www.institutional.alliancebernstein.com
May 3, 2005
NFSA 100th Anniversary
US Economic and Capital Markets Outlook
Giulio Martini
Chief Investment Officer—
Currency and Quantitative
Strategies
Recent US Economic Momentum Is Sustainable
Liquidity* Flows vs. Real GDP Growth
(YoY % chg)
10
Liquidity Flows
8
6
4
2
0
(2)
(4)
Real GDP
Growth
NFSA_ Capital Markets
(6)
72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04
*Liquidity is a measure of real money growth, growth in business and consumer credit, growth in short-term liquid assets, foreign purchases of US securities, net cash flow into bond
and stock funds
Source: Bureau of Economic Analysis, Haver Analytics and Alliance Capital Fixed Income
2
Inventory Rebuilding Still Lags Final Demand
Real Final Sales vs. Real Inventory Positions
(YoY chg)
10%
8%
Final
Sales
6%
4%
Inventory
Positions
2%
0%
(2)%
NFSA_ Capital Markets
(4)%
60
65
70
75
80
Source: Bureau of Economic Analysis, Haver Analytics and Alliance Capital Fixed Income
3
85
90
95
00
Investment Is Key Driver of Economic Growth
2004 Real GDP Growth
Equipment and Software
(9.8)%
14.5%
Imports
6.5%
Residential
Exports
5.9%
Real GDP
3.9%
Consumption
3.8%
Inventories
NFSA_ Capital Markets
Government
Structures
Source: Bureau of Economic Analysis, Haver Analytics and Alliance Capital Fixed Income
4
3.0%
1.6%
(0.0)%
Nonresidential Construction Usually
Rises Steadily
Index
160
140
Average of
5 expansions
120
100
80
1991
NFSA_ Capital Markets
60
0
2
4
6
8
10
12
Quarters from Trough
Source: US Department of Commerce, Haver Analytics and AllianceBernstein
5
14
16
18
20
1991 Recovery Was Weaker and More Gradual
Index
160
140
Average of
5 expansions
120
100
1991
80
1991
NFSA_ Capital Markets
60
0
2
4
6
8
10
12
Quarters from Trough
Source: US Department of Commerce, Haver Analytics and AllianceBernstein
6
14
16
18
20
Current Recovery Very Modest
Index
160
140
Average of
5 expansions
120
100
1991
80
Current Expansion
NFSA_ Capital Markets
60
0
2
4
6
8
10
12
Quarters from Trough
Source: US Department of Commerce, Haver Analytics and AllianceBernstein
7
14
16
18
20
Sprinklers Defy Construction Trend
Annualized Growth: 1980–2004
4.0%
(0.3)%
NFSA_ Capital Markets
Nonresidential
Construction
(Infation-Adjusted)
8
Sprinklers
Employment and Income Trends Are Improving
Payroll and Household Employment
(Year-over-Year Change)
Jobs (000s)
5,000
10%
Payroll
Employment
8%
3,000
7%
2,000
6%
0
5%
Household
Employment
(1,000)
4%
3%
Disposable
Income
2%
(2,000)
NFSA_ Capital Markets
Wage & Salary
Income
9%
4,000
1,000
1%
(3,000)
0%
91 93 95 97 99 01 03 05
Source: Bureau of Economic Analysis, Bureau of Labor Statistics and Haver Analytics
9
Disposable Income vs. Wages
(Year-over-Year Change)
91
93
95
97
99
01
03
Personal Saving at All-Time Low, But Wealth at
Record Levels
Personal Saving Rate
Household Net Worth
(%)
($ Trillions)
50
9
8
45
7
6
40
5
35
4
30
3
25
NFSA_ Capital Markets
2
10
20
1
0
15
90
92
94
96
98
00
02
04
Source: Bureau of Economic Analysis, Federal Reserve Board and Haver Analytics
90
92
94
96
98
00
02
04
Housing Market Supported By Strong Fundamentals
Home Sales and
Affordability
(000s)
7,000
Housing Affordability
(right scale)
6,000
Rates vs. Prices
Index
(%)
160
18
140
16
120
5,000
100
4,000
3,000
NFSA_ Capital Markets
1,000
11
House Price Index
(YoY % chg)
12
10
80
2,000
14
Mortgage Rate
60
Existing-Home Sales
(left scale)
0
75 79 83 87 91 95 99 03
8
6
40
4
20
2
0
0
76 79 82 85 88 91 94 97 00 03
Source: Federal Housing Finance Board, Office of Housing Enterprise Oversight, National Association of Realtors, Haver Analytics and Alliance Capital Fixed Income
Housing Starts Are Strong and Inventories Are Low
Month’s Supply of New Homes
at Current Sales Rate
Housing Starts
Units (Thousand)
2,300
January
2005
2,100
1,900
Ratio
12
10
1,700
8
1,500
1,300
6
1,100
4
900
NFSA_ Capital Markets
2
12
700
0
500
80 83 86 89 92 95 98 01 04
Source: Census Bureau and Haver Analytics
75 78 81 84 87 90 93 96 99 02
War Chest of Free Cash Flow; Bright Capital Spending Outlook
Net Cash Flow vs. Business Investment
in Equipment and Software
($ Billions)
1,400
Ratio of Free Cash Flow*
to Capital Spending
Ratio
1.4
Cash
Flow
1,200
$287
Billion
WOW!!
1,000
1.2
1.0
0.8
800
Investment
0.6
600
NFSA_ Capital Markets
0.4
13
400
0.2
200
0.0
(0.2)
0
80
84
88
92
96
00
04
*Three-year sum.
Source: Bureau of Economic Analysis, Haver Analytics and Alliance Capital Fixed Income
60
68
76
84
92
00
Strong Capex Cycle Is Underway, and It’s Broad Based
2004 Business Spending
on Equipment and Software
(Year-over-Year Percent Change)
12-Month Dollar Change in
Order Backlogs: February 2005
($ Billions)
25.5%
Computers
$14.5
Other
Equipment
Software
NFSA_ Capital Markets
Industrial
14
Other
Technology
$14.0
20.1%
Transportation
Total
$14.8
14.6%
14.5%
13.1%
10.6%
8.1%
Metals &
Machinery
Source: Census Bureau, Bureau of Economic Analysis, Haver Analytics and Alliance Capital Fixed Income
Technology Transportation
Equipment
Trade Deficit Is Large and Structural in Nature
Imports As a Percent
of Domestic Shipments
Trade Deficit
($ Billions)
0
(%)
30
(100)
25
(200)
(300)
20
(400)
(500)
15
NFSA_ Capital Markets
(600)
15
(700)
10
80 83 86 89 92 95 98 01 04
Source: Department of Commerce, Haver Analytics and Alliance Capital Fixed Income
1992
1995
1997
2002
2004
US Runs a Deficit in Every Product Category With
Every Region
2004 US Trade Deficit Composition
By Product
Autos
22%
Petroleum
25%
Industrial
Supplies
7%
Miscellaneous 2%
Capital Goods 2%
Agricultural
Goods 1%
NFSA_ Capital Markets
Consumer
Goods
41%
16
Through November 2004
*Includes Venezuela and Indonesia.
Source: Department of Commerce
By Region
Latin
North America
America 6% OPEC*
11%
17%
Other
5%
Pacific Rim
44%
Western
Europe
17%
US Relies on Foreign Capital To Fund Its
Investment Needs
Current Account Balance
As a Percent of GDP
Savings and Investment
as a Percent of GDP
(%)
1
(%)
0
21
(1)
20
22
Investment
19
(2)
18
(3)
17
(4)
16
Current
Account
Imbalance
Savings
15
(5)
14
NFSA_ Capital Markets
(6)
17
13
(7)
12
90
92
94
96
98
00
02
04
Source: International Monetary Fund Haver Analytics and Alliance Capital Fixed Income
98
99
00
01
02
03
04 F
Foreign Capital Flows into US Are Strong, Especially
From Asia
Foreign Purchases of US Financial Assets
(4-Quarter Moving Average)
($ Billions)
700
Savings and Investment of
Newly Industrialized
Asian Economies as a Percent of GDP
(%)
34
Total
600
Savings
32
500
30
400
300
28
Private
200
26
Investment
NFSA_ Capital Markets
100
18
Official
0
(100)
24
22
94
96
98
Source: International Monetary Fund
00
02
04
98
99
00
01
02
03
04F
Foreigners Have Lost Interest in US Equity
Investments…
Plant,
Equipment,
etc.
$321 Bil.
Stocks
NFSA_ Capital Markets
$194 Bil.
19
$163 Bil.
$33 Bil.
2000
Source: Federal Reserve Board Flow of Funds
2004
…and Have Turned to Bonds
Fixed Income
$1,019 Bil.
Fed Funds &
$233 Other
$133 Agency
Plant,
Equipment,
etc.
$321 Bil.
$282 Corporate
Stocks
NFSA_ Capital Markets
$194 Bil.
20
$163 Bil.
$371 Government
$33 Bil.
2000
Source: Federal Reserve Board Flow of Funds
2004
Foreign Ownership of US Financial Assets Growing
US
Treasury Bonds
Fed Funds
(Overnight Liquidity)
US Corporate
Bonds
Owned by
Foreigners
11%
24%
NFSA_ Capital Markets
42%
December 2004
Source: Federal Reserve Board
Stocks
46%
Real-Dollar Exchange Rate Still Above Prior Lows
Real Trade-Weighted Dollar Index
Mar 73=100
130
120
110
100
90
NFSA_ Capital Markets
80
22
87
83
76
70
73
77
Through March 31, 2005
Source: Federal Reserve Board and Haver Analytics
81
85
89
93
97
01
05
Growth in Oil Demand Met Largely by
Former Soviet Union (FSU)
Sources of New Supply
(Million Barrels per Day)
NFSA_ Capital Markets
6.5
23
1.3
OPEC
1.5
All Other
3.7
FSU
1999–2004
Source: BP Statistical Review, International Energy Agency (IEA), OPEC, and Bernstein
Russian Output Growth Not Based on New Discoveries
Reserve Discoveries vs. Production
Discoveries
(Bil. bbl)
30
Production
25
10
20
8
15
6
10
Discoveries
NFSA_ Capital Markets
5
24
Production
(Mil. bbl/day)
12
Few
discoveries
since the
1980s
4
2
0
0
1932
44
Source: HIS Energy, IEA, and Bernstein
56
68
80
92
04E
Russian Production Rising, but Reserves Falling
(Bil. bbl)
Cumulative Reserves Discovered
250
200
150
100
Current Reserves
NFSA_ Capital Markets
50
25
0
32
44
Source: HIS Energy, IEA, and Bernstein
56
68
80
92
04E
Oil Production Growth Outside OPEC and FSU
Very Disappointing
(%)
8
6
4
2
NFSA_ Capital Markets
0
26
(2)
66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04
Source: BP Statistical Review, IEA, and Bernstein
Growth in Oil Demand Accelerating due to Asia
Million Barrels per Day
+4.9
90
All Other
Demand
+3.2
80
New Asian
Demand
+3.3
90.8
+3.4
82.5
76.0
NFSA_ Capital Markets
70
27
60
1999
Source: BP Statistical Review, IEA, and Bernstein
2004
2009E
Demand for OPEC Oil to Rise Sharply
Sources of New Supply
Million Barrels per Day
8.3
6.5
1.3
4.8
OPEC
1.5
All Other
2.0
FSU
1.5
NFSA_ Capital Markets
3.7
28
1999–2004
Source: BP Statistical Review, International Energy Agency, OPEC, and Bernstein
2004–2009E
China’s Entry into Global Business Cycle Has Broad
Implications
China GDP Growth
Year-over-Year Percent Change
Real GDP Growth
Nominal GDP Growth
16.4
11.5
9.3 9.5
8.8
7.8
7.1
8
7.5
9.7
9.0 8.8
8.3
8.1
NFSA_ Capital Markets
5.2 4.8
29
97
98
99
00
01
02
Source: China National Bureau of Statistics and CEIC Data
03
04
97
98
99
00
01
02
03
04
China Has Altered Global Pricing Patterns
Cumulative Percent Change in Commodity and Goods Prices
During Business Cycles
Journal of Commerce
Industrial Price Index*
(%)
170
160
US Core Consumer
Goods Prices
(%)
120
Cycle
1975
1982
1991
2001
150
140
NFSA_ Capital Markets
1975
1982
1991
2001
115
110
130
120
110
30
Cycle
105
100
100
90
95
0
6
12
18
24
30
36
Months from economic trough
42
0
6
12
18
24
30
36
Months from economic trough
*The Journal of Commerce industrial price index includes prices of textiles, metals, petroleum products and miscellaneous products such as hides and flooring.
Source: Bureau of Labor Statistics, Economic Cycle Research Institute, Haver Analytics and Alliance Capital Fixed Income
42
Low Import Inflation Has Kept Core Inflation & Interest
Rates Low
Import Price of Consumer Goods
Excluding Autos
(YoY chg of Index)
6%
Inflation and the
10-Year Treasury Yield
(%)
10
10-Year
Treasury Yield
9
5%
8
4%
7
3%
6
2%
5
1%
4
Core
CPI
(YoY chg)
3
0%
2
NFSA_ Capital Markets
(1)%
31
1
(2)%
Total CPI (YoY chg)
0
90 92 94 96 98 00 02
04
90
93
96
Source: Bureau of Economic Analysis, Bureau of Labor Statistics, Federal Reserve Board, Haver Analytics and Alliance Fixed Income
99
02
Underlying Inflation: Labor Costs Contained
Annual Rates
1990–1991
First Two Years
Recession
of Recovery
Hourly Compensation
Productivity
NFSA_ Capital Markets
Unit Labor Cost
32
Source: US Department of Commerce and AllianceBernstein
3.8%
(0.6)
4.4%
4.4%
3.0
1.4%
Underlying Inflation: Labor Costs Contained
Annual Rates
1990–1991
First Two Years
Recession
of Recovery
Hourly Compensation
Productivity
Unit Labor Cost
3.8%
(0.6)
4.4%
4.4%
3.0
1.4%
NFSA_ Capital Markets
2001 Recession
33
Hourly Compensation
3.2%
2.7%
Productivity
4.0
4.8
Unit Labor Cost
Source: US Department of Commerce and AllianceBernstein
(0.8)%
(2.1)%
Labor Costs Still Contained
2001
Recession
First Two Years
of Recovery
Latest
Year
Hourly Compensation
3.2%
2.7%
4.2%
Productivity
4.0
4.8
2.7
(0.8)
(2.1)
1.4
NFSA_ Capital Markets
Unit Labor Cost
34
How Attractive Is the Stock Market? About Average
Equity Risk Premium*
(%)
8
Stocks Very Attractive
6
+1 Std. Dev.
4
Average
-1 Std. Dev.
2
NFSA_ Capital Markets
Bonds Very Attractive
35
0
60
65
70
75
80
85
90
Through March 31, 2005
Treasury securities are guaranteed by the U.S. government as to the timely payment of principal and interest if held to maturity.
*Difference between expected return on equities as represented by the S&P 500 and 10-Year U.S. Treasuries
Source: Federal Reserve and Bernstein
95
00
05
Economic Underpinnings Still Strong:
Corporate Profit Margins at 30-Year High
After-Tax Margins
Recession
(%)
10
8
Average
6
NFSA_ Capital Markets
4
36
2
70
73
US nonfinancial corporations
Source: Bureau of Economic Analysis
76
79
82
85
88
91
94
97
00
03
Potential for Dividend Growth Unusually Large
S&P 500
One-Year Forward Estimate
Operating Earnings
$74
Adjustments
Recurring “Nonrecurring” Charges
(6)
Stock-Option Expense
(3)
Lower Pension-Fund Returns
(1)
Available Earnings
NFSA_ Capital Markets
Earnings Retained for 6% Growth
37
$64
24
Available for Dividends
$40
3.4% Yield
Current Dividend
$19
1.6% Yield
As of January 31, 2005
Source: Bernstein estimates
Conclusions
 U.S. economy very sound
 Construction spending should improve gradually
 Dollar will weaken further
 Oil prices will stay relatively high
NFSA_ Capital Markets
 Stock market reasonably valued
38