Weekly Commentary

December 13, 2010

The Markets

Let's make a deal.

That's what President Obama did last week with the Republicans and the financial ramifications of the broad tax package are already starting to ripple through the financial markets. Last week, stock prices hit a two-year high, interest rates rose significantly, the dollar strengthened against a basket of other currencies and gold hit a new high then fell back, according to Associated Press, Bloomberg and The Financial Times.

The tax package is estimated to cost the government as much as $900 billion over the next few years, according to Associated Press. Understanding how this potential budget deal will affect each of the above asset classes could provide clues about the future direction of the financial markets. Here are some possibilities:

·       Stocks -- the added stimulus from the package could add as much as 1 percentage point to economic growth next year, according to economists from Goldman Sachs. That could be bullish for the stock market.

·       Bonds -- stronger economic growth, coupled with a potential increase in the budget deficit due to the nearly $900 billion cost of the tax package, could lead to higher interest rates and act as a governor on stock prices.

·       Dollar -- higher interest rates and faster economic growth could help strengthen the dollar which may lead to weaker exports and lower inflation, according to Marketwatch. On the other hand, larger budget deficits could cause investors to lose faith in our currency and put downward pressure on the value of the greenback.

·       Gold -- higher interest rates and a stronger dollar could reduce demand for gold. However, if investors fixate on the increase in the budget deficit, this could lead investors to buy gold as a haven against runaway deficits and a weaker dollar.

As you can see, there are no simple "if this, then that" scenarios in the financial markets. Instead, the financial markets consist of a vast web of interrelationships among asset classes that are fluid, dynamic and ever changing. Our job is to try and stay on top of it all for you.

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.

IN AN IRONIC TWIST OF FATE and despite the fact that the U.S. is running record budget deficits, we still have money to burn -- literally. In an effort to thwart counterfeiters, the U.S. government spent 10 years designing new $100 bills that contain sophisticated security features including a 3-D security strip and a color-shifting image of a bell, according to Yahoo! News.

Turns out the bills were too sophisticated for the printing presses and up to $110 billion of the newly printed bills, which are sitting in a vault, will have to be torched! Oops.

During the printing process, some of the bills incurred a crease which caused a blank spot to appear. Manual inspection showed that properly printed bills are mixed in with bad bills and the government estimates it will take one year to separate the good bills from the bad bills. Oh, and it cost the government around $120 million to print these bills.

Looks like "printing money" is not as easy as we thought. The biggest loser in all this -- besides the U.S. taxpayer -- is trees.

Weekly Focus - Think About It

"A man's errors are his portals of discovery." --James Joyce