August Tatum/Roulston Report

August 20, 2012

As we have identified in the past, the Tatum Survey is one of the most significant polls of economic activity available today. Unlike so many others, this census involves the same respondents every month of senior financial executives across regions and industries. It has correctly identified the last recessions and recoveries before any other similar measurements of economic activity. This month continued the downward trend in economic activity. Although the Tatum Survey specifically does not predict recessions, the current survey now shows the U.S economy in negative growth. Another month of similar response and we believe the U.S. will enter into a recessionary stage. Although employment (lagging indicator) has not shown the same negative comps, other indicators are worsening.

With most of Europe already in recession and China slowing, it would seem raw material demand is starting to slow. This will have a negative domino effect on other regions. The U.S. has been in a job depression for multiple years. There is no question the regulatory environment in many sectors has frozen activity and created roadblocks to recovery. The housing depression has also taken its toll. Historically, the sector is a large part of any cyclical recovery. Without the participation of job growth and activity in the sector, any recovery momentum has stalled. Although maybe the swoon has bottomed in housing sales and pricing, the resulting inventory and financial hangover in this segment still appears to have a long time until it regains its historical impact for driving the domestic economic engine. Without this participation and with state and local governments now $3 trillion in unfunded pension liabilities and another $1 trillion of unfunded health benefits, the economy will be challenged even in expansion elsewhere. But with regulatory overhang and recent international slowdown the survey now indicated the headwinds seem to be to strong.

Diversification into non-correlating assets and strong stock selection is the investment response to this economic slowdown. There are many opportunities for catalysts with the election and the international monetary stimulus that has been in place and appears to be expanding. With these issues, we believe the soft entry into a recession is more a negative turn in an already stagnating situation. Corporations are still the best prepared for this slowdown. With high cash availability and streamlined operations the markets are reflecting corporate earnings to be under some pressure, but not at near term risk of collapse. Some regulatory relief and some fiscal stimulus could really reenergize the domestic economy. We like what this scenario could lead to and, again recognizing the recessionary pressure at hand, we see this potentially short-lived. To read the full survey please visit August_2012_Tatum_Survey.

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