December, 2010


The final third quarter GDP report revision showed that the U.S. economy grew at a 2.6% rate. Retail sales through November 2010 were 8% better than through November of 2009. Anecdotal reports from retail outlets, and credit card companies indicate that December retail sales were higher than the prerecession high set in December 2007 and double digits higher than 2009. Career Builder’s recent employer survey indicates that twice as many employers are looking to hire than at this same time last year.

State and local government finances typically lag behind the general economy because the value of the property and income being taxed is often a year old. As a result you should expect quite a lot of negative news regarding municipal finances. Unfortunately credit default swap derivatives have invaded the municipal market and these may exacerbate some of the states’ problems. It is important to put things into perspective. For example, California, the lowest rated state, will have $86 billion of revenue in 2011. $36 billion will be allocated to education (the first expense that gets funded) which leaves $53 billion to cover $7 billion of interest payments on their bonds (the second expense that gets funded). The headlines will sound bad, expenses will be cut, some debt restructuring may occur, but we do not foresee major municipal defaults.

According to Norman Fosback, editor of Fosback’s Fund Forecaster, the U.S. economy from a gross domestic product perspective, has completely recovered to the peak achieved before the great recession of 2008. A sustained period of real growth, not just recovery, would be positive for stocks.