Recent Market Declines: Another Great Recession Ahead?

The markets have been volatile. Very volatile. I'm watching the nightly news with Brian Williams and the headline "Markets In Turmoil" led the broadcast. NBC is even so kind to have a special program tonight at 8pm with the same title. Great.

I wrote the paragraph below to conclude my last Saturday morning post about the debt ceiling uncertainty going into the weekend. While I was right in interpreting the events that were transpiring, I certainly didn't think the market would sell off as much as it did. I doubt any honest person would say that they did either.

"What is most likely to move markets is how the likely compromise to the debt ceiling is perceived by the market. Markets will assimilate this new information to establish a new equilibrium price, based on the compromise's effects on the US and global economy near and longer term. For instance, severe spending restraints could represent a short-term reduction in demand that can slow economic growth. This could negatively impact equities and be a boon for bonds."

Don't confuse the debt ceiling with what's transpiring here. They're distinctly different. In my opinion, the market has over-reacted to the coming decrease of economic stimulus by the government, some ho-hum economic indicators, and resurfacing concern about European banks and sovereign debt.

The market is down slightly more than 10% from the recent peak. It may go down some more, who knows. But it's not another great recession like 2008 and 2009. In looking at the 10-year treasury note, it's less than 2.5%--similar to October 2008 levels. Think the bond market is concerned about the loss of a AAA rating? No way. Rates would be much higher. Economic slow down is the concern or perhaps more apt: the panic.

Markets will likely exhibit continued volatility and the economy and job outlook will likely be marginal at best. These problems will take a long time to work through. Meanwhile, real people living and working in the real economy need real, after-tax returns to make their financial plans work and live their lifestyles. And rates being earned on savings simply will not cut it for the vast majority.

So what to do now? Even though I'm espousing opinions above and consider the likely hood of economic scenarios and their impact on markets when making portfolio management decisions for clients, you simply cannot time this stuff. Look at the chart of monthly returns for the S&P 500 and Russell 2000 indices below. (Click on the image to enlarge it.)

Last May and June we had larger declines than what we've had recently. In fact May, June, and August of last year saw the Russell 2000 sell off by more than 7% each month. Then look at the positive returns that followed. Trying to time these ups and downs is like playing Russian Roulette.

What I said last week is repeated below.

Care will need to be taken in investing new cash or when transferring funds between accounts. Averaging into the market in this case is a sound approach. Rebalancing your account to move equity gains over the last year into bonds is also a sound move.

In general, now is not the time to sell unless you portfolio is poorly constructed, under-diversified, high cost, or you are taking too much risk to begin with. Now could be a good time to harvest tax losses if you have some, but be careful not to be out of the market in doing so.

Be prudent and rational. Work your plan and hang in there.

Gotta run for the 8pm special. Thanks NBC.

Kevin Kroskey, CFP, MBA


"If you don't read the newspaper, you're uninformed. If you read the newspaper, you're mis-informed."   — Mark Twain

The U.S. Debt Ceiling and Possible U.S. Rating Downgrade: What Should Investors Do Now?

As the wrangling continues on Capitol Hill, increasingly  the thought is that the Treasury can manage well through roughly August 10 without a debt-ceiling increase, and even after that time, they can go on for a considerable period without technically defaulting on the debt.


Financial markets are now beginning to price in the likelihood of a U.S. government debt downgrade from AAA to AA+ in the near future, although relatively few think the government will technically default. The credit rating downgrade, however, is believed to be probable. The chances of a ‘grand bargain’ sufficiently large to satisfy Standard and Poor’s appears to be practically negligible.Not only would the federal government’s rating be impacted, but Moody’s has warned that five states are in danger of losing their triple-A ratings as well: Maryland and Virginia (both home to a large number of federal employees) and New Mexico, Tennessee and South Carolina face downgrades because of their heavy reliance on federal revenue.


Moody's added that other institutions would be affected by a U.S. credit rating downgrade, including Fannie Mae, Freddie Mac, the Federal Home Loan Banks and the Federal Farm Credit Banks. As many as 7,000 states and municipalities could feel the impact, as well as foreign bonds that are guaranteed by the U.S. government, such as those of Israel and Egypt.

The Impact of a US Credit Downgrade

While the US may at least temporarily lose it's AAA status, this may be more of a headline the media runs with rather than a great concern to investors. Other countries that in the past have lost their AAA and dropped to AA, such as Canada, Australia and Japan seem to have been only marginally impacted. More importantly, Canada and Australia were able to regain their AAA rating after several years of fiscal discipline.


A key question in many investors’ minds is what impact will a downgrade have on interest rates. Taking Japan as an example, the answer is that a downgrade may have no impact on rates. Indeed, Japan was downgraded by S&P from AAA to AA+ on February 22, 2001 and the 10-yr rate moved 24bps lower the following week.


Similarly when both S&P and Fitch lowered Japan’s credit rating to a AA in November of 2001 the 10-year rate traded relatively flat to lower in the weeks following the downgrades (Chart 2). Ten years have passed since Japan lost its AAA rating and while its 10-year yield still remains close to 1% its currency has not been negatively impacted, but rather it is near the strongest levels of the decade.


Therefore while a credit downgrade would create a long period of uncertainty before all the implications became clear, there is precedent to suggest that rates may be not spike higher as some market participants are expecting and the world’s reserve currency may remain unaffected.

So What Should Investors Do Now?

Uncertainty is never good for markets, business, and thus for the economy. Businesses have reduced spending to maintain high levels of cash. Hiring and capital spending plans are at risk of postponement or cancellation. Consumers and investors are behaving more cautiously as well.

It's important to note that the volatility in the market is for significantly different reasons than that seen in 2008-2009. At that time, global, systemic risk was pervasive and highly uncertain. This time the risk is predominantly because of our political system, often called geopolitical risk. This type of risk is more commonly associated with emerging economies, but sadly it's now forefront in our own back yard.

Yet, while we will likely see continuing high levels of volatility until the issue is resolved for at least some period of time (aka until the next political go-round), this risk is known by market participants and is not global nor systemic to the market.


What is most likely to move markets is how the likely compromise to the debt ceiling is perceived by the market. Markets will assimilate this new information to establish a new equilibrium price, based on the comprise's effects on the US and global economy near and longer term. For instance, severe spending restraints could represent a short-term reduction in demand that can slow economic growth. This could negatively impact equities and be a boon for bonds. 


Care will need to be taken in investing new cash or when transferring funds between accounts. Averaging into the market in this case is a sound approach. Rebalancing your account to move equity gains over the last year into bonds is also a good move. However, for any remaining portion of your assets currently invested in the equity markets, leave it there. Trying to time the volatility and predicting what our politicians will ultimately agree to is a loser's game.


In the words of George Costanza...Serenity Now.


Kevin Kroskey, CFP, MBA

July Monthly Market Commentary

June was looking pretty bleak … but then economic indicators turned surprisingly positive and Greece passed austerity measures that could help it avoid default. The month concluded with a powerful Wall Street rally. Still, the S&P 500 lost 1.83% for June. Most of the month’s data substantiated that we were seeing a soft patch. While politicians butted heads over the debt ceiling, the real estate market flashed weakness and the commodities sector suffered a collective hit. Even so, Wall Street’s mood has improved as we head into the next earnings season.¹  

DOMESTIC ECONOMIC HEALTH Consumers weren’t spending very much, and they weren’t feeling too confident either. Personal spending was flat in May (after ten straight months of gains) and actually decreased 0.1% in inflation-adjusted terms. Both of the major consumer confidence polls went south for June: the Conference Board’s survey dipped 3.2 points to 58.5, and the University of Michigan’s final June consumer sentiment survey retreated to 71.5 from May’s 74.3 mark.^2,3,4

Consumer inflation moderated and unemployment increased. The May edition of the Consumer Price Index rose 0.2%; core CPI was up 0.3%. Food prices were up 0.4% and energy prices were up 0.6%, but even so this was the smallest monthly increase in inflation in seven months. Year over year through May, consumer inflation was 3.6% (and core inflation was 1.5%). The Producer Price Index advanced 0.2% in May; the preceding two months had seen increases of 0.7% and 0.8%. Annualized wholesale inflation was 7.3% - the highest wholesale inflation rate since the summer of 2008. The nation’s jobless rate ticked up to 9.1% in May.^5,6,7

On the bright side, the Institute for Supply Management’s twin PMI indices signaled that the pace of expansion had accelerated in both the service and manufacturing sectors. ISM’s May service sector index increased 1.8% to 54.6, with a 4.1% boost in new orders. The recently released June manufacturing index was a pleasant surprise: defying expectations of analysts, it rose from 53.5 to 55.3. The Conference Board’s index of leading indicators bounced back from an -0.4& showing in May to go +0.8% in June as eight of ten indicators improved. Durable goods orders had increased by 1.9% during May, and May’s 0.2% dip in retail sales was shallower than analysts had expected.^2,8,9,10,11

In Washington, there was much argument over the federal debt ceiling but little agreement. While hiking the debt cap is all but inevitable, Congress elected to take the NFL/NBA approach and sustain the dispute. Meanwhile, Standard & Poor’s warned that it would cut the U.S. debt rating from AAA to D if the debt cap wasn’t raised by August 2; Moody’s threatened a cut to somewhere in its Aa category.¹²

GLOBAL ECONOMIC HEALTH The International Energy Agency surprised the futures markets in late June when it announced a plan to release 60 million barrels worth of crude from global reserves. In the big picture, the move has a chance to tame inflation pressures (especially in Europe) and aid the dollar.¹³

Speaking of Europe, reassuring news emerged from the EU as the Greek government embarked on actions to service its debts and stay in the euro. Yet Greece is not out of the woods by any means – the possibility of default still looms, and Standard & Poor’s said it would regard a proposed rollover of privately held Greek debt led by French banks as a “selective default”.¹⁴

New manufacturing index data indicated that Asia’s economies were muddling through a soft patch as well. In June, India’s benchmark PMI had its biggest one-month fall since November 2008, reaching a nine-month low of 55.3. Taiwan’s PMI went below 50 for the first time in nine months (meaning sector contraction), and South Korea’s PMI slipped to its lowest level in seven months. China’s official PMI fell to 50.9 for June – a 28-month low.¹⁵

WORLD MARKETS Some benchmarks went positive in June, others negative. According to Morningstar calculations in U.S. dollar terms, major Asian benchmarks did okay - Sensex, +2.34%; Nikkei 225, +1.26%; Shanghai Composite, +0.68% (yet Australia’s All Ordinaries went -2.70%). In Europe, the big indices mostly retreated: DAX, +1.11%; CAC 40, -0.62%; FTSE 100, -0.74%; STOXX 600, -2.92%. To our north, Canada’s TSX Composite went -4.41%. The key MSCI indices also lost ground in June (World, -1.73%; Emerging Markets, -1.86%).^16,17,18

COMMODITIES MARKETS It was another rough month for the majority of commodities investors. Oil slipped 7.1% in June, a drop aided by the IEA’s surprise call for nations to tap into petroleum reserves. Gold had its second down month in a row (its May-June performance was -3.5%) but remained +5.71% on the year despite a -2.19% month that left prices settling at $1,502.30 on June 30. When the Department of Agriculture said that America had greater inventories and acreage of corn (and other key crops) than estimated, ag futures took a big hit. Wheat lost 21.0%, corn 17.0%, soybeans 6.0% and rice 1.4% in June. Even the dollar lost some ground: the U.S. Dollar Index went -0.21% last month, wrapping up June at 74.54.^19,20,21

REAL ESTATE What can you say about a real estate market which features reduced sales activity during the prime homebuying season? There isn’t much positive to report when assessing the May data: existing home sales were down 3.8% while new home sales were down 2.1%. In annual terms, new home sales had improved by 13.5% with the average price better by $1,400;existing home sales were down 15.3% year-over-year with the median price retreating 4.6%.^22,23

Speaking of home prices, the April edition of the Case-Shiller/S&P home price index actually showed a 0.7% overall price gain across 20 metro markets – but there was a 4.0% annualized dip in prices to take any celebration out of that small monthly advance. The good news is that pending home sales really rebounded in May: the National Association of Realtors said home sale contracts were up 8.2% from April’s seven-month low and up 17.0% from the June 2010 trough.^24,25

Freddie Mac’s June 30 Primary Mortgage Market Survey showed descents in average interest rates on the four common mortgage types compared with its June 2 survey: 30-year FRMs, -0.04% to 4.51%; 15-year FRMs, -0.05% to 3.69%; 5/1-year ARMs, -0.19% to 3.22%; 1-year ARMs, -0.16% to 2.97%.²⁶

LOOKING BACK…LOOKING FORWARD Early in June, bears were groaning. By the end of the month, the bulls were back in charge. In fact, June 27-July 1 represented the best week for the Dow and S&P 500 since mid-July 2010. Still, it was a negative month for stocks.²⁷

So with this newfound momentum or at least interest in equities, we find ourselves in July – traditionally a pretty good month on Wall Street, powered by anticipation of 2Q earnings. Since 2000, July has been a little less positive than in previous stock market cycles: the Stock Trader’s Almanac notes that the Dow and S&P have respectively averaged July gains of 1.24% and 0.16% in the last 11 years, with the NASDAQ averaging a 0.45% loss for the month. That is the recent history. The current reality is that we still have concerns about a flagging world economy, severe debt problems plaguing multiple EU countries and no agreement yet on the federal debt ceiling. Let’s hope that earnings season casts its spell on the collective mind of Wall Street, with 2Q results impressive enough to make stock market performance in July 2011 correspond to Julys of decades before.³²

UPCOMING ECONOMIC RELEASES: Looking at the balance of July, here is what’s ahead: the June ISM service sector index (7/6), the June jobs report and May wholesale inventories (7/8), June PPI and retail sales and May business inventories (7/14), June CPI and industrial output and the initial University of Michigan July consumer sentiment survey (7/15), June building permits and housing starts (7/19), June existing home sales (7/20), the Conference Board’s LEI index for June (7/21), June new home sales, May’s Case-Shiller home price index and the Conference Board’s July consumer confidence poll (7/26), June durable goods orders and a new Federal Reserve Beige Book (7/27), June pending home sales (7/28), and the first take on 2Q 2011 GDP and a final June consumer sentiment poll from the University of Michigan (7/29). The Commerce Department report on June consumer spending will be released on August 2.

MONTHLY QUOTE

“The large print giveth, but the small print taketh away.”
 – Tom Waits

MONTHLY TIP
How big is your rainy day fund? Ideally, you should build an emergency fund that should equal 6-12 months of current living expenses. It is a worthwhile goal to pursue.

Best Regards,
Kevin Kroskey

Citations.
1 - blogs.wsj.com/marketbeat/2011/06/30/data-points-u-s-markets-27/ [6/30/11]
2 - cnbc.com/id/43546166/ [6/27/11] 
3 - blogs.wsj.com/marketbeat/2011/07/01/ism-much-better-than-expected/ [7/1/11]
4 - marketwatch.com/story/consumer-sentiment-declines-in-june-2011-07-01 [7/1/11]
5 - bls.gov/news.release/cpi.nr0.htm [6/15/11]               
6 - bls.gov/news.release/ppi.nr0.htm [6/14/11]
7 - latimes.com/business/la-fi-jobs-report-20110604,0,3594048.story [6/3/11]          
8 - ism.ws/ISMReport/NonMfgROB.cfm [6/3/11]
9 - bloomberg.com/news/2011-06-17/u-s-leading-economic-indicators-index-rises.html [6/17/11]
10 - marketwatch.com/story/us-durable-goods-orders-rise-19-for-may-2011-06-24 [6/24/11]
11 - marketwatch.com/story/retail-sales-fall-for-first-time-in-11-months-2011-06-14-919560 [6/17/11]
12 - bloomberg.com/news/2011-06-29/moody-s-would-likely-cut-u-s-debt-rating-to-aa-range-in-event-of-default.html [6/30/11]
13 - online.wsj.com/article/BT-CO-20110627-712832.html [6/27/11]            
14 - investors.com/NewsAndAnalysis/Article/577212/201107050905/Stock-Futures-Nose-Lower-Baidu-Adds-2.htm [7/5/11]            
15-  reuters.com/article/2011/07/01/economy-global-pmi-idUSL3E7I10O820110701 [7/1/11] 
16 - news.morningstar.com/index/indexReturn.html [6/30/11]
17 - mscibarra.com/products/indices/international_equity_indices/gimi/stdindex/performance.html [6/30/11]
18 - blogs.wsj.com/marketbeat/2011/06/30/data-points-europe-135/ [6/30/11]
19 - blogs.wsj.com/marketbeat/2011/06/30/data-points-energy-metals-494/ [6/30/11]
20 – online.wsj.com/mdc/public/npage/2_3051.html?mod=mdc_curr_dtabnk&symb=DXY [7/5/11]
21 - businessweek.com/news/2011-07-01/corn-extends-worst-monthly-loss-since-2008-on-acreage-increase.html [7/1/11]
22 - money.cnn.com/2011/06/23/real_estate/new_home_sales/?section=money_latest [6/23/11]         
23 - nytimes.com/2011/06/22/business/economy/22econ.html [6/22/11]
24 - blogs.forbes.com/morganbrennan/2011/06/29/what-can-homeowners-learn-from-case-shillers-home-price-index/ [6/29/11]
25 - usatoday.com/money/economy/housing/2011-06-29-pending-home-sales_n.htm [6/29/11]
26 - freddiemac.com/pmms/ [7/5/11]
27 - cnbc.com/id/43608555 [7/1/11]
28 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=6%2F30%2F10&x=0&y=0 [7/5/11]
28 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=6%2F30%2F10&x=10&y=18 [7/5/11]
28 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=6%2F30%2F10&x=0&y=0 [7/5/11]
29 - treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldYear&year=2011 [7/5/11]
30 - treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldAll [7/5/11]
31 - treasurydirect.gov/instit/annceresult/press/preanre/2001/ofm11001.pdf [1/10/01]
32 - cnbc.com/id/43197003 [5/31/11]
33 - montoyaregistry.com/Financial-Market.aspx?financial-market=financial-planning-where-do-you-begin&category=5 [7/6/11]

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. The NASDAQ Composite Index is an unmanaged, market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System. The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is not possible to invest directly in an index. NYSE Group, Inc. (NYSE:NYX) operates two securities exchanges: the New York Stock Exchange (the “NYSE”) and NYSE Arca (formerly known as the Archipelago Exchange, or ArcaEx®, and the Pacific Exchange). NYSE Group is a leading provider of securities listing, trading and market data products and services. The New York Mercantile Exchange, Inc. (NYMEX) is the world's largest physical commodity futures exchange and the preeminent trading forum for energy and precious metals, with trading conducted through two divisions – the NYMEX Division, home to the energy, platinum, and palladium markets, and the COMEX Division, on which all other metals trade. BSE Sensex or Bombay Stock Exchange Sensitivity Index is a value-weighted index composed of 30 stocks that started January 1, 1986. Nikkei 225 (Ticker: ^N225) is a stock market index for the Tokyo Stock Exchange (TSE). The Nikkei average is the most watched index of Asian stocks. The SSE Composite Index is an index of all stocks (A shares and B shares) that are traded at the Shanghai Stock Exchange. The S&P/ASX All Ordinaries Index represents the 500 largest companies in the Australian equities market. The DAX 30 is a Blue Chip stock market index consisting of the 30 major German companies trading on the Frankfurt Stock Exchange. The CAC-40 Index is a narrow-based, modified capitalization-weighted index of 40 companies listed on the Paris Bourse. The FTSE 100 Index is a share index of the 100 most highly capitalized companies listed on the London Stock Exchange. With a fixed number of 600 components, the STOXX Europe 600 Index represents large, mid and small capitalization companies across 18 countries of the European region. The S&P/TSX Composite Index is an index of the stock (equity) prices of the largest companies on the Toronto Stock Exchange (TSX) as measured by market capitalization. The MSCI World Index is a free-float weighted equity index that includes developed world markets, and does not include emerging markets. The MSCI Emerging Markets Index is a float-adjusted market capitalization index consisting of indices in more than 25 emerging economies. The US Dollar Index measures the performance of the U.S. dollar against a basket of six currencies. Additional risks are associated with international investing, such as currency fluctuations, political and economic instability and differences in accounting standards. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. All economic and performance data is historical and not indicative of future results. Market indices discussed are unmanaged. Investors cannot invest in unmanaged indices. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional.

June Monthly Market Commentary

The month of May saw a barrage of disappointing economic reports one after the other. As the end of the second quarter approaches, long-term interest rates have fallen while international fears have risen. Earlier this month, Greece’s credit rating was downgraded once again because of ongoing concerns regarding austerity measures and debt rescheduling possibilities. Japanese auto production has also plunged 60% since the earthquake and tsunami—731,000 units were produced in April 2010, while only 292,000 units were produced in April 2011.

GDP: The first-quarter GDP remained unrevised at 1.8%, despite expectations of an upward revision because of strong retail sales growth in February. While several retail categories were revised upward, the combination of gasoline sales, auto sales, and utility usage being revised downwards roughly offsets the retail revisions. On a brighter note, falling gasoline and utility sales means consumers are driving less as a result of higher prices rather than cutting back on other categories. In the months ahead, this could mean lesser oil imports, which in turn could potentially aid GDP growth. National gasoline prices dropped to $3.78 a gallon recently, down from a high of $3.98 but still dangerously higher than last year’s $2.78 a gallon.

Employment: Employment data was disappointing for the month of May. Businesses performed worse than expected as consumers pulled back due to rising gas prices and commodity price increases. Employment grew by a mere 54,000 compared with 241,000 during April, representing an annualized employment growth of 0.5%. Retail and leisure payroll categories accounted for the majority of this significant decline; retail added 78,000 jobs in April but only a dismal 3,000 in May, while leisure went from 30,000 jobs in April to negative 6,000 in May.

Unemployment: The unemployment rate crawled up slightly to 9.1% from 9.0%. Initial jobless claims fell 6,000 during the last week in May to 422,000. The four-week average of 425,000 compared well to the month-ago level of 432,250.

Housing: Housing prices continued to erode as the national purchasing managers' reports for manufacturers showed a major decline. The pending home sales report was a disappointment. Contract signings in April fell by 12% compared with March and fell 27% from last year’s tax-credit-fueled period. One of the causes for this decline was severe weather conditions: The United States experienced the heaviest April precipitation level in 20 years. Tight lending remained another prevailing factor, dragging the numbers lower.

Manufacturing: The ISM Manufacturing Index dropped sharply, indicating that the manufacturing sector is still growing, but at a significantly slower pace compared with April. Morningstar’s economists do not think that this was something unexpected. The Chicago regional report (announced the day before the ISM numbers were released) also gave strong indication of slowing growth.

Retail sales: The International Council of Shopping Centers report revealed that monthly retail sales increased 5.3% as luxury goods stores continued to display stellar results. The “Tale of Two Recoveries” continued, as high-end retailers such as Saks and Tiffany raised price points and outperformed the market respectively while on the other end of the spectrum, companies like Gap and Wal-mart continued to struggle. Morningstar economists expect real wages, measured by the Personal Consumption Expenditure Price Index, to move into negative territory for May; the number has been steadily declining since February.



©2011 Morningstar, Inc., 22 W. Washington Street, Chicago, IL 60602.

Fed Chairman Bernanke Speaks on U.S. Economy

Chairman Bernanke’s speech on June 7, 2011 held no surprises, with the somewhat down-beat tone reflecting the recent spate of dreary economic reports. While acknowledging that the economy and labor markets have lost some momentum, the Chairman continues to expect a moderate paced recovery to unfold through the second half of the year. He noted that consumers continue to face headwinds such as high gasoline prices and falling house prices, but takes some comfort in the recent moderation in the former. The recent upturn in inflation is expected to be temporary amid high unemployment and steadier commodity prices. He repeated the Federal Open Market Committee's commitment to end QE2 later this month, but to continue reinvesting maturing assets, and also affirmed that low rates are likely justified for an “extended period”.

With the economy still operating well below its potential, “accommodative monetary policies are still needed”, and a full-fledged recovery likely won’t take root until “we see a sustained period of stronger job creation.” He warned the Administration and Congress to establish a credible long-term deficit reduction plan, one that doesn’t jeopardize the fragile economic recovery in the near term.

Bottom Line: The Chairman said it best in that in the face of the worst financial crisis and housing bust since the Depression, “monetary policy cannot be a panacea”. It can only treat the symptoms and alleviate the pain.

May 9, 2011 Weekly Market Commentary

HIRING IMPROVES IN APRIL

The Labor Department’s latest jobs report contained some good news: the private sector added 268,000 new jobs last month, and overall non-farm payrolls increased by 244,000 in April. The private sector hasn’t seen this much month-over-month job creation since February 2006, and the net gain of 244,000 jobs was the best since June 2010. The unemployment rate went up to 9.0% in April, but Wall Street rallied Friday after the report was released.1

PMI INDEX STRONG; SERVICE SECTOR INDEX SLIPS
Last week, the Institute for Supply Management released its April reports on the manufacturing and service sectors. While the manufacturing index came in at 60.4 – down slightly from March’s 61.2 – anything above 60 indicates a booming sector. The non-manufacturing index dropped to 52.8 from March’s 57.3 reading. Anything above 50 means growth, but the index hasn’t been this low in eight months.2

GOLD, SILVER & OIL PULL BACK
Are commodities overbought? That anxiety weighed on the futures markets last week, and it was amplified by a strengthening dollar. Silver took the biggest hit, retreating 27.4% across five days to $35.28 an ounce at the Friday COMEX close. Gold lost 4.2% to end the week at $1,491.20 per ounce; copper sank 4.9% for the week, leaving it 14% under its February 14 record close on Friday. Oil slid 14.7% last week, all the way down to $97.18 per barrel at the Friday close; crude had its poorest week since mid-December of 2008.3,4

A VOLATILE WEEK SEES STOCKS RETREAT
Stocks rollercoastered a bit last week as closely watched indicators alternately came in positive and negative. By Friday’s close, the scorecard for May 3-6 looked like this: DJIA, -1.34% to 12,638.74; S&P 500, -1.72% to 1,340.20; NASDAQ, -1.60% to 2,827.56. (The “flash crash” occurred on May 6, 2010 – that’s why the 1-YR CHG column below shows such radical improvement this week.)5

THIS WEEK: No major economic releases are scheduled for Monday. On Tuesday, we have a report on March wholesale inventories and 1Q earnings from Disney. On Wednesday, three Federal Reserve Bank presidents speak and 1Q earnings from Toyota, Symantec and Cisco arrive. Thursday, the April PPI is released and the newest reports on initial jobless claims arrive; we get the Census Bureau’s report on April retail sales along with 1Q earnings from three titans of the mall – Nordstrom, Macy’s and Kohl’s. Friday, we get April’s CPI and the University of Michigan’s initial consumer sentiment survey for May.

WEEKLY QUOTE
“That which seems the height of absurdity in one generation often becomes the height of wisdom in the next.”
– John Stuart Mill

WEEKLY TIP
If you have adult children living at home, do they pay rent? It can provide you with a source of extra income.

Best Regards,

Kevin Kroskey




This material was prepared by Peter Montoya Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information should not be construed as investment, tax or legal advice. The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. The NASDAQ Composite Index is an unmanaged, market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System. The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is not possible to invest directly in an index. NYSE Group, Inc. (NYSE:NYX) operates two securities exchanges: the New York Stock Exchange (the “NYSE”) and NYSE Arca (formerly known as the Archipelago Exchange, or ArcaEx®, and the Pacific Exchange). NYSE Group is a leading provider of securities listing, trading and market data products and services. The New York Mercantile Exchange, Inc. (NYMEX) is the world's largest physical commodity futures exchange and the preeminent trading forum for energy and precious metals, with trading conducted through two divisions – the NYMEX Division, home to the energy, platinum, and palladium markets, and the COMEX Division, on which all other metals trade. Additional risks are associated with international investing, such as currency fluctuations, political and economic instability and differences in accounting standards. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. All economic and performance data is historical and not indicative of future results. Market indices discussed are unmanaged. Investors cannot invest in unmanaged indices. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional.

Citations.
1 - cnbc.com/id/42928731/ [5/6/11]
2 - zacks.com/stock/news/52612/ISM+Service+Index+Disappoints [5/4/11]
3 - blogs.wsj.com/marketbeat/2011/05/06/silver-finishes-its-brutal-week-with-a-whimper/ [5/6/11]
4 - blogs.wsj.com/marketbeat/2011/05/06/data-points-energy-metals-489/ [5/6/11]
5 - cnbc.com/id/42935357 [5/6/11]
6 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=5%2F6%2F10&x=0&y=0 [5/6/11]
6 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=5%2F6%2F10&x=10&y=18 [5/6/11]
6 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=5%2F6%2F10&x=0&y=0 [5/6/11]
6 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=5%2F5%2F06&x=0&y=0 [5/6/11]
6 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=5%2F5%2F06&x=0&y=0 [5/6/11]
6 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=5%2F5%2F06&x=0&y=0 [5/6/11]
6 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=5%2F7%2F01&x=0&y=0 [5/6/11]
6 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=5%2F7%2F01&x=0&y=0 [5/6/11]
6 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=5%2F7%2F01&x=0&y=0 [5/6/11]
7 - treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyield [5/6/11]
7 - treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldAll [5/6/11]
8 - treasurydirect.gov/instit/annceresult/press/preanre/2001/ofm11001.pdf [1/10/01]
9 - montoyaregistry.com/Financial-Market.aspx?financial-market=an-introduction-to-the-stock-market&category=29 [5/8/11]

April 25, 2011 Weekly Market Commentary

S&P PUTS THE U.S. CREDIT RATING OUTLOOK TO NEGATIVE? 

Standard & Poor’s rattled Wall Street early last week when it revised its outlook on U.S. long-term debt from “stable” to “negative”. I'm not sure if S&P was trying to make a statement of "we're on top of things" after they surely weren't in regards to the exotic mortgage instruments of years past. Regardless of the reason, their action was utterly foolish and absurd. Across the next three trading days, earnings sent the market higher. The four-day week turned into a winning one, as the numbers show: DJIA, +1.33% to 12,505.99; S&P 500, +1.34% to 1,337.38; NASDAQ, +2.01% to 2,820.16.5,6

HOME SALES, HOME STARTS IMPROVE IN MARCH
The National Association of Realtors announced that existing home sales were up 3.7% last month, about 1% higher than the rebound expected on Wall Street. (NAR noted that about 35% of these were cash sales.) In another positive development for the real estate market, the Commerce Department measured a 7.2% gain in housing starts and an 11.2% rise in construction permits for March.1

GOLD AT NEW HIGH, DOLLAR TOUCHES 3-YEAR LOW
Gold cracked the $1,500 ceiling last week. Prices reached $1,508.75 on Thursday before settling at $1,503.80 on the COMEX. Silver hit yet another 31-year high at $46.68 per ounce, with prices ending the week at $46.06. Meanwhile, the U.S. Dollar Index descended to 73.735 during the market day on Thursday, a low unseen since August 2008.2,3

LEI INDEX UP FOR NINTH STRAIGHT MONTH
The Conference Board’s index of leading economic indicators rose another 0.4% for March, complementing a revised 1.0% gain in February. Economists polled by Bloomberg News had forecast a 0.3% advance.4

THIS WEEK: The height of earnings season is upon us. On tap for Monday, we have 1Q results from Netflix and March new home sales data. Tuesday offers earnings reports from Coca-Cola, UPS, 3M, Delta Air Lines, Valero, Ford, Western Union, U.S. Steel, Broadcom and Amazon, along with the February Case-Shiller home price index and the Conference Board’s April consumer confidence index. Wednesday brings 1Q results from eBay, ConocoPhillips, Credit Suisse, General Dynamics, Starbucks, BP, Boeing and Allstate, plus a Fed rate decision and a report on March durable goods orders. Thursday gives us earnings from PepsiCo, P&G, Motorola, Exxon Mobil, Microsoft, Sprint Nextel, Bristol Myers, Viacom and Occidental Petroleum, plus February pending home sales and weekly jobless claims data. What does Friday bring? The March consumer spending report and the University of Michigan’s final March consumer sentiment poll, plus 1Q results from Merck, Caterpillar, Chevron, Weyerhaeuser and DR Horton.

WEEKLY QUOTE
“Don't let what you cannot do interfere with what you can do.”
– John Wooden

WEEKLY TIP
If you’re getting married, inform your partner about all of your debt before the wedding day. Discussing it the day of the wedding or on the honeymoon can kill the mood. Learning about credit and debt issues after the knot is tied can lead to much frustration.

Best Regards,

Kevin Kroskey, CFP, MBA


Citations.
1 - blogs.wsj.com/marketbeat/2011/04/20/existing-home-sales-rise-market-cheers/ [4/20/11]
2 - reuters.com/article/2011/04/21/us-markets-global-idUSTRE71H0EB20110421 [4/21/11]
3 - cnbc.com [4/22/11]
4 - bloomberg.com/news/print/2011-04-21/index-of-leading-economic-indicators-in-the-u-s-rises-0-4-.html [4/21/11]
5 - marketwatch.com/story/sp-cuts-us-rating-outlook-to-negative-2011-04-18 [4/18/11]
6 - cnbc.com/id/42708009 [4/22/11]
7 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=4%2F22%2F10&x=0&y=0 [4/22/11]
7 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=4%2F22%2F10&x=10&y=18 [4/22/11]
7 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=4%2F22%2F10&x=0&y=0 [4/22/11]
7 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=4%2F21%2F06&x=0&y=0 [4/22/11]
7 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=4%2F21%2F06&x=0&y=0 [4/22/11]
7 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=4%2F21%2F06&x=0&y=0 [4/22/11]
7 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=4%2F23%2F01&x=0&y=0 [4/22/11]
7 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=4%2F23%2F01&x=0&y=0 [4/22/11]
7 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=4%2F23%2F01&x=0&y=0 [4/22/11]
8 - treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyield [4/22/11]
9 - treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldAll [4/22/11]
10 - treasurydirect.gov/instit/annceresult/press/preanre/2001/ofm11001.pdf [1/10/01]
11 -montoyaregistry.com/Financial-Market.aspx?financial-market=who-needs-wealth-management-services&category=4 [4/24/11]

This material was prepared by Peter Montoya Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information should not be construed as investment, tax or legal advice. The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. The NASDAQ Composite Index is an unmanaged, market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System. The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is not possible to invest directly in an index. NYSE Group, Inc. (NYSE:NYX) operates two securities exchanges: the New York Stock Exchange (the “NYSE”) and NYSE Arca (formerly known as the Archipelago Exchange, or ArcaEx®, and the Pacific Exchange). NYSE Group is a leading provider of securities listing, trading and market data products and services. The New York Mercantile Exchange, Inc. (NYMEX) is the world's largest physical commodity futures exchange and the preeminent trading forum for energy and precious metals, with trading conducted through two divisions – the NYMEX Division, home to the energy, platinum, and palladium markets, and the COMEX Division, on which all other metals trade. Additional risks are associated with international investing, such as currency fluctuations, political and economic instability and differences in accounting standards. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. All economic and performance data is historical and not indicative of future results. Market indices discussed are unmanaged. Investors cannot invest in unmanaged indices. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional.