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.