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Commentary and market review for October follows.  Please feel free to forward to friends, family or associates you think might find it interesting. If they like it, they can subscribe and be added to our mailing list.

tom
Crow Financial

OCTOBER MARKET COMMENTARY

By Tom Crow
November 9, 2009

The markets closed out a much-subdued quarter the day before Halloween. The month ended flat to a bit down and the most recent quarter returns were down around 10% from the previous month. The volatility indicator ended the month a bit higher than it began, after moving quite a bit lower during the second and third weeks.
 
For the first time since early October 2008, the Dow managed to reclaim the 10,000 mark a few times, and has stayed within a few percent of it since. For technicians, 10,000 is just a number, but it does represent a key psychological or emotional level for some. To me, it says we've managed to claw our way back up to a point that is about 42% below the all-time high we reached over two years ago.
 
Technically, the indices look like they're ready to roll over as all are entering a right-shoulder pattern. However, our forecast and a handful of other indicators show this strength could continue a bit longer. A ton of cash remains on the sidelines and trading volume has not indicated much interest in the S&P 500. Declining volume as stock prices rise can be an indication that investors are backing away.
 
Non-farm payrolls for October were much worse than consensus expectations (but right in line with mine) with unemployment rising to 10.2%. This is the highest unemployment this country has seen in over 25 years. The number is subject to revision as always, but that brings total jobs lost in this recession to 7.3 million. An alternate measure, which includes discouraged workers and those forced to work part-time rose to 17.5%.
 
The unemployment reading is a lagging indicator, meaning things will get better before the number improves, but policy makers expecting consumers to lead the turnaround with a strong Christmas season may be very disappointed. Credit cards and home equity lines are still maxed out and the media is talking more about layoffs than new jobs. It's a little hard for me to think folks will empty their wallets and bank accounts, and spend every dime of what might be their last paycheck on presents this year.
 
The market is not the economy, and vice-versa. It may be that the market began its recovery in March, unless another selloff takes out those lows, but it looks like we'll be well into 2010 before there is any real indication the economy is improving.
 
A little bit more on IRAs this month...there are no Required Minimum Distributions from IRAs for 2009. If you've been putting off taking your distribution, you can quit worrying about it. If you took a distribution and would like to put it back, you have until the end of November, or 60 days from the withdrawal (whichever is later) to refund your IRA. If you had taxes withheld from your distribution, you'll have to put those back as well, or that amount will be considered a taxable withdrawal for the year.
 
In the next few paragraphs, I'll summarize a recent article by Bill DeShurko entitled "Rush vs. Obama: What GDP Means for Client Portfolios." Copyright laws prohibit me from reprinting it in its entirety.
 
Preliminary GDP estimates for the third quarter came in at a blistering 3.5%. The administration and media were quick to jump all over this number, declare their policies a success and the recession over. Their critics were equally quick to claim the turnaround was due primarily to increased government spending, funded by the taxpayers and therefore no real growth at all, if not a net loss.
 
GDP is made up of four major components: personal consumption, private investment, exports less imports (trade balance), and government spending.
 
Durable goods purchased, skewed dramatically by the cash for clunkers program increased 22% while non-durable goods purchased rose only 2%. We don't know the full impact of autos on the durable goods number but prior quarters don't show anywhere near this kind of disparity. Services purchased were also up, but only about 1% from the prior quarter. The $8,000 home buyers' credit may have influenced that number a bit. WE can assume the non-influenced durable goods number would also be positive, so this is a net positive sign.
 
Private investment showed more disparity with the residential category swinging from a 23% decline to a 23% increase, due almost certainly to the home buyers' credit. In the commercial sector, where there are no government bailout or incentive programs, investment continued to decline an additional 9%, following a decline of 17% the prior quarter. These numbers, combined with the looming specter of pending foreclosures, and rising inventories is not encouraging.
 
Trade showed a big turnaround in exports, an area definitely helped by continued weakness in the dollar. This does indicate economic growth outside the US. Imports saw a similar reversal from negative to positive, but that number was also influence by the cash for clunkers program. Unfortunately, several media outlets have reported foreign, not U.S. auto makers were the largest beneficiaries of the program.
 
The last piece of this puzzle is government spending. Interestingly enough, this anti-war president and congress have increased defense spending almost twice as much as non-defense spending in the last two quarters. A troubling number in this category is State and local government spending, which turned negative in the third quarter despite the huge amount of stimulus money directed through the states.
 
So, who's right? Within the confines of the article, both sides are right about some things, so the author declares a draw. It looks to me like most of the positive numbers are due to increased government spending and policy. Policy aside, government spending and government jobs are a net negative to the economy and cannot continue forever. It remains to be seen whether all the stimulus programs can actually stimulate the economy. So far, the GDP data shows it has had minimal effect as areas exempt from policies and programs have shown little, if any improvement.
 
We'll celebrate another Thanksgiving before the next commentary. It may be easy to get depressed or discouraged by all the seemingly bad news, but I've found no matter how bleak I may think my current situation is, I never have to look very far to find a person or family in far worse shape.
 
As we look towards the beginning of our 34th year in this sometimes crazy business, Vicki and I want to make sure all you all know just how thankful we are for all our clients, associates and friends who continue to make this possible. May God in His great wisdom and mercy continue to richly bless us all this Thanksgiving and always!