The Markets

What is the most actively traded security on the planet?

The answer is the two-year Treasury note and its current yield is sending us a signal, according to Bloomberg, July 17. Last week, the yield on the two-year note fell for the seventh straight week and touched its lowest level ever. At just under 0.6%, it is now lower than during the peak of the financial crisis in the fall of 2008.

What does this signal?

In short, it suggests the economy is slowing down, inflation is not a threat, deflation is a possibility, and money-market rates will remain historically low, according to BusinessWeek, July 15, Barron's, July17, and Bloomberg, July 17. Here's a list of several economic reports released last week that help support this view:

·         U.S. consumer sentiment tanked in early July, according to a survey by Reuters and the University of Michigan (MarketWatch, July 16).

·         The consumer price index dropped for the third straight month in June, according to data from the Labor Department (Market Watch, July 16).

·         Industrial production rose a modest 0.1% in June after having risen 1.2% in May, according to the Federal Reserve, July 15.

·         Another report released by the Federal Reserve, June 22, said, "The economic outlook had softened somewhat and a number of members saw the risks to the outlook as having shifted to the downside."

·         The dollar has posted significant declines recently against the euro and yen as traders position themselves for a potential slowdown in the U.S., according to Bloomberg, July 17.

While the data above points toward economic softness, second quarter corporate profits are coming in strong. Of the 48 companies in the S&P 500 index that have reported their earnings, 75% have topped analysts' estimates, including a blow-out quarter from Intel, according to Reuters, July 16.

The tug-of-war between soft economic data and strong corporate profits is helping keep the market stuck in a bouncy trading range.

Notes: S&P 500, DJ Global ex US, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.

Sources: Yahoo! Finance, Barron's, djindexes.com, London Bullion Market Association.

Past performance is no guarantee of future results.  Indices are unmanaged and cannot be invested into directly.  N/A means not applicable or not available.

HOW DO YOU SOLVE A PROBLEM LIKE JOBS? This question has a double meaning--jobs as in employment and Jobs as in Steve Jobs of Apple.

Chronically high unemployment in the U.S. is having a debilitating effect on our economy. We can point to many causes for this, but one that receives lots of press is the outsourcing of jobs overseas--and that's where Steve Jobs comes in.

Without getting into a political debate about the pros and cons of free trade, it turns out that in a little recognized fact, Apple is one of the biggest beneficiaries of outsourcing jobs overseas. We can't get enough iPods, iPhones, iPads, and Macs, but relatively few of the jobs created by our insatiable demand are sprouting on our shores.

According to Apple and BusinessWeek, as of September 26, 2009, Apple had about 37,000 full-time equivalent employees of which about 25,000 were based in the U.S. By contrast, Apple has subcontracted with a Chinese company called Foxconn that employs roughly 250,000 people who are devoted to building Apple products. Doing the math, for every one Apple employee working in the U.S., there are 10 Foxconn employees building Apple products in China. Knowing that costs are much lower in China (and that Apple products are in high demand), is it any surprise that Apple earned $3 billion in profit with a 42% gross margin in the first three months of this year?

Again, this is not meant to start a political debate about free trade or protectionism as there are many facets to this issue. It simply points out the intractable nature of high unemployment in the U.S., particularly in the manufacturing sector. Some people argue that free trade and capitalism are the best ways to grow jobs and profits. Others, notably former Intel chairman and chief executive officer Andrew Grove (Bloomberg, July 1), argue for protectionist measures to rebuild our domestic manufacturing base.

Ultimately, America needs to get its people back to work. The Apple example shows just how difficult that may be.

Weekly Focus - Think About It

"I want to put a ding in the universe."

--Steve Jobs