The Markets finished July a bit higher in the midst of a selloff, fueled mostly by more uncertainty out of Europe. I must admit, Europe's problems are worse than ours and they, like us, are looking at tens of years, if not more for a resolution. Daily swings of over 1% in reaction to economic news and speculation, whether positive or negative, out of Europe or the US is a bit ridiculous, but it's what the market is giving us, so we deal with it accordingly.

By Thursday of last week, the fourth down day in a row for the indices had effectively wiped out all the gains for the month, but a favorable response to an otherwise lackluster jobs report turned things around on Friday, and the rally held on through Monday, but just barely. Today brought renewed optimism for a solution in Europe, and the rally continues. The S&P 500 reclaimed the 1,400 level, but the Dow still has about 900 points, or roughly 7% to climb to reach the October 2007 level above 14,000.

The volatility index (VIX) has pulled back from its June average over 21 to below its July average of 17.6. A lower VIX is not required for markets to go higher, but it does indicate investors have a more-positive opinion about the markets and are taking fewer pessimistic positions accordingly. This is important for at least two reasons. First, it means investor sentiment is improving. Second, it may mean any meaningful rally is sustainable because it is not brought on by folks covering short positions because there are fewer of them.

The July employment data shows 163,000 jobs were created. The private sector created 172,000 jobs and 9,000 government jobs were lost. Analysts were pessimistic this month, on average expecting only about 100,000 jobs created. Unfortunately, the participation rate dropped once again, by over 150,000 and that drove the unemployment rate back up to 8.3%. The two prior month's numbers were revised lower by a cumulative 8,000 jobs, so the slightly-negative revisions from last month are now firmly back in the minus column.

The U6, unemployment number which includes discouraged seekers and those forced to work part time who would rather be working full time crept higher still to 15.0% from 14.9%. Last July's unemployment rate was 9.1%, caused mostly by auto workers who were out of a job for two weeks while factories re-tooled. That has not occurred this year to the same extent.

I wrote a bit last month about the fiscal cliff and the president's, or his economic advisor's wrong-headed thinking when it comes to borrowing money to pay off debt. Then, I ran across an article that explained very well why the "real" fiscal cliff we are facing has very little to do with automatic tax increases and even less to do with cuts in government spending. This is consistent with my arguments that: 1) government spending does not create wealth, and 2) that redistribution is not growth.

The very real and most-current threat to our economy comes from rising interest rates. As long as the Fed can keep rates near zero, we are able, for now, to continue to service our debts. Currently, our net interest payments on all Federal debt are $225 billion, or an average of about 0.4%. If inflation starts to heat up and forces the Fed to allow rates to climb by even 1%, making our effective rate 1.4%, our interest payments jump to $797 billion, making that our single, biggest obligation; more than Medicare/Medicaid, more than Social Security, and more than the entire defense budget...and you think the last couple of rounds of haggling over raising the debt ceiling were awful...

Lastly...I'm going to cut the president a bit of slack for his, "you didn't build that" comment. Don't be too surprised. I'm not cutting him much. But seriously...it should be painfully obvious to anyone who listens to that comment in context that he was saying the entrepreneur did not build the roads, bridges or internet that helped make his businesses successful, and technically, he's correct. However, in their haste to try and make him look bad, Romney's camp and the RNC are blatantly misconstruing his words, and in so doing, missing the bigger, more-fundamental argument...and opportunity.

To be perhaps overly simplistic...which came first the chicken or the egg? The president and his advisors speak and act as they do because they are convinced that government is a big, benevolent protector with a bottomless piggy bank that exists to help people whose lives would be miserable without it. They are completely blind to the reality that a government that provides infrastructure and defense is EXACTLY what the entrepreneurs and private industrialists and their employees agreed to fund with their tax dollars to begin with.

Which came first? Do governments exist eternally and occasionally give birth to societies full of citizens who can't survive without centralized care and supervision? Or, do societies grow from groups of individuals who eventually create governments to provide general services for the good of all?

There's a whole lot wrapped up in, "provide for the common defense, promote the general welfare and promote the blessings of liberty," but I believe this is the crux of the argument between socialists and libertarians. I have given up trying to figure out about what republicans and democrats are arguing. Neither side has accomplished anything in years, but all the folks we keep electing to argue our side are getting wealthy doing it while our national debt skyrockets and states and municipalities teeter on the edge of bankruptcy.

Quickly back to the volatility and continued overreaction discussed in the first paragraph...what does this mean for clients' portfolios? Glad you asked. It means we're going to continue to err on the conservative side, dial back the risk on any new purchases and look for safe, reliable dividends while we wait for some sense of stability to return to the market. We will resist the urge to chase dwindling gains in an overbought market, looking instead for opportunities to take profits and position portfolios for the next downturn. A single piece of bad economic news can create the next buying opportunity in a hurry.

Please call or e-mail if you have any questions, and we'll do this again in about a month.