But after over a year of economic recovery and the strongest resurgence in corporate profits in history, businesses are now starting to feel more confident and will most likely start to translate this enthusiasm into corporate spending, including new hiring as well as capital spending and acquisitions. As these companies start to hire again we would expect that to translate just as quickly into improved consumer confidence.  This is the process that most recoveries go through and should be even more pronounced this time around given the severity of the decline.  The chart below shows how Business Confidence (lower panel) has recovered following each recession (grey shaded areas) at a very quick rate, with the current recovery putting this indicator at a record high level.  Consumer Confidence (upper panel) has lagged thus far but, as we pointed out, this probably has a lot more to do with the tepid job growth thus far in the recovery.  We expect that this indicator will also start to head higher soon as companies start to deploy their record cash levels into increased spending.  The recent uptick in merger activity suggests that this is already starting to happen.

In terms of companies deploying some of their excess cash its interesting to note some recent data points that show how high cash balances and record-low interest rates are stoking the biggest increase in U.S. share buybacks ever.  American companies announced US$257.7 billion in stock repurchases so far this year, compared with $125 billion in all of 2009!  Corporations are using debt to pay for buybacks after the average yield on U.S. investment grade bonds fell to an all-time low last month.  Companies are taking advantage of low-cost financing and purchasing their stock to boost per-share earnings at a time when the S&P500 Index trades at a 24 percent discount to its average valuation since 1954.  Buybacks allow firms to boost earnings per share by reducing their equity base and may indicate executives find their stock undervalued.  IBM recently sold US$1.5 billion of 3-year bonds with a coupon rate of only 1%.  These funds were used to help support a stock buyback.  Microsoft directors also authorized the company to raise over US$6 billion in debt financing, to be used to increase dividends and support stock buybacks.  This is from a company already setting on over US$20 billion in balance sheet cash.  Evidence that businesses are parting with their record cash levels suggests that concern the economy will slip into its second recession in three years is diminishing.

Getting back to the overall economic picture, we continue to believe that the recovery continues to unfold on a global basis with Asia and the other emerging economies leading the charge as their migration to urbanization and better financial situation allows them to grow at a higher rate than the developed economies, where consumers remain mired in debt and consequently more constrained in spending than in typical recoveries.  But the view that this recovery is somehow different and weaker than past recoveries is not really accurate.  Now that the NBER has declared the recession ‘officially over’, we can compare that path of the current recovery with those following prior recessions.  The data shows that the strength of this recovery is basically in line with the data from the past four recoveries, and is actually slightly better than those of 1993 and 2001 in terms of overall economic growth. The employment data, though, has been weaker than past recoveries, for many of the reasons mentioned earlier in this letter.  But we still expect that better business confidence and large cash balances will soon lead to companies to start adding more aggressively to their payrolls, particularly since they also have been assured that central banks, particularly the US Federal Reserve, will keep interest rates “relatively low for an extended period of time.”  In terms of the stock market rebound during this economic recovery, again it is not unlike what happened following prior recessions.  Markets tend to bottom anywhere from 3 to 9 months prior to the end of the recession (4 months in this case) with the largest gains coming in the first year of the market recovery.

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