Track The Turnaround

Employment Stabilizes...For Now

We're going to see a positive employment report tomorrow. It's a no-brainer at this point:

• Last week's U.S. GDP report showed the first real pick up in business investment since the crisis started.
• The monthly ADP private-sector payrolls report today showed Its smallest loss since the the low points of the financial crisis.
• The last monthly payrolls report showed continued growth in temporary jobs.
• Share prices for Mapower, Kelly Services and other staffing firms have jumped more than 20% over the past three months and have doubled over the past year.

But an inflection point has already been priced in -- there won't be a strong market reaction tomorrow absent some other development -- and the real question is how much organic growth we'll see going forward as government support peters out, inventories get back in sync with demand and pent-up demand is satisfied.

The drama going forward is what will happen in the second half of 2010 and first half of 2011 as the crutches disappear (assuming they'll be taken away) and how much of this has (or hasn't) been priced into the markets.

The recent pickup in weekly jobless claims is an early sign that growth is unlikely to be strong and consistent enough to offset productivity gains and bolster demand for workers.

It's the Business Climate, Stupid

President Obama said in his State of the Union Address that he wants to bolster job growth. Well, there's no mystery about how to accomplish that.

Crack open the recently released 2010 Index of Economic Freedom, note the strong link between economic freedom and prosperity and follow the examples of Hong Kong, Singapore, Australia, New Zealand and Ireland, which were ranked as the world's most attractive places to do business. Note other examples such as Turkey, Montenegro, Poland, Croatia and Qatar -- nations credited with significantly reducing home-grown, man-made barriers to business investment and economic growth.

Specifically, these countries get credit for giving their citizens more freedom to work, produce, consume and invest, "with that freedom more protected and less restricted by the government."

In the meantime, the U.S., which got dropped from the rankings of the world's freest countries, got dinged for:

1. Burdensome top tax rates, exceeding international averages
2. Excessive government spending -- spending that's directly and indirectly displacing private-sector activity and growth
3. The 2002 Sarbanes–Oxley Act, which significantly increased disclosure and accounting requirements for small firms and reduced IPO activity
4. Government interventions in financial markets and the automotive sector and speculation about more change (the wrong kind) in the future -- changes that have increased price distortions, reduced market efficiency and raised concerns about the security of private property and the integrity of business contracts.
5. Uncertainties created by changes to regulation and policy that have discouraged entrepreneurship and job creation.

"The U.S. government’s interventionist responses to the financial and economic crisis that began in 2008 have significantly undermined economic freedom and long-term prospects for economic growth," the report concludes.

Here's what should be done:

1. Prioritize (for once) what the federal government does and slash government spending accordingly (easily done, right?)
2. Simplify the tax code and reduce taxes in a broad-based, even handed fashion that leaves it to the market to most efficiently pick winners and losers.
3. Stop scaring the banking system. One reason so many banks are restricting credit and holding so much in reserves is their uncertainty about what will happen to the economy and financial industry regulation.
4. Stop scaring small businesses: Suspend the most burdensome and time consuming provisions of the Sarbanes-Oxley Act when it comes to small business.
5. Make the temporary 2001 and 2003 income tax cuts permanent. The prospect of an automatic tax increase out there does not help business decisionmakers on the margins.
6. Increase human capital. When it comes to job growth, it takes two to tango -- a job opening and somebody qualified to fill it. Too many Americans are unqualified to fill 21st century jobs. Encourage (or rather, stop discouraging) states and cities that are trying to make the public K-12 system perform better, like the private sector, and compete for its clients (students, in theory). Read: more charter schools, more school choice. This costs nothing, on net, except some well spent political capital. The potential gain to the economy would be enormous. According to McKinsey and Company, the ongoing dynsfunction of our public K-12 system costs our economy $2.3 trillion a year in lost human potential, and that's likely an underestimate. Granted, that's more of a long-term benefit, but necessary if we're to restore this economy's vitality in the long-run.
7. Reduce uncertainty. Stop scaring the markets with frequent, ever-changing policy prescriptions and announcements. Give businesses a more stable playing field. They need to be more confident about taking risky long-term decisions to expand their operations.

For each of these prescriptions, the president will find plenty of support from Republicans and moderate Democrats who understand how an economy works and, more importantly (for them), how much their political careers and legacies depend on getting it right.

While I've been skeptical about this "recovery" and its direction, recent events, including the President's change of focus, make me more optimistic about the U.S. economy's long-term prospects. What makes me most optimistic is that America's politicians and policymakers are losing their margin for policy error and folly.

We're facing sky-high deficits and debt, a refreshed and lengthening track record of bad policy and its consequences, a rising pile of economic casualties from those bad decisions and a growing litany of U.S. multinations reporting intentions to scale down operations here and expand them abroad.

The financial crisis is just the latest in a 20-year string of bubbles whose implosion has exposed a long-running rot or hollowing out of the U.S. economy -- a development that preceded the crisis itself.

Generating economic growth the old fashioned way -- by earning it and improving the business climate -- is becoming one of the few options left as financial markets grow nervous about public sector debt in the U.S. and worldwide.

Mario Gabelli of GAMCO Investors puts it well:

To create the next Google, the next YouTube, the next great starup, you have to give entrepernuers the clarity and conviction that they can make money.

Listen carefully, and you'll find -- reading between the lines -- that this is being acknowledged more widely by the political class in both parties. The only question is, how long will it be before this option -- inconvenient and painful for many politicians -- becomes the only viable one left to them.

Where's the Growth? Not in Top-Line Sales

Bloomberg released some revealing stats yesterday showing little growth in top-line revenue growth over the past year outside financials and tech.

According to Bloomberg, year-over-year sales growth among companies within the S&P 500 has averaged 15.7%, but exclude financials and that number collapses to 2.2%. Take out Apple (AAPL) (even leaving out the rest of the tech group) and that number shrivels to 0.5%.

Those last two numbers are below the 12-month rate of inflation (according to the consumer price index). That means the corporate sector represented by the S&P has actually shrunk. Given that small businesses have clearly fared even worse, the entire U.S. economy has clearly shrunk in real terms over the past year.

Recovery hype, inventory corrections, great drama over the coming Apple tablet and somersaults at CNBC notwithstanding, there's no growth in the U.S. economy outside government-supported finance and tech (read: Apple).

Earnings growth within the S&P over the past year has been driven primarily by cost cutting, growth outside the U.S. and DC's gigantic subsidies of the financial sector.

The bottom line is that there hasn't been much of a top line over the past year.

Not About Bernanke: The Growing Vote of No Confidence in the Fed

Make no mistake: Ben Bernanke will be confirmed by the Senate and stay on as Federal Reserve chairman, but that's not the point.

Don't make the other mistake either: Ben Bernake is disposable even if he isn't confirmed. There are other equally qualified candidates from Vice-Chairman Donald Kohn to Princeton Economics professor Alan Blinder (and that's just the East Coast), but that's not the point either.

The Bernanke-nomination uncertainty really isn't about Bernanke. It's about the Federal Reserve and the American's growing vote of no confidence in the central bank. A market reaction to a failed renomination would be more of a reaction to the Fed's diminished authority than the loss of Bernanke.

The high level of uncertainty over Bernanke's nomination shows a lot of confidence in the Fed's ability to deliver economic stability has evaporated, thanks to the crisis it helped unleash, starting with actions undertaken by Bernanke's predecessor. And because of this, its ability to make independent, unpopular decisions in the future -- decisions it'll have to make to keep inflation under control -- has been badly compromised. The Fed could be permanently tainted by the role it played in today's mess.

If Bernanke wins a projected "yes" vote from 62 senators (the National Journal's whip count as of Tuesday early afternoon was 44 votes in support), it'll mark a new low in confidence in the central bank.

Sources: Wall Street Journal, National Journal

Previous votes were overwhelming in their support of Fed chairman -- in several cases so overwhelming the confirmation was left to a voice vote without an official tally. Not so for Bernanke, as clearly illustrated by volatility in the Bernanke-confirmation futures on Intrade.

Much of Bernanke renomination drama has been glibly dismissed by commentators as political posturing and kabuki theater -- just politicians playing to the anger and anxiety of the American electorate.

Well, the fact that the public is that angry and anxious (enough for politicians of both parties to notice), that an unusual amount of this anger is being directed toward the Fed (note the rapid rise of long-time libertarian Fed critic Rep. Ron Paul), and that many politicians (including Senator John McCain) feel it necessary to play with dynamite underlines the new reality: Call it the Fed's very own "New Normal."

"Whether he's rejected or not, it shows there's a lot of displeasure," Senator Richard Shelby told Bloomberg. "There's a credibility problem here. The Fed set fire to a house and a ran in with a firetruck. As a regulator, they were nonexistent [in preventing the bubble]."

With America's unemployment rate likely to stay in double-digits for some time, a bigger permanent American underclass in the making, economic growth poky and government-inflated at best, no clear signs over the horizon of any significant commitment to improve America's growth the old fashioned way (earn it by improving the business climate), D.C. more widely derided than it's been in decades, and an historically debt-heavy government that will be under ever more pressure to inflate its financial problems away, the Federal Reserve is and will be under the gun in a way it hasn't been since Paul Volcker headed the Fed through the energy crisis of the late 70's and early 80's.

Actually -- the risk is greater today. Paul Volcker had the absolute backing of then-President Ronald Reagan to do what it took to keep inflation under control (including jacking up interest rates into the double digits). Also, the U.S. was in a better financial position (a debt-to-GDP ratio of 30% versus today's nearly 100%). Volcker had bigger pro-votes in the Senate than Bernanke appears likely to get. President Obama's current support notwitstanding, Bernanke can't count on that support tomorrow when political push comes to shove. President Obama no longer enjoys Reagan-sized popularity, and the President's party -- predisposed to putting short-term growth ahead of inflation control and long-term stability during the best of times -- can be expected to put more pressure on the Fed to be more loose than it would otherwise be, especially as the 2010 and 2012 elections approach.

A key measure of the Fed's credibility gap going forward -- one investors are already starting to trade on -- will be the spread between U.S. Treasuries and U.S. inflation protected Treasuries and the spread between yields on U.S. Treasuries and similarly dated German bunds, Germany being the gold standard of nationally-backed, inflation-controlling credibility. Trade that gap -- short long-dated Treasuries, go long on German bunds (follow PIMCO's lead on this one) and Inflation protected Treasuries, as well as commodity indexes and ETFs.

But not all in -- at least, not just yet. Wait for more confirmation that inflation is perking up -- especially through real time, market indexes of commodity prices. And leave room to add to those holdings as we get closer to the point the Federal Reserve will have to raise rates, but finds itself less able to, as inflation expectations and inflation itself reassert themselves. That time will be sooner rather than later, especially if growth remains lackluster and unemployment high.

Because of its underperformance (to put it mildly), the Federal Reserve, along with much of the rest of the federal government, has lost credibility and future freedom of action -- whether or not Bernanke gets his second term. The Fed's commitment to inflation fighting is already in serious doubt, no matter what happens to Bernanke.

Plan accordingly. Invest accordingly.

U.S. Much Less Competitive: Bad for 'Recovery'

Any investor still wondering whether this "recovery" has legs, what's holding the U.S. economy back or where to find some of the best prospects abroad going forward will find a great resource in today's release of the annual Index of Economic Freedom, put together by the Heritage Foundation and Wall Street Journal.

It's bad news for the U.S., which dropped to eighth from sixth place, leaving Canada, rather than the U.S., North America's best business climate. In a shocker, for the first time the U.S. is no longer ranked among the world's most "economically free" countries.



There was deterioration in 10 subcategories ranging from financial freedom to property rights thanks to greater regulation, more protectionist trade policies, massive stimulus spending and bailouts of corporations deemed "too big to fail," dragging the U.S. index score to 78 from 80.7 on a 0-to-100 scale.

The report's editor says:

"Policies have resulted in job losses, discouraged entrepreneurship, and saddled America with unprecedented government deficits... These trends are important because study after study shows a strong correlation between economic freedom and prosperity."

Unable to count anymore on a rising tide of inflating credit to artificially lift all boats, the U. S. economy will need to generate economic growth the old fashioned way -- earn it -- as more of the world's growth is enjoyed by countries with good or improving policy and business climates.

Hong Kong, Singapore, Australia, New Zealand and Iceland are now ranked as the world's most attractive places to do business, according to the Index ratings. Turkey, Montenegro, Poland, Croatia and Qatar show some of the most rapid improvement in their attractiveness. That's where more of your focus on growth needs to be.

The U.S. meanwhile joins the U.K., Iceland, Bulgaria and Yemen, among countries suffering the steepest erosion in economic freedom over the past year.

Peter Boockvar of Miller Tabak put it best, when he recently told Bloomberg News that the recovery story "is all about the business climate."

"We need to make it more attractive to do business here [in the U.S.]," he said. "It's the only way we're going to be able to get real, solid economic growth over the next five years."

No Investment, No Recovery

I've been at a loss to write much about the U.S. economy over the past few weeks. What's the point? How much of the big picture has really changed besides the fact that the U.S. continues to dig itself a deeper ditch of debt, delusion and self-destructive policy?

This won't be a real recovery until business investment and payrolls start expanding again. Both continue to shrink.

Take a closer look at last week's GDP report. Two of the most important takeaways were hardly reported: 1) Business investment fell again. 2) Investment over the past year has collapsed at the fastest rate in at least 62 years.

From an invesment perspective, there's nothing to debate: this *has* been a Great Depression... and The Depression continues.

Investment has evaporated in the United States to an extent not recorded since 1947 (as far back as quarterly figures go) and on an annual basis not since 1942. Nonresidential fixed investment (business spending on factories, offices and equipment) has collapsed 20% over the past year, capped by a 1.8% drop* in the quarter that ended in September, according to the GDP report.**

The monthly report on job payrolls, due Friday, will show ongoing reductions in employment.

Growth in investment and payrolls -- or at least stabilization -- would be both a real sign of a genuine recovery and a necessary ingredient. It would reflect the start of a self reinforcing expansion: a virtuous cycle or positive feedback loop of rising private-sector spending, employment and incomes. That's the definition of a recovery.

Investment won't start growing again until prices for the huge excess of unused factory capacity, office space and housing are allowed to fall to the extent necessary to clear the Super Glut and until future after-tax returns on investment look a lot better than they do now (especially relative to potential returns abroad).

The possibility of Washington piling on more cost-inflating, profit-deflating, investment-return-killing policies -- from "cap-and-trade" to health care to union card check -- doesn't help, to put it mildly. It makes it only rational for many businesses to keep cutting, just stay put or invest outside the U.S. until the rainy days end or look close to ending.

Absent a major policy course correction that makes the encouragement of businesses investment a priority, a reversal that stops gumming up the economy's innate ability -- and need -- to clear the ruins before it rebuilds, prospects for a real recovery will not improve.

We might have to wait until the run up to November 2012, or at least November 2010.


<sup>---
*seasonally adjusted annual rate

**Note: I use the non-inflation adjusted numbers, because the inflation adjusted (chain weighted) investment figures in the GDP report only go back to 1992. The inflation adjusted results for the third quarter are even worse, by the way, showing a 2.5% drop in investment.</sup>

This Isn't a Recovery

The recession might (or might not) be over, but at least one thing is clear: this isn't a recovery.

Merriam Webster defines a recovery as "the act, process, or an instance of recovering; especially: an economic upturn (as after a depression)" or "the process of combating a disorder (as alcoholism) or a real or perceived problem." Beyond the stock market, we haven't met the first definition, and we certainly haven't met the second. We haven't dealt with any of the root causes of the financial crisis.

In early August, I wrote

there's more retrenchment to come...beyond the painful downsizing we've seen so far... we're only a quarter of the way through the inventory correction. The current Super-Glut... remains more than twice as big as the inventory bloat seen during the 2001 recession.

In late August, I wrote

Government and exports are key. Most of everything else continues to shrink or deteriorate. How far the recovery evolves beyond all this remains to be seen.

What I've seen over the last few weeks hasn't done much to change this picture. The gigantic overhang of excess inventories, unused industrial capacity, unsold homes, homes headed for foreclosure and vacant office and retail space remains a big obstacle to real economic growth.

Inventory-sales ratios are still as much as 8% above healthy levels.

More than 30% of the country's manufacturing capacity sits unused.

The commercial real estate market is sliding closer to the abyss, as prices continue to fall, sales volume remains sickly and vacancy rates rise.

As long as the massive Super-Glut persists, we won't see a serious pickup in investment and construction. As long as many businesses remain saddled with this bloat, we won't see a meaningful expansion or pickup in hiring...

...or even work hours.

Exports have been one of the few genuine bright spots over the past few months, but the Baltic Dry Index, a real-time guage of global trade, has shown little sign of more growth ahead since it bottomed earlier this year.

The risk of default (as measured by premiums in the CDS or credit default swap market) has worsened for most of the following 22 major banks tracked by the Bespoke Investment Group.

Saddled by toxic debt, glum on growth prospects or both, banks are still not lending at anywhere near pre-crisis levels. And to the extent banks are lending, businesses and consumers -- also debt heavy and also skeptical about growth prospects -- remain even less willing to borrow.




 
It's the picture of a U.S. consumer still in retreat. A record 7.58 percent of U.S. homeowners with mortgages were more than 30 days late in making their payments last month, up from 7.32 percent in July and the fourth consecutive rise. Despite an improvement in net worth flattered by the stock market rebound, consumers continue to try to reduce debt, extending a record drop in borrowing.

Oil prices, as much a gauge of global economic growth as inflation, are more or less dead in the water aside from the occasional flare-up of tension in the Middle East, which itself represents a significant risk to any real future recovery.

One of the best ways to figure out the future direction of the economy is to track the actions -- not words -- of market participants. Federal Reserve officials have expressed growing optimism about a rebound and have suggested interest rates might rise as a result. But speculators in futures markets aren't betting their own money on rate hikes (or economic growth) any time soon.

Fed funds futures prices on the Chicago Board of Trade suggest that the Fed isn't expected to meaningfully raise short-term interest rates above current near-zero levels until at least a year from now. And it's unclear how much of the slow, small increase expected over the next two years represents expectations for higher inflation rather than growth.

It's also impossible to disentangle the temporary effect of Washington's tax breaks (for housing and clunkers) and easy money policy from the few signs suggesting future growth -- such as the index of leading economic indicators and the upward sloping yield curve.

It's hard to take the recovery talk seriously.

Executives at public companies aren't. Net insider selling is back near levels preceding last year's financial tailspin. Dell took a hard long look at the landscape and decided the future was in government, not in the U.S. private sector -- that explains its decision to buy Perot Systems for a fat premium.

Meanwhile, the U.S. continues its revival of the dead-end, zombie-bank-propping policies of post-80's Japan. Washington is amassing a reputation for fiscal management that looks increasingly like pre-2001 crisis Argentina's or 2009 California's. Recurring proposals from D.C. to raise taxes, expand regulation of the economy and borrow are putting a damper on business hiring and investment.

The big wildcard to the outlook now is how long the U.S. government will be able to continue driving up the nation's debt. America's debt-to-GDP ratio by some measures is already above those recorded during the Second World War. As the Federal Reserve buys up much of that debt by basically printing money, our international creditors are expressing growing unease and (in some cases) alarm over our solvency and the dollar's stability.

U.S.-China Trade Spat Could Turn Into A Circular Firing Squad

This might not end well.

Last week, during what's becoming a routine Friday night bad-news dump, the Obama Administration announced it would slap 35% tariffs on imports of Chinese tires as an anti-dumping measure.

Over the weekend, Beijing accused Washington of "rampant protectionism" and announced plans to investigate "allegations" the U.S. was "dumping" chickens and auto parts.

As of 7:00 a.m. EDT, Asian markets are down sharply over fears a trade war could follow this initial exchange of fire. Wall Street is likely to follow.

In and of themselves, the U.S. action and China's strong hint of reaction are not all that significant and are unlikely to lead to an immediate trade war. What is very significant is the context and what it could portend.

It's a bad omen.

The timing couldn't be worse. The world economy is struggling to get back on its feet without the need of a multi-trillion-dollar crutch, and the U.S. is counting on exports (the American consumer is in a debt-laden coma and Washington may be running out of other people's money). The U.S. "recovery" is being kept afloat, for the most part, by exports and government.

President Obama is scheduled to lead the G20 summit in a few days at a session that was supposed to be devoted to serious, difficult reform of a global financial system to prevent or at least mitigate a future financial crisis. This is just two months after the U.S. led the G8's joint decleration not to engage in protectionism.

Measures to move global free trade forward have been stalled for years, most recently during the Doha Round, with many countries opting for simpler, but more distortionary ad hoc bilateral agreements. In physics, what goes up must come down (unless it can escape the earth's gravitational pull). When it comes to trade, what does not move forward, eventually regresses and moves backward...especially in a recession. That's what's happening now and what  happened before around the start of the last century -- with deadly  consequences.

The U.S. move only adds more momentum to a reversal from freer trade, following similar stealth and not-so-stealth protectionism by India, Russia, other countries and China itself over the past year's slump (click here and here).

The global slump continues, regardless of what cheerleaders are saying. The Baltic Dry (Goods) Index, a key real time barometer of trade, after showing signs of recovery from its collapse earlier this year, has started declining again.

This trade spat is a bad sign because joblessness will only get worse in the U.S. and elsewhere for the foresseable future absent a miraculous shift in Washington toward business-friendly economic policy and real change in private-sector growth. That means protectionist pressures will only intensify.

A virtual beggar-thy-neighbor policy has already taken hold in DC. The White House and the Federal Reserve are accommodating a sharp drop of the dollar -- a drop that's siphoning demand from trading partners. Note that New Zealand, among the top economic and currency performers of the past year, is now seeing its second straight drop in retail sales. The dollar's drop against the local currency plays a big role. Japan is experiencing similar travails.

The Smoot-Hawley tarfiffs of the 1930's and the subsequent trade war were critical ingredients that helped turn the stock market crash and early economic downturn of the 30's into the multiyear Great Depression.

In taking this move, it is surely the Obama Administration's hope that this might stave off or relieve some political pressure. In retaliating it is no doubt China's hope that it can also relieve popular pressure on Beijing and discourage the U.S. into taking any other protectionist measures.

In reality, in the context of deepening economic pain and growing political pressure in the U.S., China and worldwide, there is a great risk that one or both countries will miscalculate and other countries will bow to their own internal pressures and pile on.

The pressure to further restrict trade is only going to get more intense in the U.S. and elsewhere as hard times stay hard or get harder for more of the American electorate and electorates abroad. By allowing this early crack in the dam against protectionism, Obama risks unleashing a flood in the U.S. and abroad.

China is one of America's biggest trading partners and one of the country's biggest creditors. If this spat or a future spat somehow leads to even a mere slow down in the pace of American imports and its purchases of U.S. debt, China can hurt the U.S. where and when it can least afford to be hurt.

Consider this latest spat a warning of something much worse that could lie down the road as bad times and political pressures among all major trading partners intensify. Expect a sharp drop in stock market, a rise in U.S. interest rates and greater inflation if this exchange of fire is indeed a preview of what's to come and eventually turns into a circular firing squad.

What's Leading the "Recovery"?

Is the global economy really recovering? Who knows?

The U.S. recession might not be over yet, according to quarterly GDP estimates. Even if it is over, what comes next seems unlikely to meet any conventional definition of a U.S. recovery or expansion since the financial crisis has "left deep scars" that could affect the economy "for many years to come," as the IMF's chief economist bluntly puts it. Well founded concerns linger that a broke FDIC, a second round of financial crisis, a U.S. dollar collapse and national bankruptcy may lie around the corner as a government -- not particularly distinguished for its prescience, competence or immunity from short-term pressure -- faces the daunting task of taking a feeble economy off life support before inflation breaks out as the 2010 congressional elections approach.

Still, the U.S. economy has clearly stabilized from its free fall late last year. With the stock market rallying big-time on expectations the worst is behind us (fingers crossed), it's worth taking a look now at whatever industries, regions and countries are currently "leading" us into... well, into wherever it is we're headed.

Below are several Top 10 lists of industries that are so far showing the most improvement or stabilization in factory use rates, revenue growth, profit prospects (judging by P/E ratios) and job growth ; states showing the biggest increases in payrolls; and countries that enjoyed the most economic growth in the second quarter.

This could provide a glimpse into what the next U.S. expansion will look like if and when it gets taken off of government life support and back into high gear.

Change in Factory Utilization Rates
since January 2009 (in percentage points)

1. Artificial and synthetic fibers and filaments	4.05pp
2. Nonmetallic mineral mining and quarrying	2.67
3. Paper	2.28
4. Iron and steel products	2.01
5. Chemical	1.31
6. Food	0.39
7. Food, beverage, and tobacco	0.25
8. Nondurable manufacturing	-0.09
9. Oil and gas extraction	-0.15
10. Beverage and tobacco product	-0.38

_{Source: Federal Reserve}

Best Top-Line Growth:
Quarterly Revenue Growth (year-over-year)

Multimedia & Graphics Software	94.58%
Mortgage Investment	64.67
Broadcasting - Radio	57.42
Wholesale, Other	54.33
Money Center Banks	37.70
Investment Brokerage - National	36.09
Diagnostic Substances	35.75
Waste Management	35.53
Education & Training Services	32.41
Auto Parts Stores	28.11

_{Source: Morningstar/Yahoo}

Best Profit Growth Prospects:
According to Stock Market P/E ratios (trailing 12 month)    

1. Medical Appliances & Equipment	820.80
2. Computer Based Systems	360.30
3. Computer Peripherals	324.40
4. REIT - Office	317.20
5. Biotechnology	256.10
6. Sporting Goods Stores	198.00
7. Apparel Stores	167.60
8. Meat Products	124.80
9. Gold	86.40
10.Semiconductor - Integrated Circuits	79.30

_{Source: Morningstar/Yahoo}

Best Job Growth:
Change in payrolls in '000s (Dec. 2008 - July 2009)

Health Care	149.8
Federal Government	62.8
Education	26
Social assistance	12.6
Local government	8.6
Accounting	6.6
State Education	5.4
General merchandise stores	4.5
Assoc. & Organizations (incl. lobbyists)	3.4
Utilities	2.1

_{Bureau of Labor Statistics}

Top Job Growth By State:
Biggest Percent Change in Payrolls (Dec. 2008 - July 2009)

D.C.	1.63
North Dakota	0.76
Alaska	-0.59
Maryland	-0.65
New York	-0.79
Mississippi	-0.82
Vermont	-1.11
Arkansas	-1.23
Louisiana	-1.24
Virginia	-1.27

_{Bureau of Labor Statistics}

Economic Growth
Percent Change in GDP (2nd Quarter)

China	1.7
India	1.6
Korea	2.3
Slovak Republic	2.2
Japan	0.9
France	0.3
Germany	0.3
Czech Republic	0.3
Israel	0.2
Sweden	0

What's taking shape so far is a recovery (if you can call it that) led by:

• profit or sales growth of exportables (including commodities, perishable goods and high-tech);
• job growth in government and heavily government supported, regulated or influenced industries (health care, money center banks, education, utilities, interest groups and lobbyists);
• job growth in the government-driven megalopolis of D.C./Maryland/Virginia.
• economic growth in Asia and Western Europe, highlighting the importance of exports.

Most of everything else continues to shrink or deteriorate. How far the recovery evolves beyond this remains to be seen.

Credit Demand: Thanks, But No Thanks

The credit drought might or might not be breaking, but it looks like many potential borrowers couldn't care less.

More than a year into Washington's massive effort to restore credit availability, many U.S. businesses and consumers are shunning loans.

It has been reported that the Federal Reserve's recently released loan officer survey showed credit remains tight. Less attention has been paid to weakening credit demand.

The Fed's survey suggests interest in consumer, mortage, business and commercial real estate loans is still weak and, in most cases, continues to shrink.

The survey showed more lenders reported weaker than stronger demand for C&I loans.

The report continued to show a near-record balance of lenders reporting less of a need for commercial real estate loans.

More lenders reported weaker interest in consumer loans.

The best news ("best" only in a relative sense) was that a larger percentage of firms continued to report greater rather than weaker demand for prime mortgage loans, but that balance of sentiment shifted toward weakness again in the third quarter. Firms reporting less interest in nontraditional mortages continued to outnumber those reporting more, and by a greater extent than in the second quarter.

In other words, even if credit weren't tight, fewer want it.

It's another sign the top priority now for many in the U.S. is to pay off debt, rebuild savings and restore balance sheets while adjusting to the "new normal." Borrowing to spend and expand operations -- you know, the things that make an economy grow -- doesn't seem to be much of a priority at this point.

This isn't a recovery yet. It still looks more like bottom fishing.

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^{_{*The Fed didn't have enough lenders reporting subprime lending to produce a constitent time series for all mortage loans going further back in time.}}

_{^{**The net percentage figures are calculated by taking the percentage of firms reporting stronger demand minus the percentage of firms reporting weaker demand. In other words, it shows the balance of lenders seeing stronger demand versus firms seeing weaker demand.}}