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Commentary and market review for November follows. 

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tom
Crow Financial

NOVEMBER MARKET COMMENTARY

By Tom Crow
December 6, 2010

 

 

Gain (Loss) by Period

Index

Month End

Month

Most Recent Quarter

Year-to-Date

Trailing Twelve Months

Dow Industrials

11,106

(1.0%)

9.9%

5.5%

6.4%

S&P 500

1,181

(0.2%)

12.5%

5.9%

7.8%

Nasdaq

2,498

(0.4%)

18.2%

10.1%

16.5%

The markets couldn't quite make it three positive months in a row. All three indices slipped just a bit coming off of a very strong September and October. While there are plenty of economic reasons they shouldn't, technically, the markets look like they may continue to climb for a short time.

 

I'll expand on a few of those reasons below, but one of the encouraging indicators is volatility, which was virtually unchanged month-over-month, but has dropped about 10% since the first of December. The chart above is mixed compared to last month. The month, year-to-date and trailing-twelve-month numbers are worse, but the most-recent-quarter (trailing three months) was better. That tells me we are still in a streaky and volatile market .

 

Now, in no particular order...

 

Reason #1 - Continued High Unemployment:  To put it bluntly, November's employment numbers were awful. Only 38,000 non-farm jobs were added, well below the 155,000 analysts expected. Retail, manufacturing and government sectors lost jobs. Only temporary help and healthcare showed gains. The drop in retail employment may have been the biggest surprise as most analysts expected shops to have added jobs for the holiday shopping season.

 

The unemployment rate ticked up to 9.8% from 9.6% as 276,000 more workers were classified as unemployed, bringing the total to 15.1 million. At the same time, employment fell by 173,000 to 138.9 million. Some of those whose unemployment benefits have expired, or are about to, are back out looking for work...swelling the ranks of the unemployed in an economy that still can't produce enough jobs to stay ahead of the curve.

 

Listening to a panel of pundits Friday morning, most of whom were very wrong as far as their predictions were concerned, all I came away with was the feeling that they'd like us to ignore bad reports as anomalies and go crazy over good ones.

 

Reason #2 - More Bad News to Come in the Housing Market: The suspension of hundreds of thousands of foreclosures due to poor documentation took inventory off the market. Pending home sales in October jumped over 10% at the same time new home sales fell by over 8% while the average price fell by over 14% to 2003 levels.

 

At current sales volume, there is an almost nine-month supply of homes on the market. When a good percentage of the temporarily-suspended foreclosures re-enter the market, plus those that have been backing up since the suspension, that nine-month supply of homes will expand and home prices will continue to feel downward pressure. Like employment, we may be many months if not years from seeing big changes for the better.

 

Reason #3 - Another of the PIIGS is Bailed Out: Ireland became the latest country in Western Europe to be bailed out by the International Monetary Fund and the European Central Bank. Investors rejoiced worldwide and drove markets higher...in response no doubt to the stellar success and positive impact all the previous bailouts have had on the global economy. Who's next? Portugal, Italy, Ireland, Greece and Spain were the ones everyone knew were in trouble. How many more are on the brink?

 

Reasons #4, #5 & #6 - QE-II, the Greenback and Interest Rates: The Fed is buying bonds like crazy with money that is simply written into existence. Think small for a moment and imagine what would happen, just in our local economy if each of us could just write checks for whatever amount we wanted have them cashed. Sure, we'd all be bazillionaires, but we'd see no net increase in purchasing power because an enormous supply of dollars would cause enormous price increases.

 

Don't believe me? Why do you think oil prices are on the rise again? As long as those from whom we import oil know the Fed continues to flood the US economy with increasingly worthless dollars, prices will rise. Adding increased demand from other developing nations further restricts supply and only adds to that upward price pressure.

 

A worthless US dollar will result in inflation beyond oil. If our trading partners deflate their currencies to remain competitive, inflation will "go global." If inflation is caused by too many dollars chasing too few goods, flooding the economy with dollars while unemployment is high is not the answer...if we want to avoid inflation.

 

Here ends the list, for now...a few other observations and opinions...

 

As part of our elected officials' desperate attempts to find anything that works (hint...cutting corporate taxes works every time) the president proposed a pay freeze for all civilian (non-military) government employees. No raises for at least two years in the face of potentially rising inflation is not going to encourage these folks to rush out and join the ranks of the yet-to-be-seen, free-spending consumers that will reinvigorate the economy.

 

The president's blue-ribbon debt panel came out with a call for a sweeping overhaul of the federal government and how it spends money in order to reverse the trend in national-debt growth and to make the US economy more-competitive. Among other things, they proposed reforms in Medicare and Social Security, a simplified tax code, higher gas taxes, lower agricultural subsidies, hard caps on government spending and a long-term reduction in the federal workforce.

 

There are enormous program cuts and huge tax increases proposed in the report, all of which could combine to balance the federal budget by 2020. Keep in mind, the whole time the budget is not balanced, the national debt is increasing along with our continuously compounding interest payments.

 

The federal deficit will finish the year at about $1.3 trillion. The national debt will be close to $14 trillion, or $125,000 per taxpayer. Perhaps a far more-terrifying set of numbers is the current unfunded liabilities in social security, prescription drugs and medicare, which at the moment total some $111 trillion, or just over $1 million per US taxpayer.  That is compared to total national assets (small and large business and household) of just under $70 trillion.

 

Folks, that means we've allowed ourselves, and our government to spend $1.58 for every dollar of net worth that exists in this country. As long as we have debt and deficit spending, that extra $0.58 is very real and quite a bit of it is owned by the Chinese. If we don't get things headed back towards solvency, it will also exist as a big, wet blanket on our children and grandchildren's future income, savings and standard of living. We can, and should do better.

 

Have a wonderful Christmas and New Year's, or whatever winter holidays you and yours choose to celebrate, and if given the opportunity, choose generosity over materialism every time. You won't be sorry.