Michael Vaughn

Below the Fold News

With all of the negative press over the past year regarding the economy, I'm sure you may be thinking, "will things ever get better?"

It can be a depressing time to watch the news and read the headlines. Up to this point, I think it is important for all of us to step back and see the entire picture.

Here are some news "headlines" that are "below the fold" in some newspapers and media outlets.

* AT&T to bring back 4,000 outsourced support center jobs from overseas.

* KIA, the auto company, is hiring 600 workers for their plant in Lagrange, GA.

* Microsoft Corp announced plans to open its own chain of branded stores as it looks to catch up with rival Apple Inc's successful move into retailing.

* Intel Corp plans to invest $7 billion over the next two years to build advanced manufacturing facilities in the United States that make faster, smaller chips that consume less energy. The announcement comes less than a month after the world's largest maker of microprocessors used in personal computers said it would close plants in Southeast Asia and scale back U.S. operations under a restructuring that affects as many as 6,000 employees.

* Panera Bread Co., the chain of 1,250 bakery-cafes, plans to take advantage of its debt-free balance sheet and the U.S. real estate slump to open as many as two locations a week in 2009, said Chief Executive Ronald Shaich.

* Allegiant Airlines has announced 25 new routes since August and plans to increase its capacity 21% in the second quarter, not including the buildup of service to Los Angeles International Airport from a dozen communities it already serves. The airline carried 3.9 million scheduled passengers last year, up 29% from 2007, and flies its planes about 90% full.

The U.S. by far remains the world's leading manufacturer by value of goods produced. It hit a record $1.6 trillion in 2007 -- nearly double the $811 billion in 1987. For every $1 of value produced in China's factories, America generates $2.50. - article by Stephen Manning, Associated Press

America makes things that other countries can't. Today, "Made in USA" is more likely to be stamped on heavy equipment or the circuits that go inside other products than the TVs, toys, clothes and other items found on store shelves.

U.S. companies have shifted toward high-end manufacturing as the production of low-value goods moves overseas. This has resulted in lower prices for shoppers and higher profits for companies. When demand slumps, all types of manufacturing jobs are lost. Some higher-end jobs -- but not all -- return with good times. Workers who make goods more cheaply produced overseas suffer.

Once this recession runs its course, surviving manufacturers will emerge more efficient and profitable, economists say. More valuable products will be made using fewer people. Products will be made where labor and other costs are cheaper. And manufacturers will focus on the most lucrative products.

Housing

Will there be a recovery in housing? Consider these numbers: There are about 130 million homes in the U.S. If the current annual rate of housing starts were sustained at 466,000, the average age of homes would go up to 279 years (that's assuming zero expansion in the stock of homes, despite a rising population.) This is about 40 years older than Thomas Jefferson's Monticello! Typically, the "replacement rate" of homes is 70 years.

Autos

There are now about 240 million vehicles in the U.S., including those owned by individuals and businesses. In December 2008, vehicles sold at a rate of 10.3 million annually. At that pace, it would take 23.4 years to replace all the cars and trucks now on the road in the U.S. Normally, the replacement rate for auto sales is 13 years, and even at the bottom of the recession in 1981-1982 it was only 16.3 years.

What does all this mean?

The "thumbnail" version means economic activity will improve. Sooner, rather than later, we will need more homes and cars just to replenish the older ones. This doesn't even include all the consumer products we continue to purchase.

I recently went out to eat at a local restaurant on a Thursday night and people were waiting for tables to become available. I will soon be purchasing a new chain saw to cut wood for my wood stove for next year. My wife and I will soon take a short trip to celebrate our 10th anniversary. We will be buying gasoline for the car, a hotel room at a very nice hotel -- I couldn't talk her into Motel 6!! We will eat out at restaurants and probably do a little shopping. And I doubt that we will be the only Americans doing these types of spending.

The real question we all want an answer to is not "if" the economy improves but "When" will it improve? That, of course, is hard to pin down with any specificity. I do know this, we are much closer to the turnaround point than we were a day ago, a week ago, or even a month ago.

The chart below is based on the S&P 500 from 1930 to 2008, You can see how much the returns have been over the 1, 3, 6, 9, and 12 month periods after the market turnaround begins. Bull markets have averaged 45% return in the first twelve months after the market reaches the turnaround point.

(Sorry Chart not available)

How much does the market recover?

From a historical perspective, When markets and economies look their worse is the typical starting point of market recoveries. We are likely to see unemployment rising long after the stock market has begun improving. Remember, investing is like air flight…we will encounter turbulence along the way, but it is still the best method to get somewhere quickly. I understand how challenging it is to maintain investment perspective during times like these. I do believe we are near a point where the long term investor will be rewarded for their patience.

Sincerely,

Michael

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