February Monthly Market Commentary

THE MONTH IN BRIEF
Were soaring oil and gas prices threatening the recovery? Was a new European recession exerting a drag on the global economy? In February, these questions barely dented the prevalent optimism on Wall Street. The Dow gained 2.5% for the month and settled above 13,000 on February 28; it hadn’t closed that high since June 2008. Energy futures set the pace in the commodities sector. The housing market offered some hopeful signals. Our economy seemed to be clearly on the mend, although the economies of China and certain EU nations appeared poised for soft landings or mild recessions. It was a strangely calm month, one in which the stock market behaved like a mature bull market.^1,2 

DOMESTIC ECONOMIC HEALTH
Consumer spending accounts for around 70% of the U.S. economy, so it was nice to see the biggest rise in that category in four months in January: a 0.2% increase. Consumer incomes were up 0.3% as well. Other Commerce Department statistics showed a 0.4% January gain in retail sales and a 4.0% January drop in durable goods orders (the expiring 2011 tax break on capital investment likely had something to do with that decrease). With consumer spending up, retail sales up and the jobless rate descending to 8.3% for January, the big picture of the economy looked positive.^3,4

So how did consumers feel? In a word, better. The University of Michigan’s consumer sentiment survey improved for the sixth straight month, coming at a final mark of 75.3 for February. (The gauge has not posted six consecutive months of gains in 15 years.) The Conference Board’s survey also improved in February, coming in at 70.8.^3,5

While concerns abounded about foreign manufacturing, our factory sector looked comparatively healthy, even if our premier purchasing managers index decreased in February. The Institute for Supply Management’s manufacturing PMI fell 1.7% to 52.4, but it was above 50 for the 31st consecutive month. ISM’s non-manufacturing index had come in at 56.8 for January; the 25th straight month of service sector growth.^6,7

The Labor Department noted a 0.2% January advance in consumer prices. This was only the second rise in CPI in four months. Core CPI also rose 0.2% in January. Producer prices rose 0.1% in January with a 0.4% gain in core PPI. All this looked moderate, but one spike in prices got the attention of all Americans: the price of a gallon of regular unleaded gasoline soared 8.36% in February, settling at a national average of $3.73 a gallon on February 29.^1,8       

GLOBAL ECONOMIC HEALTH
As February wound down, Greece was in line for a third EU/IMF rescue package of €237 billion to attack the nation’s €350 billion in sovereign debt – €107 billion in haircuts to bond investors followed by €130 billion in loans. Was it another temporary fix to a lingering problem? If it was, it wasn’t the only continuing economic dilemma in the EU. In February, Eurozone unemployment hit a euro-era record high of 10.7% (Spain’s jobless rate is currently above 20%). The Markit Eurozone PMI came in at 49.0 for February; it hasn’t been above 50 since July. Many economists believe the EU is now in a recession.^9,1o

China’s apparent soft landing was corroborated by its latest PMI readings. Its official PMI was but 51.0 in February, up from 50.5 in January but not far from the 49.0 reading last November. Fresh data showed that Chinese consumer inflation rose 0.4% in January to 4.5% while its GDP lessened to 8.9% in Q4 2011. India’s GDP slipped to 6.1% in Q4 but its PMI remained strong at 56.6 in February; its inflation rate hit a two-year low in February.^10,11,12

WORLD MARKETS
Key benchmarks did well. In fact, gains occurred on all continents. The MSCI World Index rose 4.66% last month while the MSCI Emerging Markets Index climbed 5.89%.^13,14           

COMMODITIES MARKETS
Oil ended the month at $107.07 a barrel (and it would climb higher to open March). Oil futures posted an 8.72% monthly gain, but that paled next to the 12.67% advance for RBOB gasoline. Natural gas even rose 4.51% on the COMEX in February. Gold actually had a losing month, with futures slipping 1.52% to $1,711.30 at the close on February 29.  The U.S. Dollar Index retreated for a second straight month, going -0.78%.¹

REAL ESTATE
Existing home sales had improved again in January, and a slight decline in new home sales was offset by upward revisions to the Census Bureau’s December figures. Residential resales improved by 4.3% in the first month of the year while new home sales were down 0.9%. Both the new and existing home inventories were reduced to a 6-month supply (6.1 months for existing homes, 5.6 months for new homes), which is characteristic of a normal, healthy housing market. The National Association of Realtors said pending home sales rose 2.0% in January. In yet another positive sign, the Mortgage Bankers Association reported that there had been a 28% reduction in foreclosures in 2011. On the downside, it turned out that the S&P/Case-Shiller Home Price Index had dropped 3.8 % for December.^15,16,17

From February 2 to March 1, average home loan interest rates shifted as follows in Freddie Mac’s Primary Mortgage Market Survey: 30-year FRMs, 3.87% to 3.90%; 15-year FRMs, 3.14% to 3.17%; 5/1-year ARMs, 2.80% to 2.83%; 1-year ARMs, 2.76% to 2.72%.¹⁸

LOOKING BACK…LOOKING FORWARD
The first sixth of 2012 saw the best year-opening advance in some time for the major indices. The year-to-date numbers below represent the Dow’s best start since 1998, the NASDAQ’s best start since 2000 and the S&P’s best start since 1991. At February’s end, the Dow had settled at 12,952.07, the S&P at 1,365.68 and the NASDAQ at 2,966.89.^1,2,19

While some analysts think things are weirdly calm on Wall Street, others feel that most of the economic signs hint at a better year for the consumer, the worker and the stock market investor. Q4 GDP was recently revised up to a decent 3.0%; the jobless rate has fallen 0.7% since September; consumer spending rose in January by the most since October; the real estate market is showing signs of improvement. Hopefully, headwinds from overseas will lose some velocity and exert less drag on our economy this spring and summer.²⁴

UPCOMING ECONOMIC RELEASES: Scheduled news items across the balance of March are as follows: January factory orders and the February ISM service sector index (3/5), the February jobs report (3/9), February retail sales, January business inventories and a Federal Reserve interest rate policy announcement (3/13), February’s PPI (3/15), February’s CPI and industrial output and the initial University of Michigan consumer sentiment survey for March (3/16), February housing starts and building permits (3/20), February existing home sales (3/21), a new Conference Board Leading Economic Indicators index (3/22), February new home sales (3/23), February pending home sales (3/26), the January Case-Shiller home price index and the Conference Board’s March consumer confidence poll (3/27), February durable goods orders (3/28), the third and final estimate of Q4 GDP (3/29), and February consumer spending along with the final March University of Michigan consumer sentiment survey (3/30).

MONTHLY QUOTE

“When one door of happiness closes, another opens; but often we look so long at the closed door that we do not see the one which has opened for us.”

 – Helen Keller

To Your Prosperity,

Kevin Kroskey

This article prepared in conjunction with Peter Montoya.

Citations.

1 - money.msn.com/market-news/post.aspx?post=ba5dfb2a-4c91-4d39-aa5e-f3bfb0d9bb5e&_nwpt=1 [2/29/12]

2 - blogs.wsj.com/marketbeat/2012/02/29/data-points-u-s-markets-82/ [2/29/12]

3 - www.businessweek.com/printer/articles/339?type=bloomberg [3/1/12]
4 - www.reuters.com/article/2012/02/28/us-usa-economy-instant-idUSTRE81R0Y820120228 [2/28/12]
5 - www.conference-board.org/data/consumerconfidence.cfm [2/28/12]
6 - www.ism.ws/ISMReport/MfgROB.cfm [3/1/12]
7 - www.ism.ws/ISMReport/NonMfgROB.cfm [2/3/12]
8 - www.latimes.com/business/la-fi-consumer-prices-20120217,0,7037692.story [2/17/12]
9 - www.channelnewsasia.com/stories/afp_world_business/view/1186463/1/.html [3/2/12]
10 - www.reuters.com/article/2012/03/01/global-economy-wrapup-idUSL4E8E13IO20120301 [3/1/12]
11 - www.chinadaily.com.cn/china/2012-03/02/content_14735838.htm [3/2/12]
12 - www.aljazeera.com/news/asia/2012/02/201222995446384262.html [2/29/12]
13 - news.morningstar.com/index/indexReturn.html [2/29/12]
14 - mscibarra.com/products/indices/international_equity_indices/gimi/stdindex/performance.html [2/29/12]
15 - www.ft.com/cms/s/0/89e852da-5eec-11e1-a087-00144feabdc0.html#axzz1nvMnI56Z [2/24/12]      
16 - www.cbsnews.com/8301-505123_162-57382754/existing-home-sales-up-inventory-down-for-now/ [2/22/12]
17 - www.charlotteobserver.com/2012/02/29/3054668/housing-slump-continues.html [2/29/12]
18 - www.freddiemac.com/pmms/ [3/1/12]
19 - montoyaregistry.com/Financial-Market.aspx?financial-market=an-introduction-to-the-stock-market&category=29 [11/2/12]
20 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=2%2F28%2F11&x=0&y=0 [2/29/12]
20 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=2%2F28%2F11&x=0&y=0 [2/29/12]
20 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=2%2F28%2F11&x=0&y=0 [2/29/12]
20 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=2%2F28%2F02&x=0&y=0 [2/29/12]
20 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=2%2F28%2F02&x=0&y=0 [2/29/12]
20 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=2%2F28%2F02&x=0&y=0 [2/29/12]
21 - treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldAll [3/2/12]
22 - treasurydirect.gov/instit/annceresult/press/preanre/2002/ofm10902.pdf [1/9/02]
23 - briefing.com/Investor/Calendars/Economic/Releases/employ.htm [3/2/12]

January Monthly Market Commentary

THE MONTH IN BRIEF
In recent stock market history, there have been many peaks and valleys. January 2012 represented a peak; it was the best January for U.S. stocks since 1997, with the S&P 500 rising 4.36%. It was also the S&P’s best month overall since October. Wall Street seemed to worry a little less about Europe during the month and a little more about subpar stateside indicators like consumer spending and home sales. Still, the mood was definitely bullish.^1,2

DOMESTIC ECONOMIC HEALTH
Consumers were earning more – and apparently saving more of what they earned. Personal incomes rose 0.5% in December, and so did the personal saving rate, yet personal spending was flat for the month. After consumer spending increases of only 0.1% in October and November, this seemed to hint at a slowing economy in the last quarter of 2011. However, the jobless rate was at 8.3% in January, the lowest level in three years, thanks to the addition of 243,000 jobs.^{3, 24}

Was consumer confidence wavering? It depended on which barometer you checked. The Conference Board’s January survey fell to 61.1 from December’s 64.8 final revised mark, in the previous month, according to the Conference Board. Economists polled by Reuters had thought it would climb to 68.0. The University of Michigan’s consumer sentiment survey made a major advance in January, going to 75.0 from the year-end mark of 69.9.^2,4

The initial estimate of Q4 2011 GDP arrived in late January; a growth of 2.8%, the best in six quarters, was still below the expectations of some analysts. Speaking of growth, our manufacturing sector grew for a thirtieth straight month in January, according the PMI index of the Institute for Supply Management, rising a full percentage point to 54.1. ISM’s service sector index had also posted a December advance to 52.6 from 52.0. Not surprisingly, durable goods orders improved 3.0% in December, the third consecutive monthly gain for the indicator; orders for hard goods increased 10.0% across 2011.^4,5,6,7

As for consumer and wholesale inflation, the threat was mild to say the least. In fact, the Consumer Price Index didn’t budge in December and the Producer Price Index retreated 0.1% (with import prices falling for the fourth month in five). So, 2011 goes in the books with 3.0% consumer inflation and 2.2% core inflation; the most since 2007, but hardly remarkable.⁸

GLOBAL ECONOMIC HEALTH
Efforts to restructure Greece’s debt fell apart at mid-month, but picked up some momentum. At the end of January, a deal looked imminent, but in the eyes of some analysts, investors would have to accept as much as a 70% haircut on Greekut yes of some analysts, banks would have to accept as muchce Index didn'obernsumer spending and home sales (both less than bonds to take Greece’s debt-to-GDP ratio down to a sustainable 120% or so. Last month, Standard & Poor’s downgraded credit ratings of nine EU nations: it cut ratings for France, Austria, Slovakia, Slovenia and Malta by a notch and Italy, Portugal, Spain and Cyprus by two notches, commenting that the European Union’s debt reduction plan was not of “sufficient size or scope”.^9,10

Manufacturing did pick up in some key economies in January. Our key PMI (the ISM survey) improved for the seventh straight month, and China’s official PMI improved 0.2% to 50.5 with new orders at a three-month peak. The U.K.’s PMI climbed above 50 again to 52.1. Germany’s manufacturing index advanced for the first time since September, and that helped the EU’s Markit PMI rise to 48.8 last

month, but the Markit PMI has been below 50 (read: contraction) since last July. Overall, JPMorgan’s global manufacturing index rose to 51.2 last month.¹¹

WORLD MARKETS
Broadly speaking, it was a very good month for equities. Three of the BRICs posted outstanding gains: Sensex, +11.2%; RTSI, +14.1%, Bovespa, +11.1%. (The Shanghai Composite went +4.2% last month.) Argentina’s Merval pulled off a 13.2% gain and the Hang Seng rose 10.6%; the MSCI Emerging Markets Index climbed 11.2%. Other notable indices and their January performances: Dow Jones Asia Pacific Index, +8.1%; MSCI World Index, +4.9%; Nikkei 225, +4.1%; DAX, +9.5%; CAC 40, +4.4%; FTSE 100, +2.0%; KOSPI, +7.1%; All Ordinaries, +5.2%; TSX Composite, +4.2%. At the back of the pack among indices of consequence: Spain’s IBEX (-0.7%) and Malaysia’s Kuala Lumpur Composite (-0.6%).^12,13

COMMODITIES MARKETS
Metals set the pace in the sector last month. Gold fully rebounded from a poor December with a 10.91% monthly gain. Copper futures gained 10.30% and silver futures soared 19.15%. RBOB gasoline futures rose 8.79% on the NYMEX last month; retail pump prices went up 5.32%. Oil (-0.35%) and natural gas (-16.26%) retreated thanks to lessening demand and warmer weather. Key crop futures rose and fell, with coffee going -5.07% on the month, corn going -1.16%, cotton +3.09% and wheat +2.03%. The U.S. Dollar Index fell 1.37%.¹⁴

REAL ESTATE
The bad news seemed to outweigh the good news in this sector. The National Association of Realtors said that existing home sales improved 5.0% in December; in mid-January, Freddie Mac reported another record-low average interest rate for the 30-year FRM (3.88%, and a new record low would be set in early February). On the other hand, NAR reported a 3.5% dip in pending home sales in December and the November Case-Shiller Home Price Index slipped for October, its third straight monthly descent. While the Commerce Department noted that single-family home starts hit their highest level since April 2010 in December, overall housing starts dropped 4.1% for the month and new home sales slipped 2.2% to an annual rate of just 307,000. The annual new home sales pace is around 750,000 in a decent year.^8,14,15,16

Here was the change in average home loan interest rates between Freddie Mac’s December 29 and February 2 Primary Mortgage Market Surveys: 30-year FRMs, 3.95% down to 3.87%, 15-year FRMs, 3.24% down to 3.14%; 5/1-year ARMs, 2.88% down to 2.80%; 1-year ARMs, 2.78% down to 2.76%.^17,18

LOOKING BACK…LOOKING FORWARD
January was the best month for all three headline U.S. stock indices since October. The DJIA ended January at 12,632.91, the S&P 500 at 1,312.41 and the NASDAQ at 2,813.84. The CBOE VIX (the so-called “fear index”) was near 19 at month’s end.^1,2,19

Manufacturing seems to have picked up around the globe, and our manufacturing sector might be among the world’s healthiest. We still seem to be in a slow recovery, and the chance of a recession in the European Union (along with its sovereign debt morass) may exert a drag on our markets in February and beyond. Still, it looks like Greece is in line for a second IMF bailout and an actual “solution” toward its debt problem, so institutional investors might be less troubled by the EU debt crisis. If our economy goes to stall speed, the Fed could even opt for a QE3 in the coming months (a possibility in the opinion of some Wall Street analysts). February holds a lot of promise; for the first month in many, world markets may turn on headlines from America instead of Europe.

UPCOMING ECONOMIC RELEASES: Here is the schedule for the rest of the month: the initial University of Michigan consumer sentiment survey for February (2/10), January retail sales and December business inventories (2/14), January industrial output and the January 25 FOMC minutes (2/15), the January PPI and January housing starts and building permits (2/16), the January CPI and the Conference Board’s Leading Economic Indicators index for February (2/17), January existing home sales (2/22), January new home sales and the final University of Michigan consumer sentiment survey for the month (2/24), January pending home sales (2/27), January durable goods orders, the December Case-Shiller home price index and the Conference Board’s February consumer confidence poll (2/28), and the second estimate of Q4 GDP plus a new Beige Book from the Fed (2/29). The January consumer spending numbers come out on March 1.
 

MONTHLY QUOTE

“When we recall the past, we usually find that it is the simplest things - not the great occasions - that in retrospect give off the greatest glow of happiness.”   – Bob Hope

To Your Prosperity,

Kevin Kroskey

This article prepared in conjunction with Peter Montoya.

Citations.

1 - blogs.wsj.com/marketbeat/2012/01/31/data-points-u-s-markets-77/ [1/31/12]
2 - www.cnbc.com/id/46203174/ [1/31/12]

3 - www.nytimes.com/2012/01/31/business/economy/incomes-rise-but-spending-is-flat.html [1/30/12]

4 - www.cnbc.com/id/46162429 [1/27/12]

5 - www.ism.ws/ISMReport/MfgROB.cfm [2/1/12]

6 - www.ism.ws/ISMReport/NonMfgROB.cfm [1/5/12]

7 - www.marketwatch.com/story/durable-goods-orders-up-strong-30-in-december-2012-01-26-92200 [1/26/12]               

8 - www.businessweek.com/news/2012-01-20/consumer-prices-in-u-s-little-changed-as-fuel-costs-fall.html [1/20/12]

9 - blogs.wsj.com/marketbeat/2012/02/01/how-to-read-a-greek-debt-deal/ [2/1/12]

10 - money.msn.com/market-news/post.aspx?post=a677f0ec-38f9-432c-bbc1-fb98c5362013 [1/13/12]

11 - www.reuters.com/article/2012/02/01/us-global-economy-idUSTRE8101C520120201 [2/1/12]

12 - online.wsj.com/mdc/public/page/2_3022-intlstkidx.html [1/31/12]

13 - mscibarra.com/products/indices/international_equity_indices/gimi/stdindex/performance.html [1/31/12]

14- money.msn.com/market-news/post.aspx?post=cb1f3e7e-3c74-45b7-9f9a-4cccd825c584 [1/31/12]

15 - www.businessweek.com/news/2012-01-26/contracts-to-buy-u-s-homes-near-19-month-high-economy.html [1/26/12]                       

16 - www.foxbusiness.com/news/2012/01/26/us-new-homes-sales-drop-22-prices-fall/ [1/26/12]

17 - www.freddiemac.com/pmms/ [2/2/12]

18 - www.freddiemac.com/pmms/index.html?year=2011 [2/2/12]

19 - montoyaregistry.com/Financial-Market.aspx?financial-market=an-introduction-to-the-stock-market&category=29 [11/2/12]

20 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=1%2F31%2F11&x=0&y=0 [1/31/12]

20 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=1%2F31%2F11&x=0&y=0 [1/31/12]

20 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=1%2F31%2F11&x=0&y=0 [1/31/12]

20 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=1%2F31%2F02&x=0&y=0 [1/31/12]

20 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=1%2F31%2F02&x=0&y=0 [1/31/12]

20 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=1%2F31%2F02&x=0&y=0 [1/31/12]

21 - treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyield [1/31/12]

22 - treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldAll [1/31/12]

23 - treasurydirect.gov/instit/annceresult/press/preanre/2002/ofm10902.pdf [1/9/02]
24 - washingtonpost.com/business/economy/us-adds-243k-jobs-in-january-unemployment-rate-drops-to-83percent/2012/02/03/gIQAhV3mmQ_story.html [2/3/12]

December Monthly Market Commentary

THE MONTH IN BRIEF
The Dow advanced 1.43% and the S&P 500 rose 0.85% in December, but there was no major “Santa Claus” rally at the end of 2011. As a result, the Dow wound up +5.53% for the year while the S&P 500 posted a 2011 loss of 0.003% (exlcuding reinvested dividends). While the year was hardly spectacular for U.S. stocks, our benchmarks outshone many others. Last month we glimpsed more hints that the real estate market could be inching toward some kind of recovery. Shoppers spent freely for the holidays while legislators managed to extend the payroll tax holiday. It was a bad month for many commodities but a good month for the dollar.¹

DOMESTIC ECONOMIC HEALTH
Three developments stand out from December: the improvement in retail sales during the holiday season, the significant drop in the unemployment rate and the approval of a two-month extension of the payroll tax cut.

While we learned that consumer spending had increased just 0.1% in November, the numbers out of the malls and power centers in December were encouraging. According to the International Council of Shopping Centers index, same-store sales during the holiday season were up 4.5% over 2010. Gauging online retail sales from the start of November through Christmas Day, market research firm ComScore Inc. estimated e-commerce purchases rose by 15% year-over-year. Consumer confidence also improved. Last month’s poll from the Conference Board reached its highest level since April (64.5) and the University of Michigan’s final December survey showed its index at 69.9, the best reading since June.^2,3,4

Early in the month, the Labor Department said the jobless rate had dropped 0.4% in November to 8.6%, with unemployment down 1.5% since a high point in October, 2009. Underemployment stood at 15.6 in November. Non-farm payrolls marked their fourteenth consecutive month of expansion.⁵

The U.S. service and manufacturing sectors were growing, by the estimate of the Institute for Supply Management’s latest PMIs. ISM’s service sector index came in at 52.0 for November, down 0.9 from October; its December manufacturing index rose 1.2 points to 53.9. Durable goods orders were up 3.8% in November (+0.3% with the transportation category factored out).^2,6,7

Inflation showed signs of easing. Consumer prices, as measured by the Bureau of Labor Statistics, were flat in November. Annualized consumer inflation was at 3.4%, declining for the second straight month. Wholesale inflation rose 0.3% in November with the year-over-year gain in the Producer Price Index reaching 5.7%.^8,9

After another notable partisan fight, Congress passed an extension of the payroll tax holiday through the end of February, meaning Social Security taxes would stand at 4.2% for at least another two months. Long-term unemployment benefits were also extended through February 29 as a result of the legislation, and Medicare payments to physicians were allowed to remain at current levels through that date.¹⁰

GLOBAL ECONOMIC HEALTH
Last month, 25 of 27 economists responding to a BBC survey predicted a mild recession across Europe. German Chancellor Angela Merkel stated that 2012 “will no doubt be more difficult than 2011” for her country, while new Italian president Giorgio Napolitano called for sacrifices by taxpayers to ward off the threat of “financial collapse”. In another BBC poll, a majority of economists polled stated that the chances of a future Eurozone breakup were 30-40%.^11,12,13

As doomy as these pronouncements sound, there were positive signals in world manufacturing at the end of 2011. While the December Markit Economics PMI showed sector contraction in Germany, France and Italy, the overall index rose half a point to 46.9. Manufacturing indexes in the United Kingdom, China, Australia, Singapore and Switzerland all improved last month. In another unexpected good sign, German unemployment dropped to 6.8%.¹⁴

WORLD MARKETS
Some of the world’s benchmark indices managed advances last month; some did not. The gains to note (these figures are from Morningstar and in U.S. dollar terms): Hang Seng, +2.67%; FTSE 100, +1.21%; Nikkei 225, +0.25%; CAC 40, +0.16%. The losses were deeper: All Ordinaries, -1.06%; TSX Composite, -2.04%; DAX, -3.13%; Sensex, -4.15%; Shanghai Composite, -5.74%. The MSCI World and MSCI Emerging Markets indices had another down month: the World fell 0.17% and the Emerging Markets slipped 1.29%. Among the above indices, the FTSE 100 (-5.55%) and MSCI World (-7.61%) held up best in 2011. At the back of the pack, we find the Shanghai Composite (-21.68%) and the Sensex (-24.64%).^15,16

COMMODITIES MARKETS
Was gold overvalued? That perception may have strongly influenced its December performance; it dropped 10.48% for the month. Oil fared better but still retreated, losing 1.52% in December. Still, they both had annual gains: gold went +10.23% for 2011 (settling at $1,566.80 on December 30) and oil went +8.15% for the year (ending 2011 at $98.83 a barrel). Silver and copper respectively lost 14.90% and 3.90% in December. They had poor years: copper lost 22.73% for 2011, silver lost 9.77%. Natural gas went -15.80% on the month and lost 32.15% for 2011. Key crop futures did well in December: wheat went +6.31%, corn +6.32% and cotton +0.85%. Still, wheat (-17.82%) and cotton (-36.69%) took dives on the year. The U.S. Dollar Index was up for the second straight month (+2.59%) to finish +1.56% for 2011.¹⁷

REAL ESTATE
For once, the news across this sector was mostly good. (When was the last time that happened?) The Census Bureau said that new home sales were up 1.6% in November to the best sales pace since April. The National Association of Realtors noted a 4.4% rise in existing home sales in November, matching a pace unseen since January. Pending home sales reached a 19-month peak in November as well. Housing starts also increased by 9.3% in November. The October edition of the S&P/Case-Shiller Home Price Index, released in late December, slipped 1.2% from its September level.^18,19,20

Freddie Mac’s December 29 Primary Mortgage Market Survey showed average interest rates on 30-year FRMs at 3.95%, average rates on 15-year FRMs at 3.24% and average rates on 5/1-year ARMs at 2.88%; these were all slightly below rates in the December 1 PMMS. Rates on 1-year ARMs averaged 2.78% in both surveys.²¹

LOOKING BACK…LOOKING FORWARD
The Dow wound up in the black for 2011 largely due to a record-setting fourth quarter, seeing the biggest quarterly point ascent in DJIA history. The Dow gained 11.95% in the quarter, and that was actually topped by the Russell 2000, which went +15.02% for 4Q 2011 yet finished at -5.45% for the year.¹

% CHANGE	2011	1-MO CHG	1-YR CHG	10-YR AVG
DJIA	+5.53	+1.43	+5.53	+2.19
NASDAQ	-1.80	-0.58	-1.80	+3.36
S&P 500	-0.003	+0.85	-0.003	+0.95
REAL YIELD	12/30 RATE	1 YR AGO	5 YRS AGO	10 YRS AGO
10 YR TIPS	-0.07%	1.08%	2.41%	3.50%

Sources: cnbc.com, bigcharts.com, treasury.gov - 12/30/11^1,22,23,24

Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly.

These returns do not include dividends.

January opened with a triple-digit climb for the Dow, a good sign if you believe in the old “January effect” theory. S&P Cap IQ chief strategist Sam Stovall recapped the premise for CNBC: “An up first week in the market usually signals an up January and as goes January, so goes the year. Since 1945, whenever the market has been up in January it has been up for the entire year 88% of the time.” Of course, past performance is no basis for future results: the S&P 500 advanced 2.26% for January 2011 and finished flat for the year. If our economy continues to improve, perhaps it will provide sufficient distraction from the debt crisis in the EU and the potential for recession in European and Asian economies to promote gains for U.S. stocks.^25,26

UPCOMING ECONOMIC RELEASES: For the balance of January, the economic news items look like this: November factory orders and December auto sales (1/4), the December ISM service sector index (1/5), the December unemployment report (1/6), a new Fed Beige Book (1/11), the December retail sales numbers from the Census Bureau (1/12), January’s initial University of Michigan consumer sentiment survey (1/13), December’s PPI and industrial output (1/18), the December CPI plus December housing starts and building permits (1/19), December existing home sales (1/20), December’s pending home sales report from the NAR and a Fed interest rate decision (1/25), December new home sales and durable goods orders plus the Conference Board’s December Leading Economic Indicators index (1/26), the final University of Michigan January consumer sentiment survey and the BEA’s first take on 4Q GDP (1/27), the Commerce Department’s report on December consumer spending (1/30), and finally the November Case-Shiller home price index and the Conference Board’s January consumer confidence poll (1/31).

To Your Prosperity,

Kevin Kroskey


Citations.

This commentary written by Peter Montoya Inc.

1 - www.cnbc.com/id/45824871 [12/30/11]
2 - www.reuters.com/article/2011/12/23/us-usa-economy-idUSTRE7BM0AB20111223 [12/23/11]
3 - latimesblogs.latimes.com/money_co/2011/12/holiday-shopping-lift-christmas.html [12/28/11]
4 - www.csnews.com/top-story-confidence_surges_on_better_employment_outlook-60179.html [12/28/11]
5 - online.wsj.com/article/SB10001424052970204464404577112680918832116.html [1/3/12]
6 - www.ism.ws/ISMReport/NonMfgROB.cfm [12/5/11]
7 - www.ism.ws/ISMReport/MfgROB.cfm [12/1/11]
8 - www.reuters.com/article/2011/12/16/us-economy-idUSTRE7BE12S20111216 [12/16/11]      
9 - www.businessweek.com/ap/financialnews/D9RL8CRG0.htm [12/15/11]
10 - money.cnn.com/2011/12/23/news/economy/payroll_tax_cut_deal/ [12/23/11]               
11 - news.bbc.co.uk/today/hi/today/newsid_9669000/9669315.stm [12/30/11]
12 - www.bbc.co.uk/news/world-europe-16377010 [1/1/12]
13 - www.bbc.co.uk/news/business-16382874 [1/2/12]
14 - www.bloomberg.com/news/2012-01-03/global-manufacturing-displays-resilience-to-europe-s-debt-crisis-economy.html [1/3/11]
15 - news.morningstar.com/index/indexreturn.html [12/30/11]
16 - mscibarra.com/products/indices/international_equity_indices/gimi/stdindex/performance.html [12/30/11]
17 - money.msn.com/market-news/post.aspx?post=7a929e98-4d99-44cb-98c9-a0ef1c3151c4 [12/30/11]
18 - www.businessweek.com/news/2011-12-23/sales-of-u-s-new-homes-in-november-rise-to-315-000-rate.html [12/23/11]
19 - www.reuters.com/article/2011/12/27/us-economy-idUSTRE7BE12S20111227 [12/27/11]
20 - www.realtor.org/press_room/news_releases/2011/12/phs_nov [12/29/11]
21 - www.freddiemac.com/pmms/ [1/3/12]
22 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=12%2F31%2F01&x=0&y=0 [12/30/11]
22 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=12%2F31%2F01&x=0&y=0 [12/30/11]
22 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=12%2F31%2F01&x=0&y=0 [12/30/11]
23 - treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyield [12/30/11]
23 - treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldAll [12/30/11]
24 - www.treasurydirect.gov/instit/annceresult/press/preanre/2001/ofm71101.pdf [7/11/01]
25 - montoyaregistry.com/Financial-Market.aspx?financial-market=an-introduction-to-the-stock-market&category=29 [11/2/11]
26 - cnbc.com/id/45848630/ [1/2/12]
27 - blogs.wsj.com/marketbeat/2011/01/31/data-points-us-markets-342/ [1/31/11]=

November Monthly Market Commentary

THE MONTH IN BRIEF
An astonishing rally during the last three days of November did much to improve what had been an anxious month for investors. The Dow ended up gaining 0.76% in November after jumping 4.24% on November 30 alone, responding largely to coordinated action by the world’s central banks to improve liquidity in the European Union. We got hints that the real estate market might be finding a legitimate bottom, some fine numbers from Black Friday and Cyber Monday, and pleasant surprises from some other key economic indicators. Our stock market struggled to pull off gains in the face of debt worries, both in Europe and at home. ¹

DOMESTIC ECONOMIC HEALTH
November 2011 might be remembered most for a political and economic lowlight. On November 21, the Congressional “super committee” of 12 assigned to come up with a plan to reduce the federal deficit simply quit. This paved the way for involuntary cuts of $1.2 trillion in 2013. That prompted a stock market plunge and a Fitch Ratings decision, with the agency changing its U.S. outlook to “negative”.^2,3

In better news, consumers spent $52.4 billion during the four-day Thanksgiving Day weekend. The National Retail Federation said average shopper shelled out $398.62 in those four days, a new record. Cyber Monday sales rose 22% over 2010 levels to $1.25 billion. The Commerce Department noted that personal spending rose only 0.1% in October; however, personal wages did increase by 0.4%. The federal government’s Consumer Price Index also budged north by 0.1% in October with annualized inflation coming in at 3.5%.^4,5,6 .ng only rose 0.1% for the montday sales rose 33%m some other key economic indicators. Statesidgn

There was a rebound in consumer confidence. November’s Conference Board poll saw a 15-point spike to 56.0. The month’s final University of Michigan index of consumer sentiment came in at 64.1, much better than the final 55.7 for October; it was the third straight monthly gain for the index.^4,7

Now, over to industry. The Institute for Supply Management’s November manufacturing PMI bucked a global trend and advanced 1.9% to 52.7, marking the sector’s 28th straight month of expansion. ISM’s most recent service sector PMI (October) came in at 52.9, down from 53.0 the preceding month. Producer prices fell 0.3% in October and total durable goods orders slipped 0.7% in September (they went +0.7% when transportation orders were factored out).^8,9,10,11

The jobless rate stunningly dropped to 8.6% in November; it had been 9.0% in October and 9.1% in September. Some of this reduction in unemployment was attributable to people dropping out of the job hunt, but the private sector did add 140,000 positions last month. The underemployment rate fell 0.6% to 15.6%.¹²

GLOBAL ECONOMIC HEALTH
Political change did not stop key Italian bond yields from approaching 7% during November. On November 23, 35% of the 10-year notes offered at Germany’s federal bond auction went unsold. After these alarming developments, the Federal Reserve and other key central banks united on November 30 to foster cheaper dollar loans for European lenders, a move that global markets cheered in relief.^1,13,14,15

Economically, the world is sometimes a small village. Was the trouble in Europe now indirectly affecting China? Its PMI fell to 48 in October from 51, the largest monthly slip since March 2009; below 50 is the contraction zone. Output also contracted in Taiwan and South Korea in October. Key PMIs for the Eurozone and Great Britain also fell below 50 in that month of data.^14,16

WORLD MARKETS
Most world benchmarks seem headed for double-digit 2011 losses; fortunately, our benchmarks have done better. How did things go globally in November? Poorly, for the most part. In USD terms, here are the monthly numbers according to Morningstar on November 30: FTSE 100, -0.70%; DAX, -0.85%; CAC 40, -2.72%; All Ordinaries, -4.03%; Shanghai Composite, -5.46%; Nikkei 225, -6.16%; TSX Composite, -6.29%; Hang Seng, -9.63%; Sensex, -10.09%. The oft-watched MSCI World (-2.69%) and MSCI Emerging Markets (-6.75%) indices both slipped for the month.^17,18

COMMODITIES MARKETS
Gold futures advanced 1.45% last month while copper lost 1.56% and silver lost 4.51%. Through the end of November, gold was +23.14% YTD on the COMEX. The U.S. Dollar Index gained 2.86% in November; at 78.49, it was still -1.01% YTD. Oil ended November at $100.36 a barrel after going +7.69% for the month. Natural gas went -9.76% in November. Retail gas prices (regular unleaded) fell 4.30% last month to $3.30 a gallon at month’s end. Coffee gained 2.82% for November, but other key crop futures descended: cotton lost 11.13%, corn lost 6.03% and wheat lost 2.27%.¹⁵

REAL ESTATE
Unexpectedly, the National Association of Realtors found that existing home sales increased 1.4% in October. Inventory shrank 2.2% to an 8.0-month backlog; the median sale price was $162,500, down 4.7% from a year before. The NAR also measured pending home sales surging by 10.4% in October. The S&P/Case-Shiller Home Price Index showed an overall 0.6% decline in September; after a 3Q overall gain of 0.1%, the index showed home prices at roughly 1Q 2003 levels. New home sales increased by 1.3% in October with the annualized gain at 8.9%.^15,19,20,21

Interest rates on conventional mortgages didn’t move much. Freddie Mac noted the following change (or lack thereof) in its November 3 and December 1 Primary Mortgage Market Surveys: the average rate on the 30-year FRM stayed flat at 4.00%, and the average rate on the 15-year FRM ticked down 0.01% to 3.30%. Rates on 5/1-year ARMs moved down from 2.96% to 2.90%; rates on 1-year ARMs fell to 2.78% from 2.88%.²²

LOOKING BACK…LOOKING FORWARD
The month ended well. November 28-30 represented the S&P 500’s best three days since November 23-25, 2008. At the close on November 30, the Dow was back above 12,000, the S&P back above 1,200 and the NASDAQ back above 2,600.¹⁵

December is historically a fine month for stocks, of course. With the continuing EU debt troubles, will a “Santa Claus” rally will occur as we get toward New Year’s Day? It does seem as though there is more optimism at the moment, or at least greater distraction on Wall Street from the crisis in Europe and the apparent slowdown in China. Perhaps stateside indicators will encourage the bulls to run and make 2011 a bit better statistically for investors. As CNBC notes, the Dow has gone positive in 71% of Decembers in its long history, posting an average gain of 1.40%. December has also been the best month of the year for the S&P 500 since 1950.^29,30

UPCOMING ECONOMIC RELEASES: Here are the news items arriving between now and the end of the year: the November ISM service sector index and the report on October factory orders (12/5), the initial University of Michigan December consumer sentiment survey (12/9), the report on November retail sales and a Federal Reserve policy announcement (12/13), the November PPI and November industrial output (12/15), the November CPI (12/16), data on November housing starts and building permits (12/20), November existing home sales (12/21), the BEA’s final estimate of 3Q GDP, the final University of Michigan December consumer sentiment survey and the Conference Board’s November Leading Economic Indicators index (12/22), November consumer spending, new home sales and durable goods orders (12/23), the October Case-Shiller home price index and the Conference Board’s December consumer confidence poll (12/27), and the November pending home sales report (12/29). The December unemployment report will be out on January 6.

MONTHLY QUOTE
“If you command wisely, you’ll be obeyed cheerfully.”

 – Thomas Fuller

To Your Prosperity,

Kevin Kroskey

Citations

1 - www.reuters.com/article/2011/11/30/markets-stocks-close-idUSWEN125420111130 [11/30/11]
2 - abcnews.go.com/Business/gdp-grew-25-percent-boosted-consumer-spending-double/story?id=14821833 [10/27/11]
3 - abcnews.go.com/blogs/business/2011/11/fitch-cuts-u-s-outlook-from-stable-to-negative/ [11/28/11]
4 - www.kansascity.com/2011/11/29/3291899/americans-in-november-more-confident.html [11/29/11]
5 - www.reuters.com/article/2011/11/23/us-usa-economy-consumer-idUSTRE7AM17320111123 [11/23/11]
6 - www.businessweek.com/ap/financialnews/D9R1SFE00.htm [11/16/11]
7 - latimesblogs.latimes.com/money_co/2011/11/report-consumer-confidence-is-up-.html [11/23/11]
8 - www.ism.ws/ISMReport/MfgROB.cfm [12/1/11]
9 - www.ism.ws/ISMReport/NonMfgROB.cfm?navItemNumber=12943 [11/3/11]
10 - www.bls.gov/news.release/ppi.nr0.htm [11/15/11]
11 - community.nasdaq.com/News/2011-11/us-durablegoods-order-fell-07-in-october.aspx?storyid=104419 [11/23/11]
12 - www.reuters.com/article/2011/12/02/us-usa-economy-idUSTRE7AL14I20111202 [12/2/11]
13 - www.reuters.com/article/2011/11/29/italy-bonds-auction-idUSL5E7MS3S820111129 [11/29/11]
14 - www.fxstreet.com/fundamental/analysis-reports/the-energy-report/2011/11/24/ [11/24/11]            
15 - money.msn.com/market-news/post.aspx?post=fd688bc8-f250-4f5f-b360-b0324cd7581c [11/30/11]
16 - www.ft.com/cms/s/0/88f51a98-1c3e-11e1-af09-00144feabdc0.html#axzz1fKupP0aW [12/1/11]
17 - news.morningstar.com/index/indexreturn.html [11/30/11]
18 - mscibarra.com/products/indices/international_equity_indices/gimi/stdindex/performance.html [11/30/11]
19 - realtors.org/press_room/news_releases/2011/11/ehs_oct [11/21/11]
20 - www.census.gov/const/newressales.pdf [11/28/11]
21 - www.marketwatch.com/story/us-home-prices-drop-06-in-september-2011-11-29 [11/29/11]
22 - www.freddiemac.com/pmms/ [12/2/11]
23 - money.cnn.com/data/markets/dow/ [11/30/11]
24 - money.cnn.com/data/markets/sandp/ [11/30/11]
25 - money.cnn.com/data/markets/nasdaq/ [11/30/11]
26 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=11%2F30%2F01&x=0&y=0 [12/2/11]
27 - www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldAll [11/2/11]
28 - www.treasurydirect.gov/instit/annceresult/press/preanre/2001/ofm71101.pdf [7/11/01]
29 - montoyaregistry.com/Financial-Market.aspx?financial-market=an-introduction-to-the-stock-market&category=29 [11/2/11]
30 - www.cnbc.com/id/45481657 [11/30/11]
This news release was prepared by Peter Montoya.