Swanson's Scorecard January 2013

I typically study five areas of the US economy to find clues to the future direction of corporate profits and the economy in general. These are the five key fundamental building blocks I have used to construct my view of the economy over the last few years. Using these tools has helped me to weed out the politics and rhetoric from the basics of the business cycle. Here's a fresh look at where we are now.

1. Corporate health: Corporations continue to show better balance-sheet health, with less debt to assets. Cash flows continue to run high when compared to the total value of the markets or to US gross domestic product. Labor and capital costs remain low. So, if the rest of the world experiences a renewed growth period in 2013, much of that growth should flow through to the profits line. Looking at flows, free cash flow is extremely high as a percentage of GDP.
2. Consumer resilience: The state of the US consumer continues to improve. The US consumer is working longer hours, and debt levels are low compared with recent history and have not increased relative to net worth. The consumer continues to shop, both in person and online. Houses and cars have become more affordable, based on historical prices. Year-over-year, consumer spending, unadjusted for inflation, is running over 4%.
3. The cost of capital: Thanks to the assistance of global central banks, the real cost of borrowed capital is low and the nominal cost of bond debt is at all-time lows. Cheap capital benefits companies and may help job growth as well.
4. Exports and trade: Global trade indices, while lower than a year ago, have started to move higher. This positive move includes trade from Asia, the United States and Latin America. We are seeing this trend in railcar shipments and in air-freight numbers.
5. Housing: Our thesis that housing will propel the second half of the business cycle is showing up in the numbers. House prices are rising, employment in the housing and construction sectors is rising and the number of homes for sale as well as the number of months that they are for sale is falling.

I use this scorecard as a tool to keep me focused on the fundamentals. It serves as a mental checklist for what I need to dig further into. Throughout the cycles and crisis of the last few years, following the discipline of the checklist has been enormously helpful, and directed my thoughts correctly toward investable outcomes and away from the hysteria of the moment and cries of economic doom. The five fundamentals above have recently gained strength, and I would suggest in 2013 we will see stronger growth, in the US and global economy as pent-up spending, idle cash and greater confidence return to the marketplace.

No forecasts can be guaranteed.

The views expressed are those of James Swanson and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation or solicitation or as investment advice from the Advisor.

24070.61