Last week the major US indexes failed to attain three weeks of advances in a row.  The Dow lost its 10,000 mark (to many pundits’ dismay) while oil jumped upward causing many consumers to rush out and fill up their vehicles.  Are we at a tipping point in the markets?  Is the rally over?  Will we go back to the lows of earlier this year?  All of those questions are valid as many investors weigh the potential gain in moving out of cash and back into the markets.  One thing is certain: the recent market volatility has broken the strong uptrend in which the markets had been moving for the past few months.  Whether we go up or down from here is anyone’s guess, but there is very real potential for a downward movement in the overall markets, especially when looking back in history.  When a market moves up very quickly, it tends to overshoot the level that it can maintain, with much of the movement due to investors jumping in with large sums of money chasing a relatively small number of stocks.  So, based on history, the current market’s next step should be a correction, but history does not have a case with so much government intervention.  Most of the intervention does seem to be panning out, and with more on the way this could be the first time we avoid a correction in the markets.  One thing to watch for this week is the US government debt auction: it happens to be the largest offering ever (at $123 billion).  If the government runs out of people and institutions willing to purchase debt, then continuing on the road to recovery will be very difficult.

 

On the political front, the big news of last week was the cap instituted by the pay czar on seven US companies that only survived last year because the government gave them cash to keep operations running.  While most Americans think that earning $200,000 is very good, it is minuscule compared to what the executives of those seven companies used to make (in some cases it is a mere 10 percent of previous salaries).  The effects of these actions are yet to be seen, but it is not much of a stretch to think that companies without executive pay caps will be in a good position to hire away top talent from the struggling companies.  Many investors put money with companies because of the leadership at those companies and could see negative effects if that leadership departs due to government mandated pay cuts.  The flip side of the argument is that this highly paid “top talent” is obviously not so talented or they would not have gotten into this predicament in the first place.  The other hot button is the issue of healthcare reform.  Both the House and Senate need to get moving on a bill in order to pass something during the last part of 2009.  The various sectors of the market that any bill passage will directly affect have been trending higher, but with a good amount of reserve to the movement.  Sectors that any reform will affect most include insurance, healthcare, biotechnology and pharmaceuticals.  Once there is more clarity as to the final outcome of the bill, we will be able to see any potential upside to the above mentioned sectors that is worth an investment.

 

For the week, the three major US indices declined in value with the best performance from the NASDAQ, which declined by .11 percent, and the worst performance from the S&P 500.  The commodities sector performed the best, advancing nearly one percent while transportation and biotechnology were the largest decliners, each falling by nearly five percent.  Gold increased slightly for the week, continuing to move into new territory as the US dollar continued to decline against most other major currencies.  The overall market volatility, as measured by the VIX, increased by nearly four percent, indicating that we are in for some market movement in the coming weeks.

 

For the trading week ending 10/23/09, the returns in our portfolio models were as follows:

 

	Last Week	Year to Date	Since 12/31/07
S&P 500 WD (benchmark)	-0.70 %	21.96 %	-23.16 %
Aggressive Model	-0.99 %	7.51 %	-5.39 %
Growth Model	-0.59 %	7.28 %	-3.42 %
Moderate Model	-0.05 %	5.84 %	-3.66 %
Stable Model	-0.61 %	7.56 %	-3.47 %

 

Last week we made two changes to a few of our portfolio models.  The first change was to sell half of our holding in the small-cap value fund (RYAZX) due to its potential to break down in the coming days.  It did not make a clear sell signal, but weakened enough to where we are much more comfortable only owning half of a position.  Also, last week we added to our international exposure by moving into the Templeton Foreign Small-Cap Companies Fund (FINEX).  By adding to our international allocation, we continue to diversify away from potential troubles in the US while attempting to take advantage of investments in countries that could turn around from the worldwide slump faster than the large developed countries.

 

Economic Wrap Up: During last week, the majority of the economic news that was released indicated that while times are much better than they were at this time last year, the US economy is far from healthy.  The week kicked off with two housing-related figures, both of which came in worse than expected and seemed to indicate that the majority of the activity in the housing market has been related to the first-time home buyer tax credit.  The Producer Price Index, also released last Tuesday, came in with a .6 percent decline in wholesale prices during the month of September.  While this may seem like a very small decline, it does show that we are probably far from having inflation creep into the system in any meaningful amount; in fact deflation may be more of a problem going forward than was originally thought.  The Fed’s Beige Book was released on Wednesday and, as many expected, provided little insight that the market had not already priced in.  On Thursday, employment-related data was released showing that initial jobless claims increased by more than expected.  At the same time, continued claims declined by more than expected.  Unfortunately, this decline in continued claims can be mostly contributed to unemployed people running out of benefits.  The last piece of economic news that was released last week was the existing homes sales figures, released on Friday, showing that they were much better than expected.  The number of people purchasing their first homes in order to receive the first-time home buyer tax credit could be skewing the data significantly.  The real test will be what happens to existing homes sales once the credit is gone.

 

After a paucity of economic news last week and this being the last week of October, the calendar is packed with releases.  The week kicks off on Tuesday with the all-important consumer confidence figures for the month of October.  This is a key release with the potential to majorly impact the markets.  Also released on Tuesday is the home price index for the month of August as well as the durable goods orders for the month of September.  With the home price index being for the month of August, the data is a little stale but could provide some insight into any effect that the first-time home buyer tax credit has had on overall housing prices in the US.  On Wednesday, the new home sales figure for the month of September comes out, and we expected a higher reading than in August, partially due to the tax credit.  On Thursday, the advanced US GDP figure for the third quarter of 2009 is released.  Even though this is only an advanced number, it will determine if the US will succeed in meeting the full year 2009 GDP estimates.  The reading is expected to come in between 2.5 percent and 3.2 percent; both significantly higher than the second quarter’s final reading of negative .7 percent.  Personal income and spending wrap up the week on Friday in addition to a revised reading of the Michigan sentiment for the month of October.  The week is shaping up to be very entertaining for economic news releases with many possible market movers.

 

On a final note, we have received many calls pertaining to the litigation against Schwab and their Yield Plus fund.  We did purchase the fund during the timeframe that the lawsuit is for, however we sold out of the entire position as soon as it started to act different than it had in the past.  Thus, we saved nearly the entire fifty-percent decline experienced by the fund over the course of the last year.  The paperwork that you may have received in the mail does not require action by the individual investor unless you wish to opt out of the class action lawsuit.  Please feel free to call our office if you would like further information, but rest assured that we were not in the fund for the entirety of its decline.

The major US stock market indexes continued to rise over the course of last week, resulting in new highs for 2009.  The Dow moved above 10,000 last week for the first time in more than a year as investors pumped up the market on strong earnings and better-than-expected retail sales.  The 10,000 level for the Dow actually carries very little meaning, other than the psychological impact that it may exert on the droves of investors still in cash on the sidelines, and waiting for a reason to invest fully in the markets.  While the markets have had a very good run, it does seem as though many investors have forgotten the events of last year, and believe that everything is back to normal in the market aside from a few names missing in the financial sector.  In fact, the markets still have a long way to go before reaching new highs over last year and recouping the losses incurred during 2008.  To give you some perspective, the NASDAQ is the closest to reaching a new high over last year, needing only to increase another 23 percent from its current level.  The S&P 500 and the Dow need to move up another 29 and 33 percent, respectively, in order to attain a new high.  Right now, many companies are reporting earnings from the third quarter.  This could continue to push the markets higher, provided that the earnings are as expected.  Still, many other pieces must fall into place to sort out this economic puzzle and result in the markets making a full recovery.

 

One of the largest puzzle pieces has to do with the US consumer’s balance between spending and saving, and how it will affect the economic recovery.  Up until recently, the recovery has been almost entirely dependent on government stimulus.  Now, it appears as though another entity should take the lead.  That entity will have to be the consumer, which has made a methodical shift from easy spending to precise spending (and saving whatever is left over).  We continue to see this trend through the results of various retailers that have reported earnings; most high-end retailers are continuing to feel the pinch while the discount retailers have started to see sales pick up.  While this is not a good sign for the high end retailers, it is a somewhat positive sign for the economy, and may signal a bottoming in the spending cycle, provided that the US consumer goes back to the spending habits they had prior to the correction.

 

For the week, the three major US indexes increased in value, led by the S&P 500 gaining a little more than one and a half percent, followed by the Dow gaining a little less than one percent and the NASDAQ gaining a little more than an eighth of a percent.  The commodity sector led the way last week, returning more than five percent, with the energy sector coming in a very close second.  Semiconductors and real estate led the lagging sectors.  Oil spiked upward nearly nine percent for the week, while gold turned in a meager increase of only one-third of a percent.

 

 

For the trading week ending 10/16/09, the returns in our portfolio models were as follows:

 

	Last Week	Year to Date	Since 12/31/07
S&P 500 WD (benchmark)	1.55 %	22.82 %	-22.61 %
Aggressive Model	1.23 %	8.59 %	-4.44 %
Growth Model	1.04 %	7.97 %	-2.85 %
Moderate Model	0.60 %	5.89 %	-3.61 %
Stable Model	0.98 %	8.23 %	-2.87 %

 

Over the course of last week, we made a few small changes to the portfolio models and added one new market sector into the mix.  The new market sector we bought into is the commodity space because it moved through its previous high, while continuing to shows signs of picking up momentum.  The commodity sector currently has many drivers pushing it higher; everything from increasing potential demand as the recovery gets fully under way, to better-than-expected earnings by some of the larger industry players.  Another change we made include tweaking some of our core positions in both the aggressive and growth models in order to increase the amount of cash we have on hand.  This way, we have cash available to invest when we receive signals that it is a pertinent time to buy.  Lastly, we moved some of the models’ emerging market positions from Russell emerging markets (REMSX) to Direxion Funds Emerging markets (DXELX) in order to take advantage of the 2 times leverage and tradability of the Direxion fund.

 

Economic Wrap Up: Last week, a lot of economic news was released, with the vast majority seeming to be good for the overall economy.  One of the most surprising news releases was the retail sales figures for the month of September, which fell by a lot less than expected.  In fact, if you take out the dismal automotive sales (which everyone saw coming after cash for clunkers), retail sales were actually up by half of a percent.  Released the same day as the retail sales figures was the business inventories figure, showing a decline in inventories during the month of August of one and a half percent.  This lagging indicator came as no surprise.  The FOMC meeting minutes provided the last piece of economic news of last Wednesday, and held some insight into the rift that appears to be growing amongst the various members.  There seems to be a stronger split than usual over many of the policies that are currently in place and what should be done in the future.  One thing to consider is that the members of the voting committee will rotate out of their positions on the one year cycle, and the new members come in 2010.  On Thursday, there were multiple releases that seemed to affect the markets.  First up were the employment related figures.  Both initial jobless claims and continuing jobless claims showed better than expected results; the figures were lower than both the previous reading and current estimates.  The CPI data was also released on Thursday to show that inflation is currently of little concern to the market.  The Empire Manufacturing index for the month of October rose considerably more than expected, nearly doubling the previous reading.  This indicates that manufacturing is picking up in the New York area, as new orders and shipments skyrocketed.  On the flip side, the Philadelphia Fed reading came in worse than expected for the month of October, a clear signal that the US economy is still in the woods.  Wrapping up last week was the preliminary reading of the Michigan sentiment, which was shown to have slipped a little during October.  While this reading is negative for the economy, it is only the preliminary release and can change by large amounts prior to the final release.

 

After last week’s exciting economic news releases, this week will be quieter.  The scheduled releases for this week start off on Tuesday with the two housing-related figures for the month of September as well as the producer price index, also for the month of September.  Both of the housing figures (building permits and housing starts) are expected to show improvement over August, which should add fuel to the thought that the housing market has turned the corner.  One potential problem for the housing market could come up when the first-time home buyers who have been scrambling to meeting the deadline for the $8,000 tax credit stop purchasing once the tax credit expires.  We could end up seeing a sharp decline in purchases, much like we saw after the cash for clunkers program.  On Wednesday, the Fed’s beige book is released and is not expected to hold any new insights.  Wrapping up the week is the existing home sales figures for the month of September, as well as initial and continuing jobless claims figures.

 

Financial Planning Tip: 2010 Social Security COLA

 

The government announced last week that Social Security recipients won’t get a cost-of-living adjustment (COLA) next year for the first time in more than a third of a century. More than 50 million Social Security recipients will see no increase in their 2010 monthly payments, the first year without an increase since automatic adjustments were adopted in 1975.

 

Falling consumer prices may be to blame. By law, cost-of-living adjustments are pegged to inflation, which is negative this year because of lower energy costs. Social Security payments do not go down, even when prices drop. Consumer prices in general have declined 2.1 percent since the third quarter of 2008. The Social Security COLA is based on the change in consumer prices from the third quarter of one year to the next.

 

2009 Social Security payments increased by 5.8 percent – largely because of a 2008 spike in energy prices. This was the biggest COLA since 1982. The average monthly Social Security payment for all recipients is $1,094.

 

President Barack Obama and democratic leaders in Congress have proposed a plan that would provide $250 payments to about 57 million senior citizens, veterans, retired railroad workers and people with disabilities. The proposed plan would cost an estimated $13 – $14 billon.  The President has not said how the payments would be financed, leaving that up to Congress.

 

The payments would match the ones issued to seniors earlier this year as part of the government’s economic recovery package. They would be equal to about a 2 percent increase for the average Social Security recipient

 

The lack of a monthly increase in Social Security payments triggers several provisions in the law. Among them, the amount of wages subject to Social Security payroll taxes will remain at $106,800, unchanged for 2010. The earnings needed to earn one Social Security credit will increase to $1,120 in 2010, up from $1,090 in 2009.

The downward correction of the past two weeks now appears to be over as the major indexes showed surprising strength last week as earnings season kicked off.  Expectations continue to rise about the outlook for businesses through the end of this year and into next.  The earnings season may be slightly skewed this quarter, as many companies will compare third quarter 2009 earnings to third quarter 2008 earnings (when the markets fell apart), causing them to look very good.  While better than last year, most companies have taken a large hit in earnings and are not yet back to their pre-market-correction levels.  Earnings, however, are a somewhat lagging indicator as to how the overall economy fares, because they depend on sales.  During earnings season it is more important to hear what the companies say about future outlook.

On the international front last week, Australia did something very interesting last Monday in raising their interest rates.  They are the first G-20 country to raise rates, which could be a signal of what is to come.  The Bank of England did not follow suit, however, deciding to leave interest rates alone.  With Australia’s rate increase, they could potentially see large sums of international money flowing into the country, chasing the higher interest rates.  A more long-term consequence of this increase is that the rest of the world will have to follow suit as inflation starts to pick up.  We may see a situation where emerging economies start to raise their interest rates while developed countries keep their rates low.  This could have many unforeseen consequences.  Right now, the emerging economies around the world seem to be recovering much faster than the developed world, presenting a possible investment opportunity that would benefit from an overall increase in the global economies as well as a declining US dollar.

The three major US indexes had a very strong week, making up nearly all of the losses that occurred over the previous two weeks.  The S&P 500 performed the best of the three indexes with a return of more than 4.5 percent.  The Dow Jones average performed the worst, returning a little under four percent for the week.  Commodities all moved up during the course of the week with Gold making a new all-time-high, pushing up near $1,050 per ounce.  Gold moved up due to speculation about China choosing to purchase gold and hold it in reserve.  Copper moved up dramatically last week as demand for manufacturing started to pick up globally in the emerging markets.  Oil continued to trade in the same range it has been since OPEC said that is where they want oil prices to remain.  The US dollar continued to slide last week, despite a strong increase in value on Friday.  Overall, the trend for the dollar has continued downward, and will probably keep heading in that direction as the US adjusts their fiscal policies to the changing conditions.

For the trading week ending 10/9/09, the returns in our portfolio models were as follows:

	Last Week	Year to Date
S&P 500 WD (benchmark)	4.56 %	20.95 %
Aggressive Model	1.55 %	7.27 %
Growth Model	1.11 %	6.80 %
Moderate Model	0.88 %	5.27 %
Stable Model	1.06 %	7.18 %

Last week, we made a few changes to our models, adding to our allocation in Latin America, which has shown surprising strength over the last couple of months.  It seems that with every downturn in the markets, Latin America and – in particular – Brazil have found reasons to continue outperforming nearly every other country.  Also, we added the small-cap value-sector of the market back into our models over the course of last week, since it has recovered nicely from the sharp downturn of two weeks ago.  We bought back into the same fund we had sold (RYAZX), because small-cap value still looks set to outperform both small-cap growth and the small-cap sector in general.  As the two-week correction now appears to have ended for the major indexes, we are moving back into a more fully invested position in our models in order to take advantage of a possible rally on the back of the earnings season.

Economic Wrap Up: Last week was a very slow week for economic news releases, with only four releases that had any meaning for the market.  On Wednesday, consumer credit was shown to have shrunk during the month of August by $12 billion.  While this figure is far from good, it is significantly better than it was the previous few months.  On Thursday, initial jobless claims for the previous week were shown to have increased by 521,000 (19,000 better than was originally expected).  On the same day, continuing jobless claims came in at 6,040,000 (also better than the expected 6,105,000).  This drop in continued jobless claims, however, is somewhat misleading because some of the first people who were let go during this downturn are now running out of jobless benefits and, therefore, are no longer filing claims.  Also on Thursday, wholesale inventories for the month of August came out, showing that inventories declined by 1.3 percent during the month.  While this number is better than the July reading, it is a far cry from the expectations of some inventors who hoped that companies would start to rebuild inventories.  Eventually, companies will replenish inventories, but probably not until they are sure that demand for their products will increase.  Very few businesses can afford to build up their inventories and carry them on their books for a prolonged period of time, so most prefer to use something closer to a “just-in-time method” for their inventories so that they do not tie up company assets by having products sitting in a warehouse.  Overall for the week, the economic news releases were not overly good or bad; they were just middle-of-the-road and showed no real change in direction.

After last week was so slow, this week will more than make up for it with the number of economic news releases scheduled.  Wednesday kicks the week off with retail sales for the month of September.  This release could be interesting because it will provide further insight as to what the US consumer is doing during trying times.  Some of the major retailers seem to be signaling that we could end up with flat retail sales for the month, which would actually be a positive thing, since expectations are for sales to have declined by 2.1 percent.  Also on Wednesday, both business inventories and the FOMC meeting minutes are released.  The thing to watch for in these releases is language about actions the Fed is considering so as to unwind some of the money that flooding the system.  On Thursday, the CPI figures for the month of September are released and should indicate the level of inflation in the US.  On Friday, industrial production for the month of September comes out, and is expected to show an expansion of 0.4 percent.  Overall, this week will be exciting for economic news, with everything packed into the last three days of the week.

The third quarter of 2009 came and went, the rally continuing strongly throughout most of it, sustaining only a few bumps along the way.  On the whole, the value side of the investment universe outperformed the growth side, while mid-caps outperformed both large and small-cap investments.  Of the three most commonly followed US indexes, the NASDAQ had the best return during third quarter while both the S&P 500 and the Dow Jones returned virtually the same amount.  When we expand the time frame to include all of 2009 (through 9/30/09) we see that growth investments outpaced value investments in all three of the market cap spaces (large/mid/small-cap) and that mid-cap has returned the highest performance through the first three quarters of 2009.  For the major indexes, the NASDAQ led the way through the first three quarters of 2009 with a return of more than double the next closest index, the S&P 500. Throughout the quarter we saw volatility, as measured by the VIX, move around quite a bit.  It ended the quarter lower than it started though, implying more stability in the markets going forward than there was at the start of the third quarter.

As we moved through the third quarter, there were some signs that the economy is recovering from the turmoil of 2008.  Many investment gurus are calling for a reversal of the upward trend, with some even calling for the markets to break down through the March lows before the markets moving into a true bull market.  If this were the case and the markets did, in fact, go down to the lows of earlier this year and then start upward from there, then we would have completed what some call a “W” as far as the returns on the market.  This type of recovery is not unusual and occurs with the vast majority of market corrections that have been observed around the world over time.  The course that we are currently on is “V” shaped, which is much less common in history, but has occurred to some degree a few times in the past.  We think that we could easily experience a market correction in the coming future because the markets have increased in value so quickly, as many investors have jumped onto the bandwagon, believing that the worst is behind us.  Investors have put money into many of the asset classes just because they have been going up recently without paying any attention to any fundamental reason for an upward move.  As with any investment, if there is a lot of money chasing it (demand) and there is no real change in the number of investments (supply), then prices will move up.  We could describe these upward movements as bubbles since there is no underlying change to warrant such movement.  That could be exactly what we are seeing in the US financial markets at the moment.

Last week saw the major US indexes lose value and continue a downward movement that started the previous week.  While we could consider the last two weeks a reversal of the upward market trend, the markets are still trading in a fairly narrow band.  This trading band, coupled with the fact that there was probably some window dressing last week by the major market movers, leads us to think that this was just a short-term correction.  Now if trading continues to move the market lower and volume picks up on the downward days, then we could be in for a meaningful correction.  In that scenario, we will take some risk off the table by either selling some positions or adding a hedge in order to better protect against the downward movement of the market.  For the week, all three of the major indexes moved lower, which assisted the price of oil in spiking up more than six percent.  The US dollar continued to decline in value over the course of last week as there was more thought that the international community will become less dependent on the dollar in the future.  This week should reveal a lot about the markets.  Hopefully a market direction will be found so that we can adjust our investments accordingly.

For the trading week ending 10/2/09, the returns in our portfolio models were as follows:

	Last Week	3rd Quarter 09	Year to Date	Since 12/31/07
S&P 500 WD (benchmark)	-1.80 %	15.62 %	15.67 %	-27.12 %
Aggressive Model	-1.40 %	4.58 %	5.63 %	-7.04 %
Growth Model	-1.14 %	4.42 %	5.63 %	-4.90 %
Moderate Model	-0.65 %	4.36 %	4.35 %	-5.02 %
Stable Model	-0.83 %	4.45 %	6.05 %	-4.82 %

With the pull-back we experienced last week, we hit our selling point on three of our tradable funds.  We sold the Small Cap Value (RYAZX), Mid Cap Value (MLPIX) and Mid Cap (UMPIX).  Since those are tradable positions and we felt that there was substantial downside risk to the holdings, then if we are proven wrong we can reestablish the position without any problem.  We continue to look for areas of the market that are presenting opportunities.  One such area that we are currently evaluating is Latin America.

Economic Wrap Up: Last week was very busy for economic news releases, with the vast majority of them coming in negative for the overall markets.  The week did start out on a relatively good note with the Case Shiller US housing Index information being released to show that housing prices through July on a year-over-year basis slid by only 13.3 percent.  This was better than most had expected and continues to strengthen the belief that we have hit bottom in the housing market.  The good news did not stay around very long because only a few hours after the housing price information was released the consumer confidence figures for the month of September were released to show a decline over the previous month’s reading.  The figure was nearly 10 percent below the expectation on Wall Street.  Negative movement in consumer confidence is a very troubling development because the US is still vulnerable and is depending on the consumer to help lift our economy out of the down turn.  On Wednesday, the final release of the GDP figures for the US during the second quarter of 2009 showed a contract of 0.7 percent.  While this release was somewhat better than expectations, it was still negative and indicates that the US has a good distance to go before we get back to an expansionary time.  Also on Wednesday, there was news that unemployment during the month of September rose by much more than expected.  On Thursday, there were many economic news releases, the most important of which were: personal spending for the month of August raising by 1.3 percent, construction spending increasing .8 percent during the month of August, and pending new home sales for the month of August raising by 6.4 percent (much higher than the expected 1 percent).  All of that positive news, however, was trumped by a worse-than-expected ISM Index release, which showed a decline over the previous reading and turned out to be much lower than expected.  Rounding out a week of poor economic news releases was the confirmation that the unemployment rate in the US did move up incrementally to 9.8 percent, ever closer to the magical ten percent figure.

After such a happening week in the economic news releases, it will be nice to have a little lull in the action this week.  There will be only two scheduled announcements that could impact the overall market – those being consumer credit and wholesale inventories.  The consumer credit figures for the month of August are being released on Wednesday and are expected to show yet another month of contractions in the amount of credit floating around in the financial system.  This, in turn, could impact spending in this country as consumers continue to have a limited ability to purchase on credit.  On Thursday, wholesale inventory figures are released, and are expected to show a decline of one percent during the month of August.  While a decline may intuitively seem like a negative for the economy, it is actually a good thing because it shows that goods are still being purchased.  Also, at some point in the future, companies will have to increase inventory levels in order to replenish what has been taken out during the downturn.

Last week, the major world markets performed almost the opposite of the way they did the week before.  The three major indexes in the US gave back nearly all of their gains from the previous week, while the sectors that performed well two weeks ago turned in the worst performances.  Many of the real estate, construction and materials ETFs fell in excess of 5 percent, giving a possible signal that the housing market is still in the woods and that the current stage of the economic cycle could last longer than many pundits expect.  The overall trend in the markets has weakened some; from a technical standpoint it broke through several commonly followed moving averages, leading many knowledgeable investors to consider another correction in the market’s near-term future.  The volume on the three major US indexes was lower last week than the previous week.  As expected with such a decline in the market, the overall volatility jumped upward more than seven percent.  While this represents a large increase in volatility over the course of just one week (especially when movements have been so benign in the recent months) it is a much smaller increase than was experienced during the last half of 2008.

All of the major commodities saw their values decline over the course of last week, oil leading the decline with a fall of almost eight percent due to further speculation that world economies will recover more slowly than expected (thus having a lower current demand for oil).  Gold pulled back a little from its lofty heights over $1,000 per ounce, settling for the close of the week at $990.70.  We will be interested to see if gold can hold up at the current levels or if it will decline back to the mid $800 range.  Much of the movement of gold will depend on what China decides to do about its hefty US dollar reserves.  If they continue to purchase dollars at the same rate they have historically, then gold may continue to decline.  If, on the other hand, they decide to buy more gold instead of dollars, then the value of gold could quickly move up much higher than its current levels.

On the political front it was a very busy week, with the United Nations meeting in New York and the G-20 meeting in Pittsburg.  The United Nations met to discuss climate change amongst all of the member countries and to come up with ideas that could be implemented in attempt to slow climate change.  Instead, much of the meeting seems off track, with leaders such as Qadhafi taking over the microphone for long stretches of time and rambling about anything but climate change.  China did outline some of the steps they are willing to take to combat climate change – a change from their usual “what is in it for us” policy, and a signal that they could play a productive role in the upcoming Copenhagen meeting to hammer out a treaty on climate change.  The G-20 meeting in Pittsburg at the end of last week focused on the financial recovery of the world markets and the role that the US dollar should play in the future as the reserve currency of the world.  Precious little was resolved at the meeting, as it seemed more like a brainstorming session at which countries conveyed their concerns about the future of the world’s financial health.  The leaders ended up promising that they would continue to support economies that need financial help in these difficult economic times.  The US seemed to be trying to feel out how close some of the member countries were to moving reserves away from the US dollar into other assets, but other countries played their cards close to the vest, displaying little information about their plans.

For the trading week ending 9/25/09, the returns in our portfolio models were as follows:

	Last Week	Year to Date
S&P 500 WD (benchmark)	-2.20 %	17.79 %
Aggressive Model	-1.35 %	7.14 %
Growth Model	-0.94 %	6.85 %
Moderate Model	-0.25 %	5.03 %
Stable Model	-0.42 %	6.94 %

We made no changes to the models over the course of last week and continue to watch all of our holdings closely for any major changes in direction.  We have experienced a small pull-back on some of our tradable funds, but not to the level that would trigger us to sell any of the positions.  We currently maintain an almost fully invested position in our models.

Economic Wrap Up: Last week was slow for economic news releases, and the news that came out was mostly negative.  The US housing price index rose by 0.3 percent during July – an improvement over June’s reading but beneath expectation.  The existing home sales figure showed a smaller-than-expected number of homes sold during August.  The new home sales figure for the month of August came in lower than expected as well.  While both of the housing figures were not a positive signal for the housing market, they were not terrible, and seem to indicate that the housing market is flattening out and building a solid base from which it could appreciate in the future.  The figure for durable goods orders for the month of August was surprising in that it declined by 2.4 percent while many analysts were expecting an increase of 0.4 percent.  A decline of 2.4 percent indicates that the manufacturing industry in the US has a long way to go before returning to levels seen prior to the recent correction.  One bright spot in the economic news releases was that the Michigan Sentiment indicator for the month of September showed that US consumers are gaining confidence about the future.  Now, if only we could get them spending like they used to.

This week is a very busy week for economic news releases because we have both a month and quarter ending during the week.  Starting off on Tuesday, the Case Shiller housing price index for July is officially released, and is expected to show a decline of more than 14 percent, lending support to the theory that the housing market is leveling out.  Also on Tuesday, the Consumer Confidence figures for the month of September are released and if last week’s Michigan figures are any indication, we could see an increase.  On Wednesday, the final GDP figure for the second quarter of 2009 is released, and is expected to show a contraction of 1.2 percent.  On Thursday, we see if US consumers are putting their money where their mouths are with the release of personal spending and personal income for the month of August.  With consumer confidence on an upward trend, expectations are high that the consumer has, in fact, started to spend.  We are a little skeptical and will believe it when we see it.  If consumers are spending, then they are doing so on much less credit since the credit markets have only contracted for the past few months.  Also on Thursday, we see the release of auto and truck sales as well as pending home sales and construction spending.  Auto sales will probably be delightfully dismal (since Cash for Clunkers ended, few car dealerships have moved much inventory).  Rounding out the week on Friday is the release of the official unemployment rate in the US for the month of September, which could move the market. Most expect that the figure will come in between 9.8 and 9.9 percent.  If this is the case, then the market should not react much, but if the figure is released to show 10 percent or higher it could psychologically impact the market.  For some reason 9.9 does not seem as bad as 10 percent when it comes to unemployment, so we will have to wait and see what happens.

Financial Planning Tip: 2010 Tax-Year Changes

Based on recent low inflation, several tax-related numbers (including tax brackets and deductions) are expected to remain almost completely unchanged for the 2010 tax year.  The personal exemption amount, standard deduction, federal income-tax brackets, and many other figures will barely change for 2010 according to data released earlier this month by the Department of Labor.  These figures will affect tax returns filed in early 2011, after the annual adjustments required by law.

One of the only notable changes will be a $50 increase in the standard deduction for heads of household.  Everyone else will keep their current deductions of $5,700 for single and married taxpayers filing separately and $11,400 for joint filers.  The 2010 personal exemption will be $3,650, unchanged from 2009.

The annual gift-tax exclusion of $13,000 will not change either.  This means a person can give away as much as $13,000 per individual to anyone he or she wishes without any tax considerations.  Many wealthy people take advantage of this provision each year as part of their estate-planning strategy.  One can give away even more than the exclusion amount by paying someone else’s tuition or medical bills, but those payments must be made directly to the medical or educational provider.

Indexing brackets lowers tax bills when there is inflation by including more of one’s income in a lower bracket, such as the 15% rather than the 25% bracket.  Taxpayer savings from inflation adjustments can vary tremendously, depending on an individual’s circumstances.

The rally continued through last week in the broad base financial markets, with all three of the major indexes moving higher by nearly two-and-a-half percent and small-caps performing the best, gaining a little more than four percent.  The top performing sector was real estate, which averaged a return of more than eight percent.  The sector of the market that performed the worst was the semiconductor space, which lost nearly one percent.  Treasuries for the week fell across nearly all maturities and the US dollar continued to slide against major international currencies.  Volume on the three major indexes was at its highest since the beginning of May, which signals that the market could continue rallying as more and more people appear to be moving back into the market.  The overall volatility, as measured by the VIX Index, moved lower for the week declining by approximately one percent (coming close to its lowest level so far in 2009).  In the middle of last week, gold hit an all-time inflation-adjusted high, trading intraday above $1,020 per ounce before pulling back a little at the end of the week to above $1,010 per ounce.  Oil moved up by nearly four percent toward the top of the OPEC prescribed range and we would not be surprised to see it fall back a little at this point, especially with the options contracts coming due and oil traders moving into the November contracts.  The rally, which appeared to have stalled just a few weeks ago, now looks like it is running again as volume picks up on the broad markets.

Politics will take most of the news spotlight this week with the G-20 meeting in Pittsburgh, and Iranian President Ahmadinejad traveling to New York City to address the UN General Assembly.  Both events could majorly impact stock markets around the world.  The meeting of the G-20 will focus on the financial turmoil that has affected nearly all developed economies over the last 12 months.  There will be much discussion about how to create government entities that will be more forward-looking in hopes of preventing future downturns.  There will also be debates as to the type and amount of oversight needed in the world’s financial markets and whether one overarching international financial oversight group should exist.  Trade will also be a hot topic as the US continues to push ahead with tariffs imposed on Chinese-made tires and other countries evaluate the effect of tariffs on a wide range of goods that they can produce locally but currently import so as to lower overall costs.

President Ahmadinejad coming to New York City could impact energy markets around the world, particularly the world oil markets.  President Ahmadinejad’s opinion about Israel is well known, and it seems like every time that the name comes out of his mouth, world oil prices react as though there will be an oil shortage.  Today, Russia said that it received confirmation that Israel does not plan to attack Iran at this time and that, coupled with a minor demand decline in China, set oil falling nearly four percent for the day.  If the rhetoric is toned down at the UN meeting then the price of oil will probably continue to decline.  While this decline in oil price is nice for major oil consumers, if it is sustained for long enough, then it will force the OPEC countries to cut output to maintain their preferred price range of a barrel of oil – between $68 and $73.

Wrapping up the political front this week, Congress has many items on the agenda.  One of the most important items concerning the stock market is the financial industry regulatory overhaul.  This covers a lot of ground, ranging from deciding what powers the Fed should have as far as determining whether companies are too large to fail and what should be done about failing companies, to deciding what executive compensation metrics should be used.  In the short-term, some of the actions that will be taken might seem like an overreaction, but in the long-term, most of the regulatory changes will probably benefit the public as well as businesses.  Bank of America will be in the spotlight this week because they have decided to not comply with the Senate’s request for information about the Merrill Lynch merger.  Bank of America says that the information being requested is behind attorney-client privilege and that they should not have to disclose it.  With all of the activity on The Hill, it will be a very interesting week for the financial sector of the stock market, and we will watch closely for any investment opportunities that may arise.

For the trading week ending 9/18/09, the returns in our portfolio models were as follows:

	Last Week	Year to Date	Since 12/31/07
S&P 500 WD (benchmark)	2.49 %	20.44 %	-24.12 %
Aggressive Model	1.73 %	8.60 %	-4.43 %
Growth Model	1.43 %	7.87 %	-2.89 %
Moderate Model	1.27 %	5.29 %	-4.16 %
Stable Model	1.51 %	7.39 %	-3.62 %

With the rally continuing last week, we made a few strategic moves out of a couple of our funds that have a heavy tilt toward fixed-income and moved the proceeds toward equities.  We decided to initiate a position in the falling dollar fund, as it appears that the downward trend of the dollar will not reverse any time soon.  We also added to our positions in the small-caps and mid-caps, since these are the two sectors that appear to have the most strength going forward (if the rally does not change leaders).  The majority of our models at this point are what we consider fully invested, even as we scrutinize all of the positions for signs of weakness.  While we do not see anything in the immediate future that would warrant a change in our investment models, we do posses the flexibility to make drastic changes should the markets stray from their current course.  We are still watching the utilities sector closely for a purchasing opportunity; with the sector paying nice dividends and the stocks recovering, it could become a great investment in the near future.

Economic Wrap Up: Last week, nearly all of the economic news releases were positive and seemed to be in line with what one would expect from an economy pulling out of a severe downturn.  The week started off with the PPI, released on Tuesday, indicating that prices rose a little during the month of August, but not enough to cause alarm.  Also on Tuesday, retail sales were shown to have increased by 2.7 percent, which is a turnaround compared to the 0.9 percent contraction in sales during the month of July.  Even when the retail sales figure for the month of August excludes car sales, the figure was better than expected – a very good sign that the US consumer is getting behind the economic recovery.  On Wednesday, the CPI figures for the month of August were released and came in exactly with market expectations (a 0.1 percent increase), yet another clear signal that inflation is not currently playing a very large part in the economy.  Industrial Production was shown to have increased by 0.8 percent, which was a little higher than market expectations but well within the acceptable range for an economy that is getting back on its feet.  On Thursday, there were two key economic releases that pertain to the housing market: building permits and housing starts for the month of August.  Both building permits and housing starts were better than the readings in July and signal that the housing market may start to recover and move in the positive direction in the very near future.  Two US employment figures rounded out the week on Thursday.  First was the good news that the initial jobless claims figures fell by more than expected the previous week, then came the not-so-good news that the continuing jobless claims rose more than expected and increased over the previous reading.  Continuing claims came in at 6.23 million, a figure which is somewhat distorted when looking at historical figures because of the benefits extensions that congress passed last year allowing people to receive jobless benefits for longer than during normal economic times.  All in all, it was a good week for economic news releases, with the majority being economically positive.

This week is a very slow week for economic news releases but there are a few major ones that could materially impact the overall financial markets.  The first of the meaningful releases, the US housing Price Index for the month of July, appears on Tuesday.  While this is a very dated figure, an increase could spark more enthusiasm that the housing crisis is indeed behind us.  On Wednesday, the FOMC rate decision is released just before the end of the trading day.  Much like the last few rate decisions, most market participants do not expect any major changes from the current range of 0 and .25 percent.  The wording as to when rates could change will be the key to the release, along with the Fed’s outlook about the end of this year and the first half of 2010.  On Thursday, the largest piece of economic data slated for released is the existing home sales figure for the month of August.  We expected it will be higher than in July, signaling that some houses that are currently in “inventory” on the market are starting to move.  Also released on Thursday are initial jobless claims and continued jobless claims from last week.  On Friday, the figure on new home sales for the month of August is released, as well as the durable goods orders and the Michigan sentiment indicator.  Most of the releases this week are expected to show further strengthening in the US economic system and it would take a drastic deviation from the expected figures in order to dampen the recovery.

Financial Planning Tip: Partial Roth IRA Conversions

As of January 2010, there will no longer be income limitations on eligibility for converting a traditional IRA to a Roth IRA. This means that more people will soon be eligible to convert. But because converted assets will be considered taxable income, a conversion could push you into a higher tax bracket.

A partial conversion may be the answer. Converting only a portion of the assets may allow you to stay in a lower tax bracket. You may be able to convert additional assets in future years.

Ideally, you should have the cash on hand to pay the income tax on converted assets. A partial conversion could help limit the conversion taxes to an amount you can pay without dipping into IRA assets. You may first want to determine how much tax you can handle out of pocket and use that amount to figure out how much to convert.

Although you can convert part of a traditional IRA to a Roth, you cannot pick and choose which portion of your traditional IRA money to convert. If your traditional IRA contains both deductible and nondeductible contributions, you will not be able to stipulate which contributions to convert.

Instead, taxes will be prorated based on the percentage of nondeductible assets in the account. If, for example, nondeductible contributions represent one quarter of your IRA, then 25 percent of the converted funds will be tax free. The IRS does not permit moving the entire chunk of nondeductible assets into the Roth without also taking any pretax contributions into account.

Your nondeductible contributions may be found on IRS Form 8606. Since the form is cumulative and includes all past nondeductible contributions, you need only the most recent one.

Should you make nondeductible contributions to a traditional IRA now in anticipation of the 2010 conversion rule change? This would likely work best if there is little or no existing deductible IRA balance to muddy the waters. Even then, any earnings between now and then would still be subject to tax.

For 2010 conversions only, the IRS will allow you to spread the tax liability over two years (2011 and 2012). This means you can allocate one half of the conversion to your 2011 taxes and the remaining half to your 2012 taxes—no matter if it is a full or partial conversion.

However, splitting the conversion income between 2011 and 2012 is beneficial only if your tax rate won’t rise. Since tax hikes in 2011 and 2012 are almost a certainty for top earners, it may make sense to pay the tax in full for the 2010 tax year.

For more information about Roth IRA conversions, please contact us or your tax advisor.

Last week, all of the broad indexes increased in value on low volume during the shortened trading week, led by the technology-heavy NASDAQ.  The three major broad indexes all broke out of their recent trading ranges to the upside, creating new highs for 2009, but we are still down more than 20 percent from the highs of 2008 on all three indexes (a point which many investors seem to be willing to forget during this recent rally).  The overall market volatility, as measured by the VIX index, declined last week settling down near the lowest level we have seen during 2009.  The sector of the market that performed best over the course of the week was the real estate sector, led by news of housing possibly having reached bottom and maybe even starting an uptrend in various regions of the US.  The basic materials sector followed closely. The lowest performing sectors of the market last week were healthcare and biotechnology, despite being up more than 1.7 percent for the week.  Oil moved up modestly while staying in the OPEC deemed range, and looks like it will remain range-bound for the coming few weeks barring any major geopolitical event disrupting production.  On Friday, Gold hit an all time closing high, finishing the day at $1,006.20 per ounce, due in part to the continued decline in the value of the US dollar and continued support for the precious metal as a good hedge against future inflation.  In general, the rally appears to have the legs to continue on for a while longer, but it still seems as though it is running on borrowed time.  The market could use a sizeable correction at this point, which would help provide a base on which a long-term bull market could find footing.

On the political front last week, President Obama appeared before a joint session of Congress to try to push his healthcare agenda, and lay down a roadmap for the kind of reform he aspires to make in the coming months.  It seems like Wall Street, for the most part, did not react much to the speech, probably in part because what he said was already known and very little was said that the market had not already priced in.  Even the healthcare ETFs barely flinched.  At the end of the speech, it seemed like the congress was as divided as ever on the issue and that it will be a long, hard fight to get something passed in the healthcare reform space. On Friday last week President Obama signed a piece of legislation which increased the trade tariff imposed by the US on tires being imported from China. The current tariff is approximately four percent and the proposed change will be adding an additional thirty five percent. Needless to say that China is not happy with the decision and they are taking the issue to the World Trade Organization, to see if it is something that the US is allowed to do. Protectionism with the current state of the economy seems to be adding fuel to a fire which the US really probably does not want to burn. We are currently relying on countries such as China to purchase our US debt, something which they are becoming more and more reluctant to do, so anything which has the potential to upset the economic balancing act should be done very carefully, not under the table and signed late on a Friday night.

For the short trading week ending 9/11/09, the returns in our portfolio models were as follows:

	Last Week	Year to Date
S&P 500 WD (benchmark)	2.62 %	17.51%
Aggressive Model	1.21 %	6.76 %
Growth Model	0.98 %	6.35 %
Moderate Model	0.81 %	3.97 %
Stable Model	0.97 %	5.79 %

With the rally looking like it could continue, we decided last week to remove our hedging position and move to an almost fully invested position.  During the week we added to our position in small-cap value (RYAZX), added to our position in Guinness Asia-Ex Japan (GAADX) and initiated a new position in emerging markets using Russell Emerging Markets Fund (REMSX). We are still using more indexed than actively managed mutual funds for the most part because, while actively managed mutual funds out-perform indexed funds in the long term, they rarely keep pace with their respective benchmark indexes during drastic up swings.  We also actively weigh our investment holdings with other possibilities in order to try to achieve the best risk-adjusted returns. There are many investments showing large increases over the past few months, but many investors seem to be forgetting that in order to achieve such increases the investments take on large amounts of risk.  We look for funds that may not fly up the highest during fast up moves, but preserve capital very well in a market decline.  One play we are currently evaluating (and are very close to moving into) is a falling US dollar fund.  Our thought is that the dollar will probably continue to decline in value against other major world currencies as the US continues to dilute the dollar.

Economic Wrap Up: Last week, as expected, was very slow for economic news releases, with very few surprises.  The largest surprise of the week was the amount of the decline in consumer credit.  The market had expected a decline of some $4 billion during the month of July, but the actual figure was closer to $21.5 billion – a decline which virtually no one predicted.  This contraction in consumer credit could dampen any hopes of US consumers spending on credit as they did leading up to the current economic turmoil.  In the long run, it is probably a good thing for consumers and business to live within their means and not turn to credit or leverage too much.  Also during last week, the Fed released its latest beige book, with no real changes or surprises in any of the figures.  This should lead to the Fed policy staying the same for now.  Rounding out the releases last week was the Michigan Sentiment of consumer confidence which showed that confidence rose slightly over the previous period.

This week contains many economic news releases all crammed into the middle three days. The week starts off with the Producer Price Index for the month of August being released on Tuesday September 15^th along with retail sales (August), Manufacturing (September) and business inventories (July).  With so many large items released on the same day, we expect the market to react as it has during the last few weeks: taking any good news in stride and immediately discarding any bad.  On Wednesday, the Consumer Price Index is released for the month of August, and should give us an idea of any inflation that may be working its way into the system.  Wrapping up the week for economic news releases, on Thursday we hear about building permits, housing starts, initial jobless claims, and the Philadelphia Fed Index.  Again, the markets probably will latch on to the good news if there is any and mostly ignore any negative news.  Investors really seem to hope that the rally will continue and the markets will make it back to last year’s pre-freefall levels, and if enough think that way, then it could happen.

Financial Planning Tip: 2010 Roth IRA Conversion Rule Changes

Tax laws regarding Roth IRA conversions are changing. Beginning January 2010, individuals with modified adjusted gross incomes (MAGIs) above $100,000 will have the option of converting a traditional pre-tax IRA to a Roth IRA.  Previously, this option was available only to those making less than $100,000.  In addition, married couples filing separately will also be able to convert to a Roth IRA.

What does this change mean for you?  In short, it opens the option of having a Roth IRA even if you earn too much to be eligible to contribute to one.

The Schwab Center for Financial Research believes that for many, especially those in the highest tax bracket, converting to a Roth IRA may not be advantageous. But for many individuals earning between $100,000 and $250,000 a year, the conversion may be worth considering.

Roth conversions are best suited to investors who meet all three of the following criteria:

• Are likely to be in the same or higher tax bracket by the time they retire
• Will not need to withdraw the money for at least 10 years
• Have cash on hand to pay the income taxes for the conversion

For investors who will not need to tap into their IRA assets, converting to a Roth IRA* may be advantageous for estate-planning purposes.  Because the income tax is paid at the time of the conversion, heirs will be able to make income-tax-free withdrawals over their lifetimes.  And since Roth accounts are not subject to minimum distribution rules that apply to traditional IRAs, the assets can grow tax free until heirs are ready to withdraw.**

Additionally, paying the income tax at the time of the conversion will reduce your gross estate.

For more information about Roth IRA conversions, please contact your tax advisor.

* Earnings can be withdrawn without taxes or penalties if you are 59½ and your account has been open five years or more. Some exceptions may apply.

** Please note that non-spouse beneficiaries of a Roth IRA are required to take minimum distributions.

With summer drawing to an end, many of the market movers will return to work, possibly resulting in some exciting times for the stock market.  September is, historically, the worst month of the year for investments with a wide range of speculation as to the reason for this phenomenon.  Whatever the reason, with the activity that the markets have seen over the past 12 months it would be hard to expect a mellow month of trading.  The current volatility reading of the VIX is 25.65 indicating a possible move of 7.4 percent either up or down over the next 30 days.  Since it is September, many would argue that a 7.4 percent decrease is more likely than a 7.4 percent increase from the current levels.  Taking into account expectations for this month, the Financially Speaking models have moved into a more defensive than offensive position, in order to attempt to mitigate a downward movement in the markets.  Will it be a downward move that will rival last year’s waterfall decline?  Probably not.  But could it present an excellent buying opportunity?  We think it could.  We have allocated the Financially Speaking models to a variety of funds, many of which have the ability to move around in different sectors of the market to take advantage of changing conditions.  With funds making their own broad changes it should be less necessary for us to make as many changes as we did at this time last year.  That is not to say that we will not make changes to the allocations, but if the funds we are using think the same way as us and take protective measures, then we may not need to sell as quickly as if they were long only funds in one specific sector of the market.

On the political front, the members of congress returned from the month-long recess and have received an earful from many of their constituents about the healthcare debate.  Healthcare will probably be the number one initiative on the docket as President Obama has stated that he really wants to get something on the books and passed to help those who are without healthcare coverage in the US.  Without a clearer picture of the outcome of the healthcare debate it is very hard to pick out which companies will win in the end and which will have a hard time operating under the new regime.  One company that made the news in the healthcare space last week was Pfizer which got slammed with a $2.3 billion fine from the department of justice for unlawful promotion of some of their drugs.  This fine caught the attention of many on Wall Street, not only because of its size (approximately a fourth of the company’s net annual income) but also because of where part of the fine money is earmarked to go.  According to the Secretary of The Department of Health and Human Services, Kathleen Sebelius, the “historic settlement will return nearly $1 billion to Medicare, Medicaid, and other government insurance programs, securing their future for the Americans who depend on these programs.” This decision to use fines in order to fund government plans has many worried about possible further actions in the healthcare sector by the government.

Oil last week appeared to hit the bottom of its trading range at approximately $68/barrel (after declining last week by more than six percent).  This price happens to coincide with the lower end of the range at which OPEC has stated they would like to see the price of oil stay.  Maintaining that preferred level (between $68 and $73 per barrel) would take quite a large geopolitical change, since OPEC controls so much of the traded oil supply.  Gold, unlike oil, had a very strong week, rising nearly four percent and inching ever closer to the elusive $1,000 per ounce level.  The US dollar was virtually unchanged last week, but could be in for some changes this week as China attempts to issue their own Yuan denominated debt on the open market.  This debt auction is the first of its kind for China and could represent the first of many steps that China could take in attempt to move away from their current dependence on the US dollar.

For the trading week ending 9/4/09, the returns in our portfolio models were as follows:

	Last Week	Year to Date
S&P 500 WD (benchmark)	-1.18 %	14.50%
Aggressive Model	-0.73 %	5.48 %
Growth Model	-0.62 %	5.32 %
Moderate Model	-0.40 %	3.13 %
Stable Model	-0.57 %	4.77 %

With last week starting off with such a large move to lower across the broad markets, we decided to move toward a market-neutral position in all of our models, through the use of a hedging position.  We hedged using Direxion Funds S&P 500 Bear (DXSSX), and attempted to achieve a statistically market-neutral overall portfolio.  In doing so, we knew that we would give up some of the short-term potential upside, but at the same time drastically reduce downside risk in the portfolios.  We will look into removing the hedge as more information comes out about possible market movements.  As far as our current buying options, we have our eye on the utilities sector.  Utilities look like they are primed to move higher over the coming months as the US and Europe step toward winter and its increased energy consumption.

Economic Wrap Up: Last week was a slow week for economic news releases, with the majority of the releases coming in as expected.  Two areas that were better than expected (but not surprising) were the pending homes sales for the month of July increasing by 3.2 percent and the auto sales figures for the month of August.  With all of the recent activity in the housing market, an increased number of pending homes sales was expected, and with the government’s Cash for Clunkers program taking full effect for most of the month of August, a spike upward in auto sales was also expected.  Two economic news releases that came in worse than expected were the release of the factory orders for the month of July and the employment figures (both ADP and the monthly unemployment rate) for the month of August.  Both of the releases indicate that we remain on this economic speed bump, with factory orders increasing less than expected and the August unemployment rate running at 9.7 percent.

The economic news releases scheduled for this week are few and far between.  The week kicks off with the consumer credit figures for the month of July (9/08).  The figure is expected to show a contraction of several billion dollars, even while contracting much less than the previous month.  Consumer Credit is a key economic news release because it will give a clear indication as to the US consumer’s ability to purchase items on credit.  If the proverbial well continues to dry up, then the consumers will not have the purchasing power they once did and probably will be enticed into saving more than the historical norm.  The Fed’s Beige Book is released on Wednesday (9/08), and is not expected to contain any material changes since its previous release.  Wrapping up the week is the wholesale inventories report for the month of July, with the markets expecting a contraction of one percent.  At some point in the future all of these months of inventory contractions are going to lead to a very rapid expansion, but no one knows when it will occur.  Businesses can continue to draw down inventories for quite a while and even after they have drawn them down there is nothing to say that they have to replenish them in the same manner as in the past.  Many companies could switch to an inventory system closer to the just-in-time system, which utilizes minimal inventory buildup.

Last week was uneventful for the markets, with very low volume and lackluster performance from nearly every sector.  One of the few bright spots was the home construction and real estate sector.  This is a very good sign because it signals that the US housing market is probably turning upward and that, coupled with a meaningful increase in consumer confidence, is exactly what this economy needs in order to move onto more sure footing.  An interesting twist on this economic situation is that when the housing market picks up and people stop seeing home values declining, they will become more confident that the cycle is in fact over, thus creating a self-fulfilling chain of events.  It is a chain of events that could occur rapidly as many first-time home buyers (enticed by the first-time home buyer credit), as well as real estate speculators who have been waiting on the sidelines, finally start purchasing in large quantities.  Once the recovery begins we are interested to see how the Federal Reserve and other government entities react and how changes to current policies are made.

The Federal Reserve has the monumental task of deciding when the monetary easing they have undertaken has run its course.  At that point they need to slowly begin to let the hot air out of the balloon of money that has been floating the system.  The recent happening in China can provide a glimpse of how difficult a time the government will have with this step.  There has been rumbling that the Chinese government wants to pull back on the amount of liquidity in their system and their market’s reaction was to shed nearly 22 percent during the month of August.  Taking no action is not viable for the government because it would result in hyperinflation and the continued decline in the value of the dollar against many of the world currencies.  What are the Fed’s options?  First, they could begin raising interest rates from their current near-zero level in order to prevent future inflation.  That option, however, can have a major negative impact on the fixed-income market in the US.  Second, they could pull some liquidity out of the system through US financial institutions.  However, this could lead to a lending freeze, which is partially to blame for our current state.  After these two major options there are a myriad of other options with both good and bad aspects to them.  Ultimately, the government will do something; it is just a matter of when and how much.  Once they lay out a plan and the market has developed some expectation as to what is coming down the pipe line, there will be much less drastic movement.

For the week all of the major index averages closed slightly higher.  The home builders, construction, and biotechnology sectors led the way while the banking/financials and materials sectors brought up the rear.  Oil had an off week, moving lower by nearly one-and-a-half percent, partially due to speculation about changes that the government is considering as to how individuals are allowed to speculate in the oil market.  If they were to make it impossible to speculate about the price of oil, we could see a dramatic price reduction in the near future as a large portion of the current value of a barrel of oil is due to market speculators.  Ultimately, it could be good to have the price of oil move on supply and demand rather than having it move because Wall Street firms are gambling with large pools of money.  For the week, the overall volatility according to the VIX index declined by one percent.  The markets move slowly this time of the year.  We usually see very little movement for the next few weeks, so any signals that the markets could move up or down drastically should be taken with a grain of salt.

For the trading week ending 8/28/09, the returns in our portfolio models were as follows:

	Last Week	Year to Date
S&P 500 WD (benchmark)	0.36 %	15.86 %
Aggressive Model	0.32 %	6.25 %
Growth Model	0.29 %	5.98 %
Moderate Model	0.26 %	3.55 %
Stable Model	0.30 %	5.37 %

Over the course of last week, we made only one significant move in the portfolio models and that was to purchase a full position in Profunds mid-cap value fund (MLPIX). We purchased this fund because it looks to be the strongest broad sector behind small caps, in which we already have a full position.  We purchased MLPIX because it offers us exposure to the very specific value side of the mid-cap universe; the fund also allows trading without penalty, so if the market goes against us, we can sell the fund without upsetting the fund family or forking over a redemption fee.  We continue to look for sectors of the market that seem favorably priced for investment, but with the market moving sideways in a narrow trading range it is very difficult to differentiate between what is a meaningful move in a fund and what is just noise trading.

Economic Wrap Up: Despite last week being a relatively benign week for overall market movement, there were many economic news releases throughout the week. The most important of these was the consumer confidence figure for the month of August, which showed an increase of nearly 14 percent over the July figure.  While it is hard to tell what was driving the increase in consumer confidence, the main thing to take away is that it increased and increased significantly over the previous reading.  Hopefully the increased reading was not just a random event and we will begin to see a slow and steady move upward in the coming months.  Another very important news release was the preliminary GDP figure for the second quarter of 2009, which came in better than expected, but still showed a contraction of one percent.  New home sales for the month of July also beat expectations, coming in at 433,000 while the market expected 390,000.  This unexpected increase is yet another signal that the housing market is turning around.  Now the key for the market will be how long it takes to work off the excess housing inventory.  Overall, there was nothing extremely negative released – meanwhile, most of the releases that were quite good failed to move the market significantly.

This week is a very slow week for economic news releases with the potentially most impactful release, the unemployment rate for August 2008, being released on Friday the 4^th.  Auto sales are being released on September 1^st for the month of August, and to no one’s surprise are expected to be much better than July’s figure, due to Cash for Clunkers, which expired early last week.  The final piece of economic news that could impact the markets is the FOMC minutes from the last meeting.  This release is not expected to contain any surprises, but at some point the Fed could begin to outline its thinking about the next several quarters and the next steps toward economic recovery.  When they do decide to outline their plan, they are likely to release initial hints of the coming change in meeting minutes.  Next week (a short week with Labor Day on Monday) is notoriously slow for economic news, and this year is no exception.  With little economic news over the next two weeks, either the market will have to move on other events or it will move sideways.

Monday led off last week with the decline that should have happened on Friday August 14^th when news came out about declining consumer confidence.  Either investors took a little time over the weekend to digest the information released, or all of the major traders had taken the day off, but the news caught up with the markets on Monday.  The markets reacted appropriately as the concern about the importance of consumer confidence has just started to set in.  The US consumer will move the market and dictate fiscal policy for the rest of this year and well into next.  As we have stated before, the government cannot spend its way to a healthy US economy and much of the burden will be on the backs of consumers, who are currently wary about job security (if they still are employed), and worried about the value of their home.  Much of the fiscal policy of late has aimed at increasing consumer confidence, including policies such as the Cash for Clunkers Program, keeping interest rates near zero (an attempt to get banks to lend money) and the talk of a possible second round of stimulus.  Many of the government’s actions have come at the expense of the US dollar’s value, which has been declining now for quite some time and is starting to lose face in the eyes of foreign buyers.  The declining value of the dollar leaves the US government in quite a quagmire, as they need to continue enticing consumer spending while trying to stem the slide of the dollar.

With the US still in need of repairs to the system, many investors are looking to international markets as a place to diversify away from the US.  While this is a good idea in theory, it can be difficult to implement.  Many of the international mutual funds that are readily accessible to investors correlate highly to US markets because of our close ties in foreign trade and lending. The key to investing internationally is to find investments that are specific to a target region that is independent of the US, such as the Nordic Region and Latin America (both of which are performing well).  We, at Financially Speaking, constantly weigh our investment options between US and non-US assets; while each region currently has its own specific threats, the future investment opportunity looks strong.

The broad markets all increased in value, led by larger-cap firms last week, while volume for the week remained sluggish.  Natural resources had a very good week with oil in particular jumping more than nine percent (most of it due to an inventory report for the US on Wednesday).  Oil is now at its highest level for 2009 and could present a problem for the economic recovery if it continues to increase in price.  While it is unlikely that we will see oil prices shoot back over $140 per barrel, any increase to the $85+ per barrel range could suppress the US consumer.  Gold rose by only seven-tenths of a percent, as many investors continue to sit on the sidelines in relative safety waiting to see if the market can continue to move higher.  An interesting note after looking at the figures from last week: the overall volatility in the markets increased over the course of the week, as indicated by an increase of more than three percent in the VIX reading.

For the trading week ending 8/21/09, the returns in our portfolio models were as follows:

	Last Week	Year to Date
S&P 500 WD (benchmark)	2.24 %	15.50 %
Aggressive Model	-0.63 %	5.87 %
Growth Model	-0.29 %	5.62 %
Moderate Model	-0.08 %	3.20 %
Stable Model	-0.32 %	5.01 %

Last week we made a few strategic moves as far as the balance of our allocations in our models. With the market blowing through support on Monday with a large down day, we decided to move defensively since it looks like there will be little support for the market at these inflated levels.  While the market did turn and move higher every day after Monday’s decline it seems to be moving on borrowed time at this point.  In order to position for a market that could move lower in the future, we decided to employ a defensive strategy in which we use a variety of mutual funds that can invest in any part of the markets the managers see fit.  Our new addition to the models is the JP Morgan Strategic Income Opportunities Fund (JSOAX).  This is a fixed-income, multiple style mutual fund that can maneuver in all parts of the fixed-income market including “going short” and moving heavily to cash. We sold our position in the Merger Fund (MERFX) in favor of concentrating our allocation into the Arbitrage Fund (ARBFX), as it looks like it could take advantage of the coming markets better.  We continue to watch a variety of sectors in the market for making a possible investment in the future, but the vast majority of them are not giving any clear signs as to what would move them higher and make us want to invest in them.

Economic Wrap Up: Last week was a slow week for economic news; many of the releases came in exactly as expected.  The largest deviation from expectations was in the crude inventory levels report, which was released on Wednesday the 19^th to show a drop in inventories to the tune of 8 million barrels.  The announcement about oil inventory levels immediately sent oil moving much higher on the thought that we could feel a pinch from the supply and demand curve.  A second deviation from expectations was the existing home sales figure, which was released on Friday to show that more homes were sold during the month of July than was expected.  This release was a good sign for both the residential housing market and banks because it shows that the residential market appears to have stabilized and banks are now lending money for people to purchase homes.  On the negative side of the equation, initial jobless claims spiked higher unexpectedly, spooking the market temporarily until investors realized that they are a very lagging indicator and that they will probably increase before they decrease.

This week is very busy for economic news releases with several that would have a meaningful impact on the overall market.  The week starts off on Tuesday with the home price index for the month of June, the Consumer Confidence figure for August and Durable goods orders for the month of July.  The consumer confidence figure is the main release to watch; it is expected to increase slightly after the plunge it took for July.  With all of the uncertainty surrounding employment, healthcare reform and the housing market, it seems like many US consumers will be hard pressed to find anything to bolster their confidence.  On Wednesday, new home sales for the month of July are released and we expect them to come in slightly lower than the June reading.  On Thursday (8/27), the preliminary GDP figures for the second quarter of 2009 are released, with the market expecting a reading of negative 1.6 percent.  While this figure is still preliminary, it should give a good idea of the size of the contraction in second quarter GDP.  On Friday (8/28), two very important releases come out: personal spending and personal income for the month of July.  As we have said for quite some time, the success or failure of all the government actions will depend on the US consumer spending money.  If the readings show that incomes have increased and spending has decreased, it could be an ominous sign indicating another market correction.