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Monthly Archives: November 2009

Busy Week of Data Ahead of “Bargain Friday”

It was a drab week overall for the economy last week. The data on housing and industrial production for October failed to meet expectations while the three reports for November – jobless claims, Empire State Manufacturing and Philly Fed manufacturing index – came in at or above expectations. The October retail sales and leading indicator data for October was roughly in line with expectations. Taken together, the data released last week does not change our view that the economy will post a 3.0% growth rate in Q4 2009 and will deliver above consensus growth in 2010.

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Benevolence in Bellevue

The path to being an independent financial advisor varies, but a lot of advisors wouldn’t attempt to go independent without first building a substantial client base. That wasn’t the case for Michael Boone, whose modest beginnings have fueled a passion for helping others.

After only nine months into his financial career, Michael decided to go independent and founded MWBoone and Associates in Bellevue, Washington. Not having many industry contacts or clients meant that the early years on his own were lean. For example, he reports his gross revenue was $5,900 his first year in business.

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Running the Table

At around 1100, the S&P 500 index is in line with its high of the year. Signs that the recovery in the economy and earnings are sustainable are encouraging investors to drive stocks to higher. The key sign of sustainability is job growth, and the key to job growth is profit growth.

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Data Deluge on the Way This Week

Last week’s rather sparse U.S. economic data calendar highlighted two fundamental factors that are driving the U.S. dollar lower: the twin trade and budget deficits. While a weak report on consumer sentiment in early November was worrisome, data on jobless claims, banks’ willingness to lend, another set of robust economic data from China, and the weaker dollar were enough to keep the eight month, 65% rally in the U.S. equity markets on track.

In sharp contrast to last week’s data calendar, this week’s is chock full of data. Among the reports due out are:

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Running the Table

With many market participants fretting about the sustainability of the economic recovery, we thought that last week’s slate of economic data would have to "run the table" in order for the equity market to break the slump it had been in mid-October. For the most part, the data released last week did "run the table", with the vast majority of reports coming in at or above expectations. The market also benefited from another "friendly" FOMC statement, in which Federal Reserve (Fed) policy makers upgraded their assesment of the economy, but again promised to keep rates low "for an extended period". Equity markets responded positively to the preponderance of good news, as the S&P 500 posted a healthy 3.2% gain in the week, the first weekly gain since mid October.

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Financial Regulatory Reform

This week marks the 10th anniversary of the passage of the of the Gramm-Leach-Bliley act (passed on Nov. 12 1999). This financial "reform" act helped to sow the seeds of the recent financial crisis by effectively repealing the Great Depression-era Glass-Steagall act of 1933. The Glass-Steagall act had separated lending and investing for many decades after combining both activities in the same financial institution had led abuses that threatened the stability of the financial system and worsened the Great Depression. The financial "reform" act passed 10 years ago this week allowed for consolidation between commerical banks, investment banks, and insurance companies, blurring the distinctions between lines of business and regulatory oversight. The unintended outcomes of this transformation was an explosion in the volume of mortgage originations and the use high amounts of leverage by investment banks that ultimately threatened the stability of the financial system.

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Are Stocks Over Valued?

Back in the summer months of May, June, and July, the stock market, measured by the S&P 500, remained in a range around 900 after investors moved from pricing in another great depression to a typical recession. Now, this fall, the S&P 500 has been in a range around 1050 as investors have moved from pricing in a typical recession to a recovery. The recent pattern of performance of the S&P 500 is remarkably similar to what place during the early summer months.

The nearby chart of the S&P 500 compares this summer’s performance (from Aprll 22 through July 31) and the pattern this fall (from September 1 to now). They are nearly a perfect match, with the fall being exactly 150 points higher on the index than during summer. What this suggests is that recent slide may not be the end of the pullback either. An eventual move down of a few more percentage points in the next few weeks may unfold if ….

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Assessing the Sustainability of the Recovery

Taken together, last week’s economic reports raised concerns about the sustainability of the recovery. While our view remains that the economic recovery that began in Q3 2009 is sustainable and will persist into 2010 and beyond, the market began to doubt that view after a mixed week of economic data.

The sustainability of the recovery, and more importantly, the health of the albor market will be at the forefront of debate this week amid a very busy (and meaningful) weak of economic data. This week begins with the release of nonfarm payroll job report for October on Friday. In between, markets will digest key reports on housing sales, vehicle sales, chain store sales, and construction spending. Throw in the FOMC meeting, and the market will be just as overwhelmed by the economic calendar this week, as it was by the busy calendar over the past two weeks.

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