A huge, pink elephant floated across the road in front of me this morning on my way to work. We just stared at each other, and I'm sure the grin on my face was about as silly as his. I wasn't hallucinating, it's the first week in October and the International Balloon Fiesta is back in Albuquerque. Almost 600 balloon pilots from all over the world are flying all week and the morning skies, weather permitting are a spectacular sight...no matter how many times you've seen it.

The markets bounced back a little from last month's selloff, but fears over the economic impact of the federal government shutdown and the looming debt-ceiling fireworks has investors running for the sidelines again. About half of what the indices gained this month has been wiped out. We're advising caution at this point, but we do believe that whatever selloff occurs in response to all this will present a great buying opportunity before the end of the month, or until the next crisis.

This seems an appropriate place to insert, and introduce technical analysis from our consultant, Chris Jungmann, and to welcome his former clients. We may not always send our commentary combined like this, but it worked out this time. From Chris:

I've intentionally taken a step back from the government shut-down news-feed, and not just for my sanity.  It's easy to be caught up with the rhetoric coming from Washington and miss the bigger picture.  In this update, I'll give you our take on how the markets are reacting so far, and a prognosis.

Looking at recent market activity it would seem that the markets don't care much.  As I look back at the markets since my July 22nd update, I find little change.  For example the S&P (now up 18.5% year-to-date, was up 18.6% then), copper (-14% now, -10% then), gold (-23% now, -22% then), and crude oil ($108.05 now, $103.84 then) are almost all virtually at the same level now.  If a default was imminent we would expect drastic changes in stock markets and commodities around the world.  Certainly it's no exaggeration that a default of a nation of this size would be unprecedented and the consequences dire.  So are the markets complacent?

Because of that possibility, however unlikely, Tom and I have to remain cautious like everyone else.  As much as we look for advantages in a contrarian strategy, the risk/reward equation is not favorable right now.  It would seem likely that the October 17th "drop dead" date will be pushed back further somehow, but markets won't likely be satisfied by such a measure.  As I've noted for a long time now the markets are fueled by QE, and mostly QE, and while this is not reassuring in itself, the Central Banks of the World have no choice, unless they want to take their chances in a Mad Max world.

So aside for some short-term scares, the multi-year trend remains up both according to my humble assessment of what I consider the Central Banker's dilemma, and the emotion-free computer algorithm as it analyzes market data.  For now we're looking for some short-term profit opportunities and would rather be slow to a rally than quick to a sell-off. For the near-term, we would take an S&P 500 close below 1,655 as an encouragement to be more-defensive.

I hope that everyone is enjoying the Balloon Fiesta, or at the very least the cooler weather.  This is one of my favorite seasons in New Mexico, and I hope that you are all able to take a moment here and there to enjoy it.

Best regards,
Chris

With the shutdown in force, there was no jobs report for September. ADP estimated a rather weak number around 160,000. We'll send an interim update with a summary if we get one before next month's regular Commentary.

Not having Department of Labor numbers to sift through gives us a little time to look at a few other things that may have significant impact on the markets and the economy in the near future. The first of which is the retirement of Ben Bernanke as Federal Reserve Chairman.

Regarding frontrunner Larry Summer's withdrawal from the race, Doug Casey had the following to say, "One of the stupidest people ever placed in a position of leadership in the history of the United States will not become the next Federal Reserve Chairman."

Summers was almost single-handedly responsible for the loss of $1.8 billion from Harvard University's endowment, and as Treasury Secretary under former President Bill Clinton, Summers championed many of the policies that led to the credit bubble and subsequent crisis. He also used public money to bail out hedge fund Long Term Capital Management in 1998.

As far as the U.S. dollar is concerned, the new Fed frontrunner, Janet Yellen, probably won't be much better if you believe that, at its core, the Fed is a flawed institution because our currency should not be manipulated and debased by men or women in power.

Ignoring the current political comedy going on in D.C., the underlying cause of our present and future economic uncertainty is a crushing amount of debt, so in our opinion, whoever takes the helm of the Fed will be a failure. We need to stop printing money, and we know Bernanke's replacement isn't likely to do that. Yellen is likely to keep interest rates low for years and keep the printing press running.

The potential likelihood of Yellen running the Fed pushed the stock market to record highs. Ten-year Treasury yields fell from 2.98% less than two weeks ago to 2.80%, and gold rose nearly $10 to $1,316 an ounce.
 
Looking for some positive news, an article summarizing a recent speech given by former Obama economic advisor Austan Goolsbee provided a little. He said he anticipated that the stubbornly slow economic recovery would continue, noting that this recovery was similar to the non-V-shaped one that followed the dot-com bust.

He quoted a headline (actually from July 2008) from the satirical publication The Onion: Recession-Plagued Nation Demands New Bubble To Invest In. A facetious quote from that article read, "'What America needs right now is not more talk and long-term strategy, but a concrete way to create more imaginary wealth in the very immediate future,' said Thomas Jenkins, CFO of the Boston-area Jenkins Financial Group, a bubble-based investment firm. 'We are in a crisis, and that crisis demands an unviable short-term solution.'" This is funny stuff, folks.

By way of a much-condensed summary, Goolsbee said we would not find much hope for economic recovery in housing, the Federal Reserve or emerging markets. He also said we could forget about Europe, where politicians became excited recently because new data suggested that the Continent was finally approaching a growth rate of ... zero.

He suggested the current government shutdown would last two weeks, or until it becomes apparent that one side is winning the argument. But, whether a winner is apparent or not, he does not expect any deal to last for more than about the next six months. So it looks like, despite calls to the contrary from both sides, insiders are expecting we'll continue to govern, "from crisis to crisis."

Are there any prospects for renewed economic growth? Goolsbee cites three positive characteristics of the U.S. economy that will eventually bring us more-complete recovery. 1) Entrepreneurship, which he argued has made the United States the richest country on earth and will continue to do so; 2) Productivity, second worldwide only to Luxembourg, with its burgeoning workforce of about 250,000; and 3) Demographics, in that our population is aging more slowly than those of the rest of the developed world.

Finally, Goolsbee half-jokingly said our recession would end when 25-year-olds move out of their parents' basements and decided to rent, not own, their own places, because they'll buy pots and pans and futons.