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Weekly Economic Commentary

Concerns over the eurozone dominated the month of November in the global financial markets, leading to another difficult month for equity market returns and risk assets in general, and another solid month of returns for U.S. Treasuries and other safe-haven investments. While the economic backdrop soured in the eurozone, and continued to slow in China, the U.S. economy held up reasonably well in November, and this week’s batch of economic reports are likely to support that view. Monetary policy will also garner a great deal of attention this week, with a full slate of Federal Reserve (Fed) officials scheduled to speak, along with the release of the Fed’s Beige Book, a qualitative assessment of economic and business conditions in each of the 12 regional Fed districts. No fewer than six global central banks meet to set rates this week; three of the six are likely to cut rates.

Throughout November and indeed over the past several months as well, financial markets have largely ignored the solid, but not spectacular, growth in the United States. Many market participants remain focused on the current and potential impact of the euro-zone crisis on the United States and global economies, and rightly so. A loss of confidence in policymakers, stresses in banking and financial markets, and higher borrowing rates are all ways in which the fiscal mess in Europe may impact the United States and other global economies. A likely recession in the eurozone (and in the United Kingdom) will slow U.S. exports to those areas. The United States sends about 15% of its exports to the eurozone and the United Kingdom. Since 20% of China’s exports head to the Eurozone, China’s export driven economy is likely to slow as well. While the direct impact of a recession in Europe on the global economy would certainly slow global growth, a global recession similar to the Great Recession of 2007 – 2009 is not a foregone conclusion, although many markets are already in the process of pricing in just such an outcome.

Easier monetary policy can offset some, but not all, of the financial market stresses and higher borrowing costs associated with the eurozone fiscal mess. Many emerging market central banks are already easing policy, and developed market central banks, including the Fed, have already begun to use nontraditional measures (such as quantitative easing) to cushion the global economy from the situation in Europe.

Our view remains that the U.S. economy is likely to grow between 2.5% and 3.0% in the fourth quarter of 2011 and post growth of around 2.0% in 2012. A further, dramatic deterioration of the fiscal and market situation in Europe, a policy mistake here in the United States or abroad, or an

A November To Remember for the Economy?

November 28, 2011

John Canally, CFAEconomist LPL Financial

Highlights � How is the euro-zone fiscal mess

impacting the U.S. economy?

� A full slate of economic data this week may show that the U.S. economy is doing just fine, despite the turmoil in the eurozone.

Monday, November 28 New Home Sales Oct

Dallas Fed Manufacturing Index Nov

Tuesday, November 29 Consumer Confidence Nov

Wednesday, November 30 MBA Mortgage Applications wk 11/25

Challenger Layoff Announcements Nov

ADP Employment Change Nov

Chicago Area Purchasing Managers Index Nov

Pending Home Sales Oct

Beige Book

Thursday, December 1 Initial Claims wk 11/26

Construction Spending Oct

ISM Manufacturing Nov

Domestic Light Vehicle Sales Nov

Chain Store Sales Nov

Friday, December 2 Private Sector Payrolls Nov

Unemployment Rate Nov

Nonfarm Payrolls Nov

Economic Calendar

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WEEKLY ECONOMIC COMMENTARY

exogenous event (terror attack, natural disaster, etc.), among other events, may cause us to change our view.

As we wrote in last week’s Weekly Economic Commentary, financial markets continue to ignore the relatively solid run of economic data seen over the past several months, focusing instead on the fiscal crisis in Europe. Nevertheless, the economic data helps to drive earnings prospects in the United States, and earnings are the ultimate driver of stock prices. The economic and corporate data may not matter to market participants today, but once it starts to matter again, some market participants may be surprised by how well the U.S. economy is performing.

Will it be a November to Remember for the United States Economy?This week, the focus in the United States will be on November data, with key reports on employment, the consumer, and manufacturing. The reports on employment, which include the ADP employment report on private sector hiring in November, the Challenger report on layoff and hiring announcements in November, along with the government’s November employment report, are likely to be consistent with the weekly reports on initial claims for unemployment insurance in November which revealed that the labor market was improving, albeit modestly as the month progressed. The market is looking for about a 150,000 gain in private sector employment in November, following the 104,000 increase in private sector jobs in October and an average monthly gain of 152,900 so far this year. The unemployment rate is expected to remain at 9.0% in the month.

Early reports from the retailers over the just-completed Thanksgiving weekend suggest that the consumer got off to a very good start in the holiday shopping season, confounding the experts who were looking for a more modest gain in sales this holiday shopping season (Please see this week’s Weekly Market Commentary for details). The market will get more detail on the solid start to the 2011 holiday shopping season as retailers report their November sales (and provide guidance for December) on Thursday, December 1. The market will also digest a report on vehicle sales in November this week. Vehicle sales and production are at three-and-a-half year highs.

The manufacturing sector is also in the spotlight this week, highlighted by the Institute for Supply Management’s (ISM) report on manufacturing for November. The market is looking for a slight expansion in manufacturing activity in November to 51.6 from 50.8 in October. A reading above 50 on the ISM indicates that the manufacturing sector is expanding. A reading above 42 has historically been consistent with growth in the overall economy. The ISM has been over 50 in every month since July 2009, and has been above 42 since April 2009 [Chart 1].

As previously noted, monetary policy will also be in focus this week, with the release of the Fed’s Beige Book, accompanied by a full roster of Fed speakers. We continue to expect the Fed to pursue historically accommodative monetary

1110090807060504030201

67.5

60.0

52.5

45.0

37.5

30.0

ISM Manufacturing: PMI Composite IndexSeasonally Adjusted, 50+=Increasing

1 The ISM Has Been Above 50 Since July 2009, and Above 42 Since Early 2009

Source: Institute for Supply Management, Haver Analytics 11/28/11

(Shaded areas indicate recession)

Purchasing Managers Index (PMI) is an indicator of the economic health of the manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.

The ISM index is based on surveys of more than 300 manufacturing firms by the Institute of Supply Management. The ISM Manufacturing Index monitors employment, production inventories, new orders, and supplier deliveries. A composite diffusion index is created that monitors conditions in national manufacturing based on the data from these surveys.

WEEKLY ECONOMIC COMMENTARY

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This research material has been prepared by LPL Financial.

The LPL Financial family of affiliated companies includes LPL Financial and UVEST Financial Services Group, Inc., each of which is a member of FINRA/SIPC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity.

IMPORTANT DISCLOSURES The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

The Beige Book is a commonly used name for the Fed report called the Summary of Commentary on Current Economic Conditions by Federal Reserve District. It is published just before the FOMC meeting on interest rates and is used to inform the members on changes in the economy since the last meeting.

policy in the period ahead. Even if the economy tracks to the consensus expectation (roughly 2.0% real gross domestic product growth in 2012 and 2.5% in 2013), the Fed is likely to ease even more in 2012 (via additional purchases of Treasury securities or mortgage-backed securities in the open market), as the Fed’s forecasts for economic growth and the unemployment rate remain more optimistic than the consensus.

The Beige Book is once again likely to be dominated by the word “uncertain”. The words (or derivations of the word) appeared 26 times in the Beige Book released in October and 33 times in the Beige Book released in early September 2011. Europe, the super committee, the economic outlook and the holiday shopping season are all likely to be mentioned in this edition of the Beige Book, which is being prepared ahead of the December 13 FOMC meeting.

There are a number of Fed officials slated to make public appearances this week, but the only member of the Fed’s “center of gravity” set to speak this week is Vice Chair Janet Yellen. We continue to look to the Fed’s “center of gravity” — Chairman Bernanke, Vice-Chair Yellen and New York Fed President Dudley — rather than the fringes of the Fed, for any shift in tone.

Outside of the United States, no fewer than six central banks meet this week to set policy and three of the six (Brazil, Thailand, and the Philippines) are expected to cut rates, in part to help combat the impact of the Eurozone debt debacle on their domestic economies. China’s central bank, the People’s Bank of China (PBOC), does not have a set meeting schedule. However, the PBOC is watching the domestic inflation data in China closely, and may choose at any time to reverse some of the restrictive monetary policy it put in place between early 2010 and mid-2011. The official Chinese ISM report (commonly referred to as the PMI) for November is due out this week, and could provide a catalyst for the PBOC to act, especially if the report shows — as expected — that manufacturing in China contracted in November 2011 for the first time since early 2009.

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Jeffrey Kleintop, CFAChief Market Strategist LPL Financial

LPL F INANCIAL RESEARCH

Weekly Market CommentaryNovember 28, 2011

Black Friday Caps a Dark Week for Investors

HighlightsIt was a black Friday for investors as the holiday week closed with the S&P 500 turning in its worst performance during the week of Thanksgiving since 1932.

Fear gripped the market that the risk of a default by a major European government that would trigger a financial crisis was rising.

It is likely to take years to resolve the debt problems in Europe; however as with the lingering U.S. subprime mortgage debt and housing problems, merely stabilizing the problem may allow markets and the economy to heal from the damage.

As progress in managing risks and efforts toward fiscal sustainability meets with setbacks and disruptions, expect continued market volatility — but not all of it to the downside as in the past seven trading days.

It was a black Friday for investors as the holiday week closed with the S&P 500 turning in its worst performance during the week of Thanksgiving since 1932. Despite strong retail sales indications and solid readings on U.S. economic growth, worsening sentiment on the European debt problems — combined with a failure of the super committee in the United States to agree on deficit cuts — pulled the S&P 500 down 4.7% adding to the cumulative decline of 7.9% in just the past seven trading days.

U.S. economic data was solid again last week with claims for unemployment benefits falling further below the 400,000 level, home sales rising over 13% year-over-year, and a 12% year-over-year rise in orders for durable goods excluding the volatile transportation (airplane) orders in October. This week’s ISM reading on Thursday and the employment report on Friday will be closely watched. Fourth quarter gross domestic product (GDP) is on pace to top the third quarter’s growth rate.

In addition, retail sales during Thanksgiving weekend climbed 16% as more shoppers hit the stores and spent more money, according to the National Retail Federation, wildly exceeding consensus estimates. Retail sales matter to the stock market mainly because they reflect the health and sentiment of the consumer and investor [Chart 1], but also because they contribute to growth of the economy and corporate profits.

The market knew going into last week it was a long shot that the super committee would produce a deal for the $1 trillion-plus in deficit reduction with which they had been tasked. However, some disappointment over the failure that may have affected markets was that it dimmed the prospects for getting those items passed that have greater near-term consequences for the economy and markets. The real deal Congress must pass before year end is some combination of these expiring programs:

� Payroll tax cuts

� Unemployment benefits extension

� The 100% depreciation of new capital spending for businesses

� The annual physician Medicare fix and the AMT fix

Although these extensions are by no means off the table and it is still likely some of these pass in an end-of-year session, the odds that Congress cannot reach any agreement have risen.

WEEKLY MARKET COMMENTARY

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The main driver of last week’s market action was the fear among some market participants that the risk was rising of a default by a major European government that would, in turn, trigger the collapse of financial institutions and a crisis throughout Europe and beyond. This potential path echoes the chain reaction that followed the bankruptcy of Lehman Brothers in September 2008 that led to a global financial crisis.

In late October 2011, European policymakers crafted a ground-breaking agreement that addressed recapitalizing the banking system, created an orderly default by Greece, and provided financial buffers against losses on future bond issuance among eurozone members. All of these steps are in an effort to reverse the tide of money that has flowed out of the European sovereign bond market and pushed up borrowing costs. These actions averted a 2008-like financial crisis. However, concerns remain about the outlook for economic growth in Europe and the ability of some countries to meet budget targets. As hurdles to implementation of the debt plan are materializing, bond yields of some European nations have risen to levels that make progress on balancing budgets very difficult. There are eight European countries with yields over 6% [Chart 2]. Last week, Italy saw its 10-year borrowing cost rise above the 7% threshold that forced Greece, Ireland, and Portugal to seek bailouts in 2010.

There are many technical factors driving yields higher, including European bank asset sales as these institutions raise required capital. However, fundamental factors lie at the heart of the rise, particularly for the eight European nations with yields over 6%.

� The troubles of Greece, Portugal and Ireland are no secret. These three nations were granted bailouts in 2010 that continue to provide ongoing support. The worst off is Greece, which, despite a landmark debt deal, still faces years of economic decline. The best off is Ireland which has

2 European 10-Year Bond Yields

Source: LPL Financial, Bloomberg 11/27/11

Past performance is no guarantee of future results.

0% 7% 14% 21% 28%

Greece Portugal

IrelandHungary

ItalySpain

IcelandPoland

BelgiumCzech Rep

AustriaFranceFinland

NetherlandsNorway

UKGermanyDenmarkSweden

Switzerland

12.0%9.3%9.3%

7.2%6.6%6.5%

6.1%5.8%

4.2%3.8%3.7%

2.9%2.7%

2.3%2.3%2.3%

2.0%1.6%

0.8%

26.5%

1 Solid Consumer Demand Typically Comes Along with Solid Investor Demand

Source: LPL Financial, U.S. Census Bureau 11/27/11

The S&P 500 is an unmanaged index, which cannot be invested into directly. Past performance is no guarantee of future results.

06 07 08 09 10 11050403020100

50%

30%

10%

-10%

-30%

-50%

-70%

12%

9%

6%

3%

0%

-3%

-6%

S&P 500 (Left Axis)Core Retail Sales (Right Axis)

Year-Over-Year Change in S&P 500 and Core Retail Sales (excluding Autos, Gasoline and Building Supplies)

WEEKLY MARKET COMMENTARY

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proven itself as the bailout country most loyally implementing austerity and markets are responding. Irish yields have fallen from 13.8% to 9.3% over the past four months and the economy has produced solid economic growth. Fortunately, the bond markets of these nations are relatively small and banks have largely insulated themselves from the impact of a default.

� Hungary is part of the European Union and received IMF funding, but does not use the euro and cannot until 2020 at the earliest.

� Italy has implemented spending cuts and is running a primary surplus, meaning that the borrowing is to cover their debt costs and not to fund new spending. Italy’s budget deficit is less than 5% of its GDP, lower than France’s 7% and close to Germany’s 4%. However, Italy has over 2 trillion euros in debt totaling about 120% of GDP. In an effort to lower debt, Italy has cut government workers, raised revenue with closing some tax breaks, and sold some government assets. With the recent change in power in the Itailian government, more cuts are on the way.

� In some ways, Spain is better positioned than other European countries. It has shown a greater tolerance for cutting spending and last week’s election generated a strong majority for the incoming ruling party which has emphasized further fiscal reform. Fortunately, Spain’s debt-to-GDP is only half that of Italy. On the negative side, its budget deficit is twice Italy’s and its banking sector is perhaps the most damaged in Europe, other than Greece.

� While Iceland does not use the euro and is not even a member of the European Union, Iceland suffered a banking collapse in 2008 and required support from the IMF. Iceland has made some progress. Notably, Iceland had its credit rating outlook raised last week by Standard and Poor’s and bond yields have declined to 7% from about 13% at the peak in 2008.

� While a bond yield of 6.1% may seem high, Poland’s borrowing costs are in line with the average of the past 10 years and well below recent peaks and therefore likely to remain manageable.

As many European countries (eight), have yields below 3% as above 6%. Although these countries do not share the same fiscal position, they are not immune to the economic impact of contagion in the region. The troubles with Greece, Italy, and Spain lie at the heart of the problem for all of Europe. The long-term success of rescue efforts is dependent upon European nations taking additional steps to adhere to their plans for achieving financial stability and deficit reduction. It is no coincidence all of these three countries have seen a change to their governments in 2011 to those willing to take more aggressive actions.

Lack of enforcement of budget rules is a big part of what drove Europe to the current state. Going forward, the European policymakers want to ensure important steps are taken before extending additional support to halt the slide in the markets. While it will take years to resolve the debt problems in Europe, with the lingering subprime mortgage debt and housing problems in the United States, merely stabilizing the problem can allow markets and the

While it will take years to resolve the debt problems in Europe, with the lingering subprime mortgage debt and housing problems in the United States, merely stabilizing the problem can allow markets and the economy to heal from the damage.

As many European countries (eight), have yields below 3% as above 6%.

WEEKLY MARKET COMMENTARY

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This research material has been prepared by LPL Financial.

The LPL Financial family of affiliated companies includes LPL Financial and UVEST Financial Services Group, Inc., each of which is a member of FINRA/SIPC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity.

IMPORTANT DISCLOSURES

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

economy to heal from the damage. We expect the passage of the difficult, but necessary, reforms among the troubled nations, during the coming weeks and months.

As progress in managing risks and efforts toward fiscal sustainability meet with setbacks and disruptions, expect continued market volatility — but not all of it to the downside as in the past seven trading days. Hopefully, as we leave black Friday and the month of November behind the market has a brighter start to December.