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WELLS FARGO INVESTMENT MANAGEMENT

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WELLS FARGO INVESTMENT MANAGEMENT Powered By Docstoc
					THE ECONOMIC & FINANCIAL MARKET
     OUTLOOK THROUGH 2004:
  What Next For The U.S. & California
             Economies?

   A Presentation To The Annual CMTA
        Pre-Conference Workshop
      South Lake Tahoe, California
              April 19, 2004
           ANOTHER "JOBLESS RECOVERY"
Cumulative % Change In Private, Non-Farm Payrolls Before
            And After The Cyclical Low Point
    7
              Recession            Recovery
C
U   6
M                                                    Avg., Past 6 Long
U   5                                                Economic Cycles*
L
A
T   4
I
V
E   3

G 2
R                                                            3/90-7/92 Cycle
O
W 1
T
H
  0
                                                        Current Cycle, 11/00-3/04
   -1
     -12 -10 -8 -6 -4 -2 0 2 4 6 8 10 12 14 16 18 20 22 24 26
                 Months Before And After The Cyclical Low In Economic Activity
 * Based on six economic cycles back through 1953.
 Source: U.S. Commerce Department
"MISERY'S"* WARNING FLAG FOR THE PRESIDENT
            Cumulative % Chg. In The "Misery Index*"
20%

                                Current Recovery
15%                               (11/01-3/04

10%


 5%


 0%


-5%
                                       3/91-7/93 Recovery
-10%


-15%
       0    3       6       9      12       15     18     21      24     27      30      33      36
                                   Months From The Start Of Recovery
* Avg. of inverted index for job gains, rolling 12-mo. periods, and an index of retail gasoline prices.
   Sources: U.S. Dep'ts. Of Energy and Labor
INVENTORIES UNUSUALLY "LEAN" VS. SALES
             Business Inventory-Sales (I/S) Ratio
1.49

1.47      Rolling 3-Year
              Avg.
                                                    Monthly
1.45

1.43

1.41

1.39

1.37

1.35

1.33
                                                                          2/04
1.31
  Dec-96     Dec-97     Dec-98    Dec-99   Dec-00     Dec-01   Dec-02   Dec-03
     Source: U.S. Department Of Commerce
                 U.S. EXPORT ORDERS RESPOND
                          TO A WEAKER DOLLAR
       % Rept'g An Increase                                                  Index: 2000=100
  60                                                                                        112
                                                                  Export Orders, Mfd.
                                                                       Goods
                                                                     (Left Scale)           110
  58
                                                                                               108
  56
                                                                                               106
  54
                                                                                               104

  52                                                                                           102
                                                                                       3/04
                                                                                               100
  50
                                                                                               98
  48                                                   "Real Trade-Weighted" $*
                                                             (Right Scale)                     96
  46
                                                                                               94

  44                                                                                           92
   Dec-98          Dec-99           Dec-00         Dec-01         Dec-02          Dec-03
* Based on the dollar's inflation-adjusted, trade-weighted exchange rate against 44 other currencies.
 Sources: Nat'l Ass'n Of Purchasing Mgrs.; J.P. Morgan & Co.
 A BETTER SHOWING BY CALIFORNIA DURING THE
          CURRENT ECONOMIC CYCLE
         Non-Farm Job Growth; Year-Ago Percent Change
4.5%
                                                         CA

3.5%


2.5%
                                                         U.S.
1.5%

                                                                                   3/04
0.5%


-0.5%                                  Note: Bars Denote U.S. Recession
                                                  Periods
-1.5%


-2.5%
   Dec-89     Dec-91      Dec-93     Dec-95     Dec-97      Dec-99        Dec-01   Dec-03
       Source: U.S. Dep't Of Labor
TRADING PLACES: NORTHERN CALIFORNIA ON THE
 LEADING EDGE OF THE ECONOMIC SLOWDOWN
                Yr-Ago % Change In Non-Farm Payrolls
6.2%
5.2%
4.2%
3.2%
                      Central Valley
2.2%
1.2%
0.2%
-0.8%                                                                           2/04
-1.8%
-2.8%                                                     No. California
                     So. California
-3.8%
-4.8%
                                        Note: Bars Denote Recession
-5.8%                                           Periods
-6.8%
-7.8%
    Dec-89     Dec-91     Dec-93       Dec-95    Dec-97     Dec-99     Dec-01   Dec-03
      Source: U.S. Dep't Of Labor
         CALIFORNIA'S ECONOMIC GROWTH DRIVEN BY
           "DOMESTIC," NOT “EXPORT” INDUSTRIES
                  Year-Ago Percent Change In Employment, March 2004
6%
                                            "Export" Industries
5%
4%                                          "Domestic" Industries
                                                                   F
3%                                                                 I
                                                                   n S
2%                                                                 l v
                                                                     c
1%                                                                   s




                                                                                       Prof & Bus Svcs


                                                                                                         Educ & Health
                                               Software Pub.
                      Resid. Constr.




                                                                         Real Estate




                                                                                                                         Leisure &
0%




                                                                                                                         Hosp.ity
      Total Nonfarm




-1%                                                                M




                                                                                                            Svcs
                                       T                           o
                                       e                       I   t P
-2%                                                            n
                                       c                           I I




                                                                                                                                     Government
                                       h                       t   o c
-3%                                                            e   n t
                                       M                       r     u
-4%                                                            n     r
                                        f
                                       g                       e     e
-5%                                                            t     s
-6%
-7%
      Source: California Employment Development Department
          A MORE VULNERABLE CA HOUSING MARKET
                TO HIGHER INTEREST RATES?
% Of Households Qualifying For The Median-Priced Home, By Selected
                               Area
60



50
                        12/96

40                           12/00
                                 2/03
                                   2/04
30



20



10



 0
             U.S.              CA               LA   SF   Cent. Valley
     Source: California Association Of Realtors
ECONOMIC OUTLOOK: THE U.S. AND CALIFORNIA
         ECONOMIES COMPARED
  Year-To-Year Percent Change, Unless Otherwise Specified
                                                                               Forecast
                         1991    1992   1993     2000   2001   2002   2003   2004 2005

"Real" GDP/ GSP
 U.S.                     -0.9    2.7    2.7     3.7    0.5    2.2    3.1    4.1    3.0
 California               -1.9   -1.2   -0.8     6.5    -1.3   1.9    3.0    3.7    2.7

Unemployment Rate (%)
 U.S.                 6.9         7.5    6.9     4.0    4.8    5.8     6     5.8    6.0
 California           7.7         9.3    9.4     4.9    5.4    6.7    6.7    6.2    6.2

Housing Starts/Permits
 U.S. (Starts, MM)       1.01     1.2   1.29     1.57   1.60   1.71   1.85   1.86   1.67
 California (Permits, Th) 105     98     84      149    149    168    198    196    189


Other Key California Data
Tax. Retail Sales(% Chg.) -3.9    0.6   -0.1     12.0   0.0    -0.2   3.1    4.2    4.9

Population (% Chg.)       2.3    2.1    1.3      1.9    1.9    1.7    1.6    1.5    1.4
Net Inmigration (Thus)    224    225    -45      322    364    308    251    237    199

Source: The UCLA Anderson Forecast, March 2004
AGGRESSIVE COST-CUTTING HELPS SUSTAIN THE
    RECOVERY IN MARGINS AND PROFITS
Year-Ago % Change, Selling Prices Vs. Non-Farm Unit Labor
 5%
                         Costs*
                                                      Margin Pressure
                         Note: Bars Denote
 4%                      Recession Periods

 3%

 2%                              Selling Prices


 1%                                                                       '03Q4

 0%

 -1%                                      Unit Labor Costs
                     Margin Expansion
 -2%

 -3%

 -4%
   Mar-89    Mar-91    Mar-93    Mar-95      Mar-97   Mar-99   Mar-01   Mar-03
      Source: U.S. Commerce Dep't.
 WEAK "PRICING POWER" DRIVES A TECH-LED
         INVESTMENT RECOVERY
 Year-Ago Percent Change, Inflation-Adjusted Spending
28
                 Info Processing Equipment
24
                                                                       '03Q4
20
16
                                             Low-Tech Equipment
12
 8
 4
 0
 -4
 -8
              Structures
-12
-16                                Note: Bars Denote
-20                                Recession Periods

-24
01-Mar-91        01-Mar-94          01-Mar-97          01-Mar-00   01-Mar-03
Source: U.S. Commerce Department
 "APPRECIATING-CURRENCY" COUNTRIES LIFT
   U.S. IMPORT PRICES & “PRICING POWER”
Year-Ago Percent Change, Import Prices Of Manufactured Goods
 7%


 5%
                        Canada
                                         Europe
 3%


 1%                                                                      3/04


 -1%


 -3%                                                  "Emerging Asian"
                                                        Economies
 -5%


 -7%
   Dec-99 Jun-00 Dec-00 Jun-01 Dec-01   Jun-02    Dec-02   Jun-03   Dec-03      Jun-04
     Source: U.S. Department Of Labor
SMALL BUSINESS "PRICING POWER" ON THE RISE
  Percent Of Small Businesses Reporting Price Increases
 20
                                                                      Mar. '04

 16


 12


 8


 4


 0

                                               Recession
 -4                                             Period

 -8
  Dec-94            Dec-96            Dec-98             Dec-00   Dec-02
 Source: National Federation Of Independent Businesses (NFIB)
              A LOOK BACK AT THE LAST
           “UP CYCLE” FOR INTEREST RATES
 The Treasury Yield Curve, Selected Periods; Yields In
7.3
                       Percent

                                                           Federal Funds Target Rate,
                          5/18/00                               5/16/00=6.50%


6.3



                6/29/99

5.3




                      11/18/98              Fed Funds Target Rate,
                                               11/17/98=4.75%
4.3
      0         5           10          15         20         25          30            35
                                   Years To Maturity
      Source: Bloomberg Financial News, Inc.
    HOW CLOSE A CLASH BETWEEN PUBLIC &
       PRIVATE-SECTOR BORROWING?
Year-Ago % Change In Federal & Non-Federal Borrowing
15%

                                                                        '03Q4
                                              Non-Federal
10%



 5%



 0%



-5%
                                                     Federal


-10%
   Dec-89    Dec-91     Dec-93     Dec-95   Dec-97   Dec-99    Dec-01    Dec-03
     Source: Federal Reserve Board
  THE FEDERAL RESERVE KEEPING THE POLICY
           "PEDAL TO THE METAL"
  The Federal Funds Rate Less The PCE "Deflator;" Percent
5.0


4.0


3.0

                                                  Avg., 1969-2003=2.6%
2.0


1.0
                                          Fed "Easing" During The
                                           Sluggish 1991-92 Recovery
0.0


-1.0                                     Note: Bars Denote
                                         Recession Periods                        3/04


-2.0
  Jan-90        Jan-92      Jan-94      Jan-96      Jan-98      Jan-00   Jan-02   Jan-04
       Sources: Bloomberg Financial News, Inc., U.S. Commerce Dep't
      EIGHT SURPRISES FOR 2004
* ANOTHER TERRORIST ATTACK

* THE “CARRY TRADE” UNRAVELS

* “DISINFLATION” LINGERS ON

* A DOLLAR TAILSPIN
* SAUDI TURMOIL
* A CHINESE RECESSION
* A DEMOCRATIC ELECTION VICTORY
* POLICY STRAINS BEGIN TO SHAKE THE EURO
           BOND MANAGERS STILL CAUTIOUS
Portfolio Duration Vs. Target, In Percent; 4-Wk. Moving Averages
 104

 103

 102

 101

 100

 99
                       "Neutral" (100% Of
                       Benchmark Duration)
 98

 97
                                                                           4/13/04
                                                                            Week
 96

 95

  94
 25-Dec-01        25-Jun-02      24-Dec-02         24-Jun-03   23-Dec-03        22-Jun-04
     Source: Stone McCarthy Research Associates, Inc.
EARNINGS GROWTH TO PROPEL STOCKS HIGHER
        Yr.-Ago % Chg.                                          Qtr-To-Qtr % Chg
                                                                                   80%
 25%
                                S&P 500 Earnings Growth
                                     (Left Scale)                                  60%
 19%                                                                  Forecast*

 13%                                                                               40%

  7%
                                                                                   20%

  1%
                                                                                   0%
 -5%
                                                              S&P 500
                                                             (Left Scale)          -20%
 -11%

                                                                                   -40%
 -17%

 -23%                                                                              -60%
    Mar-97 Mar-98 Mar-99 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05
      * First Call "bottom-up" consensus estimate, including goodwill adjustments.
       Source: First Call, Inc.
A FAIRLY TIGHT LINK BETWEEN THE S&P 500
    P/E MULTIPLE AND INTEREST RATES
      Percent                                          S&P 500 Price Per $ Of Opng. Earnings
16                                                                                        27
                      10-Yr T-Note
                       (Left Scale)
14
                                                                                         23
12
                                                                                         19
10

8                                                                                        15
                                                                                4/5/04
6
                                                                                         11

4                                  P/E Ratio
                                  (Right Scale)
                                                                                         7
2


0                                                                                        3
Jan-79   Jan-82     Jan-85   Jan-88      Jan-91    Jan-94    Jan-97   Jan-00   Jan-03
      Sources: Standard & Poors, Inc.; Federal Reserve Board
SEEMINGLY "RICH" STOCKS "CHEAP" VS. BONDS
     S&P 500 P/E Multiple                                                       Yield Ratio*
27                                                                                             1.8

                                               S&P 500 P/E Multiple
                                                  (Left Scale)                                 1.6
23

                                                                                               1.4
19

                                                                                               1.2
15
                                                                                    4/16/04    1.0

11
                                                                                               0.8

 7                                                  Yield Ratio, Bonds Vs. Stocks
                                                           (Right Scale)                       0.6


 3                                                                                             0.4
 Jan-79       Jan-83       Jan-87        Jan-91       Jan-95        Jan-99      Jan-03
    * Ratio, 10-Yr. Treasury yield vs. earnings-price yield (E/P) on S&P 500 stocks.
    Sources: Standard & Poors, Inc., IBES, Federal Reserve Board
                "DEFENSIVE" STOCKS* TURN WITH
                       INTEREST RATES
                  Cumulative % Chg., Past 4 Bus. Cycles*
 6                                                                                           3
                         Cum. % Chg. In 10-Yr. Treas.
                                  Yields                                                     1
 3                             (Right Scale)
                                                                                             -1

                                                                                             -3
 0
                                                                                             -5

 -3                                                                                          -7

                                                                                             -9
 -6
                                                                                             -11

            Cum. % Chg. In "Defensive" Vs.                                                   -13
 -9
                  S&P 500 Stocks
                   (Left Scale)                                                              -15

-12                                                                                          -17
      0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48
                                Month's From Recession's End
      * Health care and consumer staples. Expansions beginning 12/70, 4/75, 1/83 and 4/91.
      Source: Federal Reserve Board; Citigroup, Inc.

				
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