plunge now that the tax credit is gone
Home Prices probably headed lower again, pushing more homeowners underwater
• Great Second Quarter Earnings season
Total S&P 500 net income up 38.7% year over year, revenues up 11.4%
Positive EPS surprises outnumber disappointments by more than four to one
Estimates for 2010 being revised upward, 2011 also up but less so

Zacks Investment Research Page 1 www.zacks.com

Full Report

Overview

I spend most of my time keeping up with the news and analyzing data. One of the things that totally
frustrates me is how the news seems to focus on totally manufactured “crises” while seeming to
ignore many of the real and pressing problems the country (and world) are facing. Thus, all of the
talk is about how a group of people exercising their private property rights, and their right to the
free exercise of religion is a national problem simply because the place they own is a few blocks
from 9/11’s Ground Zero.

Meanwhile, the world is heating up rapidly, with four straight months of record high worldwide
temperatures, yet the Senate cannot even muster the votes to debate climate change legislation.
The economic stimulus package, which played a key role in preventing the economy from
collapsing into a depression, is wearing off and as a result the economy is slowing. The growth rate
of 2.4% in the second quarter was well below the 3.7% rate of the first quarter, and is likely to be
revised sharply lower.

Despite this, there is no prospect for any real additional stimulus. The focus is instead on the short-
term budget deficit, even though through the first 10 months of fiscal 2010 it is actually $100 billion
lower than it was in the first 10 months of fiscal 2009. Meanwhile, the people who are shouting the
loudest about it are the same people that oppose the single most important step we could take in
reducing the long-term structural deficit, which is to let the Bush tax cuts on the wealthy expire as
scheduled. For any couple earning less than $250,000 a year there would be no impact, and for
couples earning less than $500,000 the impact would be very modest. It would have a big impact
on those earning more than $1 million a year, but a lot of those people work in the Financial
industry and have benefited the most from the extraordinary actions taken to save the financial
system.

We finally have seen some progress on the duration of unemployment metrics, as the median
duration fell to 22.2 weeks in July from 25.5 weeks in June. However, a big part of that is probably
from the long-term unemployed simply dropping out of the labor force, and the level is still more
than 80% higher than the worst levels ever recorded prior to the Great Recession. Nothing is being
done about it because of the fear of short-term deficits; meanwhile, millions of our fellow citizens
are falling into destitution.

Private sector employment has grown for seven months in a row, but at a pace that is not even
sufficient to keep up with the growth in the population. Government jobs, even excluding the
Census, fell in July as strapped state and local governments were forced to lay people off. Initial
claims for unemployment insurance stopped dropping at the end of 2009, and we are now at the
high end of the “trading range” we have been in since the start of the year.

Social Security is supposedly in crisis, even though its trust fund will be able to pay full benefits
through 2037, and 78% of scheduled benefits after that, and the scheduled benefits are
significantly higher than the current level of benefits. That trust fund is invested in some of the
safest assets in the world (at least in terms of repayment risk) -- treasury notes and bonds -- and
yes it is real (see Social Security Still in Good Shape). Medicare is more problematic, although according to
its trustees report, the changes made through the Health Care Reform Act lengthened the time
until it reaches a crisis point by 12 additional years.


The trade deficit is a real problem, and is rebounding quickly back to the hideous levels we saw
just a few years ago, rising 83.7% year over year in June. It, not the fiscal deficit, is the reason we
are so deeply indebted to the rest of the world. That is not an opinion; that is an accounting
identity. About 40% of the trade deficit is due to our addiction to oil imports. The climate bill that
the Senate can’t get around to even debating would take some modest steps to reduce those.
Most of the increase in the trade deficit, though, has come from the non-oil side.

The cap and trade provisions in the bill would put a price on carbon emissions, which is the first
step towards getting serious about reducing our oil imports. I would favor a more straightforward
carbon tax rather than the convoluted cap-and-trade system (with a large portion of the tax
revenues collected from it going to reduce other taxes). Doing nothing is just plain reckless. Other
command and control steps such as raising the CAFÉ standards on cars are helpful at the margin,
but are not going to be enough to solve the problem. Putting a price on carbon emissions will
unleash the magic of the market place to help solve it.

A weaker dollar would help there, yet the dollar seems to gain strength every day. Net exports
subtracted 2.78 points from growth in the second quarter (and that figure is going to be revised
MUCH higher) versus subtracting just 0.31 points in the first quarter. In other words, if the trade
deficit had not been increasing the economy would have grown 5.2% in the second quarter and
4.0% in the first quarter. Yet the silence on the issue is thunderous.

There is some good news, though, in the form of corporate earnings. That, after all, is the news
that is most important to the stock market. Total net income for the S&P 500 is up 38.7% (yr/yr)
with 91.2% of the reports in. There have been 341 positive surprises and just 78 disappointments.
Revenues are up 11.4% year over year. The forward 12 month earnings yield is almost triple the
yield on the 10-year T-note. Historically the two yields have tended to be close together.

Growth Slows to 2.4% in 2nd Quarter

In the second quarter (2Q) Gross Domestic Product (GDP) grew at a rate of 2.4%, which was
slightly less than the 2.5% consensus expectation, although the expectations had been moving
down over the last week or so. However, the first quarter was revised sharply higher to an increase
of 3.7% from 2.7%, while the rate of economic growth for all of 2007, 2008 and 2009 were revised
lower.

Growth in 2007 is now seen to have been 1.9% vs. the 2.1% we thought it grew before the
revision, for 2008 growth was 0.0% rather than 0.4%, and for 2009, the economy shrank by 2.6%
rather than 2.4%. Chart One1 shows the path of GDP before and after these revisions.

Data that have come out since the GDP report, most notably the Trade Deficit (see below) and
inventory numbers suggest that when we get our next look at the second quarter the overall growth
rate will be revised sharply lower than the first estimate of 2.4%. Probably the final result will start
with a 1, not a 2.

1
http://www.calculatedriskblog.com/


Chart One
GDP: Before and After

Goods Good, Services Stagnate

Without a doubt, growth has been slowing from the 5.0% rate in the fourth quarter to 3.7% in the
first quarter to the current estimate of 2.4% in the second quarter. However, the quality of the
growth has been improving. In the second quarter, 1.05 points of growth came from the change in
inventories (non-fixed investment), down from 2.64 points in the first quarter and 2.83 points in the
fourth quarter.

The biggest part of the economy by far is consumption, accounting for 70.4% of total GDP in the
2Q. In the 2Q, Personal Consumption Expenditures (PCE) added 1.15 points of growth, down from
1.33 points in the 1Q but up from the 0.69 point addition in the 4Q.

In total, goods added 0.79 points to growth in the 2Q down from 1.29 points in the 1Q, but up from
0.42 points in the 4Q. Of that, durable goods added 0.53 points versus 0.62 points in the 1Q, but
up from a 0.07 point subtraction from growth in the 4Q. Spending on durable goods was 7.36% of
the entire economy in the 2Q.

By the very nature of being durable, spending on durable goods tends to be easy to postpone
when times get tight. Instead of going out and buying a new car from Ford (F - Analyst Report) or
Toyota (TM - Analyst Report), when people are worried that they might get laid off in the near


future they simply drive the old clunker a little longer.

That demand then gets pent up (you get tired of driving that old thing, or the repair bills start to
mount) and when good times return, the spending on durable goods tends to jump. Thus, durable
goods tend to “punch above their weight” when it comes to determining if the economy is in a
recession or is booming.

Spending on non-durable goods is a much bigger part of the economy at 15.77%. However, non-
durable goods spending tends to be much more stable than spending on durable goods. In the 2Q,
non-durable goods consumption added 0.25 points to growth, versus 0.67 points in the 1Q and
0.49 points in the 4Q.

Most of consumer spending, though, is not on stuff, it is on services -- accounting for 47.24% of the
whole economy. Despite its huge size, services added just 0.36% in the 2Q up from just 0.03
points in the 1Q and 0.27 points in the 4Q. Services tend to be performed in real time, and cannot
be stored, thus they tend to be a more stable part of the economy.

The part of the economy that really punches above its weight is Investment. Gross Private
Domestic Investment (GDPI) is really the thing that makes the difference between boom and bust.
It is broken down into fixed and non-fixed investment, with non-fixed being the change in
inventories I discussed above. Inventory investment is considered low-quality growth since if
factories are making something that is simply piling up on store shelves, it means that they will
have to cut back production in the future.

Fixed Investment in Equipment Strong

Fixed investment, on the other hand, is a bet on the future of the country, and for the most part
adds to the country’s productive capacity. In total, GDPI makes up just 12.66% of the overall
economy, but it was responsible for 3.14 points of growth in the 2Q up from 3.04 points in the 1Q
and 2.70 points in the 4Q. The change in fixed investment is even more dramatic, with fixed
investment adding 2.09 points in the 2Q up from 0.39 points in the 1Q and an actual subtraction of
0.12 points in the 4Q.

Fixed investment is further broken down into residential (Home building and improvements) and
non-residential. Non-residential investment was 9.62% of the economy in the 2Q and added 1.50
points to growth, up from 0.71 points in the 1Q and a subtraction of 0.10 points in the 4Q. It is
further broken down into investment in structures, such as the building of new office buildings and
shopping centers, and into investment in equipment and software (E&S).

Spending on structures added 0.14 points to growth, but that is a big positive swing from the
subtraction of 0.53 points in the 1Q and a 1.10 point subtraction in the 4Q. That improvement is a
major surprise, and I would not expect it to last. There are simply too many vacant office buildings
and empty stores in the country for it to make sense to be building a lot of new ones.

However, the increase in spending on structures of 5.2% comes on the heels of seven straight
quarters of it being a drag on growth. Spending on non-residential structures has fallen by 33.7%
over the last two years, and in the process it has declined from 4.04% of the whole economy to just
2.65% of the economy.

Equipment Encouraging


Investment in E&S added 1.36 points to growth, up from 1.24 points in the 1Q and 0.91 points in
the 4Q. E&S spending increased by 21.9% and now represents 6.97% of the whole economy. That
is up at a 21.9% rate and E&S investment is now 6.97% of the economy up from 6.43% a year
ago. This is a very encouraging development, suggesting that businesses are starting to deploy
some of the massive cash hoard they have amassed.

Despite all the whining you hear on CNBC about uncertainty regarding taxes and regulation, the
animal spirits are starting to rise. The sharp increase in E&S spending is all the more surprising
since manufacturing capacity utilization is only at 71.4%, which is an extremely depressed level;
the long-term average is 79.2%. If businesses are investing even when they have factories sitting
idle, it means that they must be getting more confident about the future.

On the other hand, it is partly a reflection of the sharp decline in E&S spending that happened
during the recession. Even with the sharp increase, E&S spending is still 8.7% below where it was
two years ago.

S&L Government Adds to Growth, But Will Not Last

Government spending was responsible for 0.88 points of growth in the 2Q, a big swing from the
0.32 point subtraction from growth in the 1Q and the 0.28 point drag in the 4Q. The federal
government was responsible for 0.72 of that, up from a contribution of 0.15 points in the 1Q and a
0.01 point contribution in the 4Q. Most of the swing has come from spending for Defense, which
added 0.40 points after adding just 0.02 points in the 1Q and being a 0.13 point drag in the 4Q.
Non-defense spending added 0.33 points in the 2Q, up from a contribution of 0.13 points in the 1Q
and adding 0.14 points in the 4Q.

Government spending for calculating GDP is very different from the government budget, since it
excludes transfer payments like Social Security. That spending is part of Consumption, and is
counted when Grandma spends her Social Security check.

In total, government spending was 20.51% of the economy in the 2Q, and of that only 8.26% is
federal government spending. Defense spending was 5.57% and non-defense federal spending
was 2.70% of GDP. State and local governments added 0.16 points of growth in the 2Q a big
swing from the 0.48 point drag in the 1Q and the 0.29 point drag in the 4Q.

State and local governments are generally not allowed to run deficits for operations (they can float
bonds for capital improvements like roads and sewage systems). Since most are facing very large
deficits due to falling tax revenues, they will have to cut spending sharply in the coming quarters,
and will once again be a significant drag on the economy. If instead of cutting spending they raise
taxes to balance their budgets, they are likely to reduce either Consumption or Investment
spending (or both). State and local government spending was 12.24% of the whole economy in the
2Q.

For more on Second Quarter GDP see: In-Depth: 2nd Quarter GDP Growth.

Private Sector Job Growth Low

In July, the unemployment rate remained unchanged at 9.5% even though the economy lost a
total of 131,000 jobs. The unemployment rate a year ago was at 9.4%. However, the private sector
added 71,000 jobs. The big reason for the overall loss of jobs was that 143,000 temporary census
workers completed their work and were laid off.


Last month, a total of 221,000 jobs were lost, with the private sector gaining only 31,000 and
225,000 census workers being laid off. The private sector job gains for last month were revised
sharply lower from an original reading of 83,000 jobs gained. The total number of jobs lost in June
was revised up from 125,000.

The reason the economy could lose jobs and have no change in the unemployment rate, even in
the face of a growing population, is that the percentage of people participating in the labor force --
the civilian participation rate -- has been on a steady downtrend. In July, it fell to 64.6% from 64.7%
in June, and down from 65.4% a year ago.

The participation rate will never get close to 100%. For that to happen, even infants and old people
in nursing homes would have to be working. But it does indicate that even though the
unemployment rate is only slightly higher than it was a year ago, the overall employment picture is
significantly worse than last year.

Last year, though, things were deteriorating at a rapid pace, and now the direction is mixed on a lot
of indicators. The percentage of people who are actually working, or the employment rate (also
known as the employment population ratio) was 58.4%, down from 58.5% in June and 59.3% a
year ago. The unemployment rate is really about the interaction between the participation rate and
the employment rate.

Participation Rate vs. Employment/Unemployment

Chart Two shows the long-term history of the participation rate, the employment rate and the
unemployment rate. Note that there was a huge secular uptrend in the participation rate starting in
the early 1960’s which lasted until the end of the century. The participation rate peaked in April
2000 at 67.2%. It started to fall just before the 2001 recession, and never really recovered before
starting to plunge again.

Even during the secular rise in the participation rate, it would flatten out or decline slightly during
economic downturns. When it is hard to find a job, people get discouraged and leave the
workforce, with older workers facing bleak employment prospects they opt for early retirement (also
more people go on disability).

There were two great demographic forces that pushed the participation rate higher. The first was
the Baby Boom, which started in 1946. By the mid-1960’s, those babies started to enter the
workforce (if they were not in Vietnam). The tail end of the Baby Boom was in 1964, meaning that
by the early 1980’s all of the Baby Boomers were in the work force.

The second huge demographic force was the entry of women into the labor force. If in the mid-
1960’s you read an article about women and labor, the odds were that it was about childbirth. In
July, women were 49.7% of all production and non-supervisory employees. They are fully
integrated into the labor force and not likely to increase their participation rate significantly in the
future (at least relative to men). The leading edge of the Baby Boom is now starting to retire.


Chart Two
Workforce Shrinkage

The employment rate is much more volatile than the participation rate (if it wasn’t, the
unemployment rate would be very stable over time). It, too, was on a secular uptrend from the early
1960’s through the end of the century, reaching a higher high in each expansion, and the lows
during each recession were not quite as low as the previous downturn.

That pattern was decisively broken in the last expansion. The employment rate peaked in April
2000 at 64.7%, and in the 2001 recession and its aftermath it fell to a low of 62.0 in September of
2003. The subsequent recovery was feeble and the highest the employment rate ever got to was
63.4% in March of 2007 before starting to slip again.

While we had a little bit of a recovery in the employment rate in the spring, and the current rate is
still above the 58.2% level we hit in December, we are starting to fall again. The December rate
was last seen in October 1977.

In other words, if the participation rate had not been falling, the unemployment rate today would be
much higher. Then again, the unemployment rate during the entire Bush presidency would have
been significantly higher as well. While it is the unemployment rate that gets all the headlines, the
employment rate is just as important.

Some Progress on Unemployment Duration


Perhaps the best news in the employment report is that we finally seem to be making some
progress on the long-term unemployed. The duration of unemployment measures are still terrible,
but at least this month they moved in the right direction. The median length of unemployment fell to
22.2 weeks from an astounding 25.5 weeks in June. That, however, is up from 15.9 weeks a year
ago, and as the graph below shows, at that time, it was an all-time record high.

The average duration fell to 34.2 weeks from 35.2 weeks in June, but up from 31.2 weeks last
year. Prior to the Great Recession, the highest the median duration ever reached was 12.3 weeks
in May of 1983. The highest pre-Great Recession average duration was hit a month later in June
1983 at 20.8 weeks. Thus, while the improvement is very welcome, the absolute level is still just
plain awful.

Chart Three
Unemployment Duration Ticks Down from Stratosphere

Long-term unemployment is a very different experience than short-term unemployment. Under
normal circumstances, state-based unemployment insurance only lasts for 26 weeks. During
recessions, the federal government has always stepped in with extended unemployment benefits.
Despite the off-the-charts level of the long-term unemployed, it was a major struggle to get
unemployment benefits past a Senate filibuster, but it was eventually accomplished.

Since the unemployed are severely liquidity constrained (i.e., they don’t have any money and are
going to have a hard time borrowing it) they will tend to spend the unemployment benefits very
quickly, thus stimulating the economy. On a dollar-spent per-job-saved basis, it is hard to find a
more effective stimulus program than extended unemployment benefits.

In July, there were a total of 14.599 million unemployed, down from 14.623 million in June but up


from 14.534 million a year ago. Of those, 6.572 million or 44.9% of the total had been out of work
for more than 26 weeks. That is a significant improvement from the 6.751 million (45.5% of the
total) that had been out of work for more than 26 weeks in June, but up from “just” 4.972 million
(34.2%) a year ago.

During a recession, the number of people out of work for more than 15 weeks -- and especially
those out of work for more than 26 weeks (orange line) -- really shoots up. The Great Recession
has been exceptional in this regard. Since the official start (12/07) of the recession, the number of
long-term unemployed has increased by almost five fold, while in most recessions it “merely”
doubles.

Note that the number of long-term unemployed continues to rise well past the official end of the
recession, and that the peak in long-term unemployment has been coming further and further past
the end of the recession with each passing business cycle.

If the decline in the number of long-term unemployed we saw this month really does mean that we
have hit a peak, it is very encouraging news indeed. The sharp decline in the number of people out
of work between 15 and 26 weeks (green line) means that there are fewer people entering the
long-term unemployment pipeline and makes a current peak seem plausible. However, one month
does not make a trend, and it will take a few more months before we can declare victory on this
front.

The decline in the participation rate is probably the greatest among the long-term unemployed. You
are far more likely to get discouraged and give up looking for a job when you have been out of
work for nine or ten months of rejection and no response to the resumes you send out than you are
when you have only been looking for nine or ten weeks. Thus, the decline in the number of long-
term unemployed does not mean that all those people got jobs.

For more on the employment report see: Employment Report In-Depth.

Chart Four


Very Long Term Unemployed Still Biggest Group

Historical Perspective Needed

The general tone of the press coverage in response to the employment report was that this
recovery is particularly weak and that job creation has been awful. The question, then, is:
"Compared to what?"

Well how about the last two recessions? We don’t yet have an “official” end to the Great
Recession as scored by the NBER, but the general consensus of economists is that it ended in
July 2009. That is when several key indicators started to turn up, and was also the start of the third
quarter, which was the first quarter to show positive GDP growth.

Thus, including July 2009, there have been 13 “post-recession months” that we have data on job
creation for. Unlike the previous two post-recession periods, this one coincided with the every-ten-
year census. Therefore, it makes sense to focus on private-sector job creation rather than total
jobs.

In the 13 months following the end of the 1991 recession, (blue line) the economy lost a total of
498,000 jobs. In the 13 months after the 2001 recession, (pink line) it lost a total of 1.323 million
jobs. Over the last 13 months, (yellow line) the economy has lost a total of 338,000 private sector
jobs. If one argues that the month the NBER dates as the end of the recession is really still part of
the recession, then the total job losses over the subsequent 12 months are 332,000 for the post
1991 recession period, 980,000 for the post 2001 recession period, and a loss of 41,000 private
sector jobs over the last 12 months.

The prior two recessions were very mild affairs relative to the Great Recession. Yet so far, the
recovery in private sector jobs has been far stronger than it was following those two downturns.


Without question, there needs to be more job creation. People are hurting and want to find jobs. I
have argued over and over again that we need more fiscal stimulus to do that. The consumer was
deeply in debt before the crisis, having used the run-up in house prices to extract equity, and when
the value of his house fell his personal balance sheet was destroyed and now needs to be rebuilt.
That means paying down debt and saving more, not new spending.

That reduced overall demand and resulted in lots of idle capacity. With lots of equipment sitting
idle, businesses see little reason to build more. With lots of vacant offices and storefronts, why put
up more? That further depresses demand.

The only thing that is left is for the government to help prime the pump and cushion the downturn.
Given the scale of the problem, $800 billion spread over three years simply was not enough. Just
because a garden hose was not able to put out a roaring wildfire being pushed by Santa Ana winds
would not lead one to conclude that water will not put out a wood-based fire.

For more on job creation in the current recovery versus previous recoveries see: Post-Recession
Private Job Growth.

Chart Five

This Jobs Recovery Not as Bad as Previous Two


Why the Economy Recovered at All

On many metrics, the economy was more unbalanced heading into the Great Recession than it
was in 1929 before the Great Depression. One of the most important of these metrics was the
level of leverage that had developed though out the economy. This is illustrated in Chart Six2. The
main reason why we did not fall into another Great Depression was that the policy response was
far quicker this time around, under both the Bush and Obama administrations.

There were many facets of this response, although the two most prominent were the TARP and the
Stimulus Act, or ARRA. The big question is what would have the economy looked like if the policy
makers in the both the Bush and Obama administrations had sat back and done nothing. It is, of
course, impossible to prove a counter-factual, but there are economic models that can be used to
try to answer the question.

The Blinder-Zandi Paper

Alan Blinder, a professor at Princeton, and Mark Zandi of Moody’s Economics (and one of the chief
economic advisors to the McCain Campaign) have attempted to do just that. In a long -- but very

2
The Graph is from http://www.voxeu.org/index.php?q=node/5395 by Carmen Reinhart and Ken Rogoff, and which I discuss at greater length in
Deleveraging and Deficits


readable -- paper (see here), they argue that without any of the responses, 2010 GDP would have
been 11.5% lower than it is likely to turn out, payroll employment would have been 8.5 million lower
and we would now be facing outright deflation rather then just being at risk of falling into it, as we
are now).

As for the Stimulus Act (although they do caution that disentangling the effects of all the moving
parts of the government reaction is difficult), they estimate that it alone raised GDP by 3.4%, kept
unemployment 1.5% lower than it would have been (in other words, U-3 unemployment would now
be at 11.0% rather than at 9.5%) and saved or created 2.7 million jobs. Their findings on the
effects of the ARRA are broadly consistent with the findings of the non-partisan Congressional
Budget Office (CBO).

They say “We do not believe that it was a coincidence that the turnaround from recession to
recovery occurred last summer, just as the ARRA was providing its maximum economic
benefit.”

I have to agree with them. However, I was arguing during the debate over the ARRA that the
proposed solution was too small, and needed to be substantially larger given just how messed up
the economy was in the wake of the freezing up of the credit markets. Now the effects of the
stimulus are wearing off, and -- surprise, surprise -- the economy is starting to slow again.
However, there is not the political will to do anything about it at this point, or at least not enough
political will to be able to muster the 60 votes needed in the Senate to overcome a filibuster to
address the problem. For more see: Why the Recession Ended, for a lot more see the Blinder-Zandi
paper linked above.

Chart Six
Total Debt to GDP, the long view


Trade Trouble

In June, the nation's Trade Deficit jumped to $49.90 billion from $41.98 billion in May, and from
just $27.14 billion a year ago. That is an 18.9% rise for the month and a 83.9% increase from a
year ago. It is far worse than the expectations which were for the trade deficit to be more or less
unchanged from May.

It also strongly suggests that when the next look at second quarter GDP comes out that it will be
revised downwards. The trade deficit is a direct subtraction from GDP in the form of net exports, so
any increase in it directly hits GDP growth.

In just a hint of a silver lining, the May trade deficit was revised down from an original read of
$42.27 billion. Our exports were $150.45 billion in June, down from 152.44 billion in May (down
1.3%) but up from $127.87 billion (up 17.7%) from a year ago. Since growth of 15% will result in a
doubling in less than five years, it means the economy is on its way towards achieving President
Obama's goal of doubling U.S. exports over five years.

But so what? It is not really exports that count, but net exports. An increase in overall world trade
is generally a good thing, but if our imports more than double while our exports just double, the
U.S. will be in far worse condition five years from now than it is today.

That is what seems to be happening. Our imports jumped to $200.35 billion from $194.42 billion in
May (up 3.1%) and from $155.01 billion a year ago (up 29.2%). At that rate, our imports would
almost quintuple over five years.

Chart Seven3 shows the long-term path of our imports and exports (the trade deficit being the
distance between them). The Great Recession caused an absolute collapse in world trade, and
with it a sharp drop in the U.S trade deficit, but now world trade is recovering, and with it so is the
U.S. trade deficit.

Without the drop in the trade deficit, the decline in GDP would have been far worse during the
worst part of the Great Recession. For example, in the first quarter of 2009, GDP would have
dropped over 9% rather than "just 6.4%" without the drop in the trade deficit.

3


Chart Seven
U.S. Trade: Exports and Imports

A big part of our goods deficit comes from our oil addiction, but that has not been the main factor in
the increase in the trade deficit. Our petroleum deficit fell to $21.20 billion in June from $21.49
billion in May (down 1.3%) and is up from $17.04 billion a year ago (up 24.4%). It was our non-oil
deficit that jumped in June to $40.02 billion from $32.23 billion in May (up 24.2%) and from $21.10
billion a year ago (up 89.7%).

In other words, oil has dropped to 42.5% of our total trade deficit from 62.8% a year ago. Chart
Eight4 breaks down the trade deficit (blue line) into its petroleum (black) and non petroleum (red)
parts over time.

4


Chart Eight
Oil and Non-Oil Trade Deficit

It appears that the strength of the dollar in recent months due to the Euro crisis is already starting
to take its toll on U.S. international competitiveness. It is not just that our trade deficit with Europe
is deteriorating, rising to $7.8 billion in June from $6.2 billion in May. Our companies compete
directly with European companies in many third-world countries.

We need to see the dollar weaken to get the non-oil part of the trade deficit under control. That will
make U.S. goods more competitive abroad, and will also make imports more expensive. As a
result, domestic producers like Ford (F - Analyst Report) would take market share from foreign firms
like Toyota (TM - Analyst Report), or, more likely, firms like Toyota would move still more of their
production to the U.S. rather than importing cars from Japan. In either case, it would result in more
employment here in the U.S. and is not limited to just the Auto industry. Since oil is priced in
dollars, it will tend to go up in price when the dollar gets weaker, so a weak currency will not really
solve that part of the problem.

The trade deficit is more like a cancer on the economy. It is what leads the U.S. to be indebted to
the rest of the world, not the budget deficit. After all, during WWII, the U.S. ran budget deficits that


were far larger as a share of GDP than what we are running today, but we financed them internally,
through the selling of war bonds. We emerged from the war as by far the world's largest creditor,
not in hock to the rest of the world as we are now.

Unless the price of oil were to collapse to the very low levels that prevailed in the late 1990's, the
oil side of the equation is going to be a constant thorn in the side of the economy. After all, 42.5%
of the overall deficit is still a very significant part of the problem. For the most part, oil is used as a
transportation fuel. Very little of it is used to generate electricity anymore.

We need to find a way to cut back on the amount of oil we use for transportation. Moving to more
efficient cars would be a great help. However, as a nation, we suffer from Alzheimer's. We have
already seemed to have forgotten the pain of high oil prices two years ago. In July, as Detroit was
rebounding from a year ago, it was sales of pickup trucks and SUVs that were leading the way,
while small fuel efficient cars were languishing on the lots.

For more on the trade deficit see: Trade Deficit Jumps to $49.9B and for a discussion of the May
data see: Trade Deficit Gets Even Worse.

Getting Hotter

The reasons for using less oil go far beyond just the trade deficit, although the threat of national
bankruptcy from a persistent trade deficit and imported oil’s centrality to it should be more than
enough. There are worse things possible than just the relative impoverishment of our country.
There is the potential end of civilization as we know it, not just here but around the world.

Here are the highlights (and a map5 showing temperature anomalies around the world) from the
latest National Oceanic and Atmospheric Administration report on current climate conditions (full
report here):

“The combined global land and ocean average surface temperature for June 2010 was the
warmest on record at 16.2°C (61.1°F), which is 0.68°C (1.22°F) above the 20th century
average of 15.5°C (59.9°F). The previous record for June was set in 2005.
June 2010 was the fourth consecutive warmest month on record (March, April and May
2010 were also the warmest on record). This was the 304th consecutive month with a global
temperature above the 20th century average. The last month with below-average
temperature was February 1985.
It was the warmest June and April–June on record for the Northern Hemisphere as a whole
and all land areas of the Northern Hemisphere.
It was the warmest January–June on record for the global land and ocean temperature. The
worldwide land on average had its second warmest January–June, behind 2007. The
worldwide averaged ocean temperature was the second warmest January–June, behind
1998.”

While this report does not prove that global warming is occurring, it is far more persuasive
evidence than that the February blizzards proved that global warming was some sort of hoax.
Actually, since warmer air carries more moisture, global warming will tend to mean bigger
precipitation events, and if they happen in the winter, it means more snow. Thus, the blizzards
were not evidence against global warming, but rather consistent with it.

5
http://www.ncdc.noaa.gov/sotc/?report=global&year=2010&month=6&submitted=Get+Report


Chart Eight
A Long Hot Spring

Current Problems Appear to be Related to Global Warming

While it would be a mistake to say that any single weather-related event is due to global warming,
we appear to already be seeing the consequences. It should be alarming that it has consistently
been well over 90 degrees this summer in Moscow, leading to massive fires that have choked the
city with smoke. The massive floods in Pakistan seem to be tied not just to a stronger than normal
Monsoon, but also to the melting of the glaciers in the Himalayas.


As shown in Chart Nine6 below, sea ice in the Arctic continues to shrink at an alarming rate. The
fires in Russia and the shrinking sea ice raise the disturbing possibility that the world has already
reached a tipping point, and from now on, global warming may be more caused by Mother Nature
than by direct human burning of fossil fuels. The peat bog fires around Moscow are releasing
massive amounts of CO2 into the atmosphere, the thawing of the permafrost is releasing lots of
methane (molecule for molecule over 25x more potent as a global warming gas than CO2) into the
atmosphere, and with the melting of the sea ice, more sunlight is absorbed by the dark sea rather
than being reflected back into space. The extreme warmth in the northernmost latitudes is where
those positive feedback loops are going to cause the most trouble.

Chart Nine
The Melting Arctic

Cheap Insurance for an Uninsurable Risk

If the rising temperatures were to lead to the melting of the Greenland or Antarctic ice caps, (and
an iceberg more than four times the size of Manhattan just broke off from Greenland) the
consequences would be far beyond anything that could be insured. Many, if not most, of the major
cities of the world would literally be underwater (and not just be worth less than the mortgage).

It is not just the absolute level of the temperature that is the problem, but the fact that it is changing
rapidly. If, for example, the world had been five degrees (F) colder for recorded civilization,

6
http://www.ncdc.noaa.gov/sotc/?report=global&year=2010&month=6&submitted=Get+Report


civilization would still have probably come about. However, the ice caps would have been much
larger, and sea levels correspondingly lower. As a result, New York City would have probably been
built well out into what is now the Atlantic. The process of going to current temperatures would
have been just as disastrous as moving to a world five degrees hotter from current temperatures.

We don’t know for sure that global warming is occurring, although the preponderance of the
evidence is pretty high that it is. Then again, I don’t know for sure that my house will burn down in
the next year, yet I still buy a homeowners insurance policy. Shifting the tax system to one that is
more based on the amount of carbon we use than one based on the amount of income we earn
seems to be a very cheap insurance policy.

A steep and rising tax on oil would mean that the magic of the market would be turned to finding
ways to use energy more efficiently, or to finding alternative sources. Firms able to do so would
reap enormous profits, and if their competitors were able to cut energy costs and they were not,
their companies would suffer. The cap-and-trade bill that is currently under consideration in the
Senate is at best a weak first step, but it is a step in the right direction.

Of course, it will not really matter if we cut our carbon emissions and countries like China -- which
just passed us as the largest energy-consuming country -- don’t do anything. However, it seems to
me that it is a lead pipe cinch that if we don’t act, neither will they. Cumulatively, we have put the
bulk of the CO2 in the atmosphere, and on a per capita basis we still put out far more CO2 than do
the Chinese.

However, we would have to offset the carbon taxes by cutting other taxes. Since a carbon tax
would be on the regressive side, the best way to do the offset would be to use the funds to cut the
payroll tax, which is extremely regressive. Cutting the payroll tax would also give employers an
incentive to hire, thus helping cut unemployment. Very cheap insurance indeed. For more see:
Hot!

Housing to Collapse (Again)?

In July, Housing Starts rose to a seasonally adjusted annual rate of 546,000, an increase of 1.7%
over the 537,000 rate in June. However, the June rate was revised down from 549,000, so relative
to where we thought we were yesterday, it is a decline of 0.5%. Relative to the 587,000 pace of a
year ago, it is a drop of 7.9%. Housing was not exactly booming a year ago, when we were near
the deepest point of the Great Recession.

The numbers are even weaker than they appear in the headline number. All of the strength was in
the extremely volatile Condo and Apartment segment. Starts of single-family houses fell 4.2% to
an annual rate of 432,000 from 451,000 in June and were down 13.6% from the 500,000 annual
pace of a year ago. Starts in buildings with five or more units rose to 95,000 -- a gain of 17.3%
from June, and up 31.9% from last year. This is happening in the face of the lowest mortgage
rates on record.

As Chart Ten7 shows, normally housing starts, particularly single-family starts, start to increase
significantly before the recession officially ends, and continue to rise sharply in the early part of
recoveries. Now we have a huge inventory overhang of existing homes (which are very good
substitutes for new homes), especially if one counts the shadow inventory of houses that are in --
or about to go into -- the process of foreclosure.

7


Thus, even though mortgage rates are at extremely low levels, housing starts are still going
down. While we are a little bit off the worst levels hit in late 2008 and early 2009, the level of
housing starts is still below the worst levels on record prior to the Great Recession.

The best indicator of future housing starts is Building Permits. There, the news was not anymore
upbeat. Permits fell 3.1% from June to an annual rate of 565,000, and were down 3.7% from a
year ago. For the month, single-family permits were down 1.2% to an annual rate of 416,000 while
permits for structures of 5 or more units (measured by unit, not by number of structures) fell 9.2%
to a rate of 129,000. The picture is very different on a year over year basis as single-family permits
are down 13.2% while Condo permits are up 44.9%.

For more on Housing Starts and Permits see: Housing Starts Still Weak . For a discussion of the
June numbers see: Housing Starts Sink Again.

Chart Ten
Housing Locomotive Derailed

Underwater Housing

One of the central reasons for the recession -- and for the anemic recovery from it so far -- has
been the popping housing bubble. Housing is, for most homeowners, a highly leveraged
investment. Even the old conservative rule of a 20% down payment is a far more leveraged
position than is allowed when buying stocks, where at least 50% down is required. During the


housing bubble, almost no one was putting 20% down anymore, and down payments of under 5%
were common.

Even long-time owners were encouraged by the banks to treat their houses as if there was an ATM
in the kitchen next to the toaster oven. Cash-out refinancing and homeowners lines of credit were
common. In fact, even during the huge run-up in housing prices, the percentage of equity people
had in their houses did not rise significantly on average nationwide. People assumed that housing
prices would never fall and so it was safe to spend the equity gains that occurred as housing prices
rose.

Then, as prices fell, the equity in houses fell even more sharply as a result, wiping out trillions of
dollars of wealth. It also resulted in huge numbers of people being “underwater” on their
mortgages, owing more than the house is worth.

Being underwater is a necessary condition for a foreclosure to happen. If the homeowner has
positive equity in a house, he will always be better off simply selling the house rather than let it slip
into foreclosure. It is, of course, not a sufficient condition.

Chart Five8 shows the percentage of homes with mortgages that are underwater (solid blue line,
left scale). It doesn’t matter if the house with the $250,000 mortgage is worth $249,000 or $49,000,
as long as it is worth less than the amount of the mortgage it is included.

At one time, it was common for people to have mortgage-burning parties where people celebrated
the last payment to the bank on the house. That has not died out, and about one third of houses in
the country actually have no mortgage on them at all. Some of those are all-cash investors, but
mostly it is older people who have lived in the house for a long time and finally paid it off. Thus the
percentage of homes in the country that are underwater is significantly less, just under 20% rather
than over 30%, as is shown by the dashed blue line.

The red line shows the total value of the underwater mortgages to be about $2.4 trillion, down from
a peak of about $2.6 trillion in the second quarter of 2009, but up from under $500 billion in 2006.
Of course, there have been a lot of foreclosures over the past few years, and homes that have
already been foreclosed on are not under water.

For more on this see: Housing: Still Flooded.

Chart Five
Underwater Homeowners

8


New Homes Sales Bounce, But Still Ugly

New Home Sales rose 23.6% in June from May to a seasonally adjusted annual rate of 330,000.
However, the May total was revised down sharply from a rate of 300,000 to 267,000. Thus, relative
to where we thought we were, the increase was more like 10%.

Relative to a year ago, sales were down 16.7% from last year’s rate of 396,000. On a not-
seasonally-adjusted basis, sales were just 30,000 for the month -- the weakest June on record.

As the graph below (from http://www.calculatedriskblog.com/) shows, new home sales normally
rise sharply towards the end of recessions, and are one of the most important locomotives pulling
the economy out of recessions. This time around, the locomotive is derailed.

Except for May, the June level of new home sales would have been the lowest on record, and the
records go all the way back to the Kennedy administration. They are also 76.2% below the peak
set in July 2005 at the height of the bubble. The previous record low (prior to the Great Recession)
was set in September 1981, back when mortgage rates were in the high teens, whereas in June,
the average rate for a 30-year fixed mortgage was just 4.74%.

For more on new home sales in June see: New Home Sales Up in June and for a discussion of the
May numbers see: New Home Sales Collapse .

Chart Six
New Home Sales Near Record Low


Existing Homes Sales to Fall Sharply

Existing Home Sales fell 5.1% to an annual rate of 5.37 million in June from a rate of 5.66 million
in May, although that was 9.8% above the 4.89 million annual rate a year ago. The rate was,
however, well above the 5.09 million rate that was expected by the consensus of economists.

However, existing home sales are recorded when the sale is closed. While to get the homebuyer
tax credit of up to $8,000 the contract had to be signed by the end of April, people had until the end
of June to close on the sale. Thus, the June number is artificially inflated and is likely to fall sharply
in July. Inventories of existing homes rose by 2.5% to 3.99 million.

As shown in Chart Seven9 the months of supply at 8.9 months, up from 8.3 months in May. It is
very likely that the months of supply will rise back into the double digits in July. A healthy housing
market has under 6 months of inventory available. The combination of sharply lower sales in July
and August with the higher inventories are going to push the months of supply back up again,
possibly into double digits.

That, in turn, is likely to put significant downward pressure on housing prices. As that happens,
more and more people will become underwater on their houses, owning more on the mortgage
than the house is worth.

9


For more on the June numbers see: Existing Home Sales Fall 5.1% and for a discussion of the May
numbers see: Used Home Sales Disappoint.

Chart Seven
Existing Homes Months of Supply Headed Higher

Earnings Still Doing Great

The second quarter earnings season is shaping up to be a very strong one. A total of 456 (91.2%)
of the S&P 500 firms that have already reported. The median surprise so far is 6.12% and there
have been 341 positive surprises and only 78 disappointments (surprise ratio of 4.37) as far as
EPS is concerned. As for growth, the total net income of those 456 firms is 38.7% higher than it
was a year ago. For those firms, that is down from the 49.6% growth they posted in the first
quarter.

As far as the top line is concerned, the story is also upbeat. Positive surprises lead
disappointments by 270 to 158, or a surprise ratio of 1.71 and a median surprise of 1.06%. Total
revenue is 11.4% higher, down from the 13.1% growth those same firms saw in the first quarter.


However, there seems to be an asymmetrical response in the market. Firms are not being
rewarded if they post a positive surprise, but are punished severely if they disappoint, particularly if
they disappoint on the top line.

Looking ahead to the third quarter, the comparisons continue to get tougher, and growth is
expected to drop to 15.9% among those that have not reported yet, and to 17.4% for those that
have already reported, or about 17% in total. For an economic recovery that seems to be very
sluggish and lethargic, that is still very impressive. With 9.5% unemployment and very sluggish
growth in median real wages, there are lots of reasons for the average American to complain. But
for the business community to complain it show itself to consist of a bunch of spoiled crybabies.

For the full year, earnings are expected to grow 41.6% in 2010, with further growth of 15.2% in
2011. Next year we should once again set a new all-time record high for S&P 500 earnings. That
will be long before employment returns to record levels.

Keep in mind that these results refer to the S&P 500, which are almost by definition, big
businesses, many of which get a majority of their earnings from overseas. Small businesses have
not been faring as well, and have had a hard time getting access to capital. An effort to aid small
businesses through a package of loans and tax cuts was recently blocked by a filibuster in the
Senate, even though many of the Senators that voted to prevent a final vote on the bill were co-
sponsors of the legislation. Since small businesses are the principal driver of job creation, one can
only conclude that those U.S. Senators want to keep unemployment as high as possible, at least
through November.

The S&P 500 is selling for 18.8x 2009 earnings, but just 13.2x 2010 and 11.5x 2011 earnings. By
historical standards that is quite cheap. Normally, when interest rates and inflation are low, P/E
ratios are higher than average. Well, we currently have some of the lowest rates of inflation in
decades and interest rates are at near record lows. It only costs the government 2.67% to borrow
for 10 years. It is not hard to find good, solid blue-chip companies that are providing dividend
yields of more than that, and not just a bunch of electric utilities, either.

One thing is certain -- the coupon on a 10-year t-note will not increase over the next 10 years. The
odds of the likes of Johnson & Johnson (JNJ, 3.71%), McDonald’s (MCD, 3.06%) or DuPont (DD,
4.07%) increasing their dividend in the next 10 years is pretty high. Currently 134 S&P 500 stocks
yield over 2.7%, and 86 of those have payout ratios of less than 60%. Earnings that are not paid
out in dividends are reinvested for future growth, or are used to buy back stock, which also lifts
earnings per share. Based on this year’s earnings, the earnings yield is 7.58% and based on next
year it is 8.70%.

The table on the next page shows the earnings surprises by sector.


Table One

Earnings Surprises in the Second Quarter

Scorecard & Earnings Surprise 1Q Reported
EPS EPS # #
Yr/Yr % Surprise
Income Surprises Surp Surp Grow Grow
Growth Reported Median
Pos Neg Pos Neg
Auto 808.63% 100.00% 37.73 5 1 6 0
Consumer Discretionary 25.37% 94.12% 12.38 27 3 26 6
Transportation 73.88% 100.00% 9.09 8 0 9 0
Conglomerates -1.81% 100.00% 8.82 8 0 7 2
Oils and Energy 95.39% 95.00% 7.77 29 9 28 10
Computer and Tech 64.40% 83.33% 7.69 40 12 53 7
Finance 37.65% 98.70% 7.18 59 13 53 22
Utilities 6.62% 97.67% 6.96 29 11 27 14
Industrial Products 64.79% 85.00% 6.52 15 2 13 4
Aerospace -1.73% 100.00% 5.32 8 2 5 5
Consumer Staples 7.01% 89.19% 5.04 25 6 25 8
Construction 1060.00% 100.00% 5.00 7 1 9 2
Basic Materials 114.14% 100.00% 4.92 15 6 21 2
Business Service 20.01% 94.74% 3.75 14 0 15 3
Medical 17.54% 95.74% 3.20 37 5 35 10
Retail/Wholesale 14.47% 61.36% 1.32 15 7 21 6
S&P 500 38.72% 91.20% 6.12 341 78 353 101

TOP RATED INDUSTRIES BY ZACKS INDEPENDENT RESEARCH

Autos
The industry is recovering from a near total collapse last year. It has done a very good job
of cutting costs and now with production picking up, it is well positioned to profit. The
collapse last year brought car sales to well below the scrappage rate, so there will be lots of
pent up demand. Consider the parts makers and the auto dealers in addition to the likes of
Ford.
Semiconductors


As the world economy picks up, so will spending on technological gadgets. Smart phones
like the BlackBerry and the iPhone are becoming things carried by ordinary people, rather
than just power users. Corporations have been conservative in spending on new computers
over the last few years both due to the recession and because of the lack of a viable new
operating system. Microsoft’s Vista was widely panned, but Windows 7 is getting good
reviews, which should entice firms into upgrading the increasingly antiquated PC’s on
people desks. All of these things mean more demand for semiconductors. Other tech
components like disk drive makers are also well positioned to benefit.

LOWEST RATED INDUSTRIES BY ZACKS INDEPENDENT RESEARCH

Real Estate Investment Trusts
There is a glut of supply for almost all classes of commercial real estate. This is leading to
higher vacancy rates and falling effective rents (often hidden by things like higher
remodeling allowances and months of free rent). While commercial construction activity has
started to decline, there are still a lot of new office buildings, regional and strip malls, etc.
that have just come on line or which are still in the pipeline. It will be hard to absorb that
space with unemployment rising. Furthermore, cap rates (sort of like an earnings yield or
inverted P/E for stocks) are not very attractive at this point.

Banks
Credit quality has started to deteriorate sharply and the trend will continue for a long time.
The losses that the banking system will absorb are truly massive. Right now the focus has
been on bad residential mortgages, but there is reason to believe that bad credit will spread
to other areas, most notably the commercial real estate sector. The regional banks are
much more exposed to commercial real estate than are the “too big to fail” banks, and are
particularly low rated on the Zacks rank. If the economy slows, credit quality is likely to
deteriorate even more sharply. We have already seen significant weakness in the mortgage
market; even prime mortgages are under stress. Now things seem to be spreading to other
consumer sectors such as auto loans and credit cards. In general, the more exposure a
bank has to spread income and the mortgage market, the more you want to avoid it. The
more it makes its money from fees, the better it looks. While we would underweight
Financials, it is too important a sector to be naked in. We would favor insurance companies
over banks (but not the financial guarantee firms).

Investment Brokers
Financial reform legislation is likely to curb the profitability of Wall Street, and there is always
the risk that the sort of things that Goldman Sachs is being investigated for will spread to the
rest of the industry. The recent correction and generally low trading volume will also slow
profit growth.

I know my comments are often controversial. I welcome replies, both pro and con, although I
prefer well-reasoned responses to flames. If you see flaws in my logic, I especially welcome
your responses. Feel free to e-mail me at dvandijk@zacks.com

List of Links to Blog Posts
An x denotes that it has been linked earlier in the report. This listing is in approximately (reverse)
chronological order, and covers more than a month, so the same topic is sometimes addressed in more


than one post, but is based on the earlier data. An “X” next to the link indicates that it was also linked earlier
in this report.

Housing Starts Still Weak x
Factory Output Jumps in July
Deflation Diverted or Delayed?
Extended Claims Soar
Deleveraging and Deficits
Trade Deficit Jumps to $49.9B x
Fed to Reinvest Cashflows
The Problem of the F's
Post-Recession Private Job Growth x
Employment Report In-Depth x
Social Security Still in Good Shape x
Initial Jobless Claims Bounce Back
ISM: Services Sector Accelerating
ADP Sees Private Sector Gain Jobs
Savings Rate Rising
ISM Better than Expected
Housing: Still Flooded x
In-Depth: 2nd Quarter GDP Growth x
Why the Recession Ended x
Initial Jobless Claims Dip
A List of Cheap, Big-Cap Stocks
Durable Goods Disappoint
Home Prices Rise in May
New Home Sales Up in June x
Initial Jobless Claims Jump Back Up
Existing Home Sales Fall 5.1% x
Potential Revenue Disappointers
Hot! x
Housing Starts Sink Again x
Basic (But Dismal) Math
Inflation or Deflation?
Factory Output Falls 0.4%
Initial Jobless Claims Plunge, But...
Trade Deficit Gets Even Worse x
Initial Jobless Claims Retreat
Fed Lowers Economic Outlook, Rates Unchanged
New Home Sales Collapse x
Judge says 'Go Ahead and Drill'
Used Home Sales Disappoint x

DISCLOSURES & DEFINITIONS

The analysts contributing to this report do not hold any shares of TLM. The EPS and revenue forecasts are the Zacks Consensus
estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts’
personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts’ compensation was, is, or will be,
directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the
securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable,
but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be
construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to
change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or
its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time
to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will
outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in
line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under
perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the
989 companies covered: Outperform - 13.1%, Neutral - 79.5%, Underperform – 6.8%. Data is as of midnight on the business day
immediately prior to this publication.

Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends
in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The
model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4
= Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term
attractiveness of a company’s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1


and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed
the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into
five groups, based on each stock’s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk,
th
while the 5 group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and
Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively.

Important Notes on Zacks Asset Allocation:
Investors who fit our Aggressive category will tend to be younger investors who have the time horizon to weather volatile short-term
fluctuations to their total portfolio. The emphasis for Aggressive investors will be on growing their portfolio through future price
appreciation. These investors may have a higher weighting of their total portfolio in small-capitalization stocks. Moderate investors will
seek both growth through future price appreciation and income growth as well. They may hold some small-capitalization stocks. Moderate
investors will also selectively hold some dividend paying stocks and high grade corporate and government bonds. Conservative investors’
main goal will be on preservation of capital. Their emphasis will be to maintain current income while protecting the nest egg they have
accumulated over the years. These investors are not willing to tolerate short-term fluctuations in portfolio value. We recommend investors
use our current target allocations as a starting point to determine their ultimate exposure to stocks, bonds and cash. We do realize
everyone’s circumstances vary, and depending on situations, objectives and risk tolerance, a more personalized allocation may better
suite their needs.


Zacks Pro Stimulus Analysis

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