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Topic: Investment Landscape

Last week we saw the market continue to grind higher with the Dow retaking 11,000 for the first time since the market peaked in April / May prior to the flash crash in early May.

Economically, the “official” unemployment rate remained at 9.6% (magically...wink wink) while nonfarm payroll employment edged down -95,000 in September, much more than expected. One could ask how we could continue to lose jobs and the unemployment rate stay the same? Only by some exiting the labor pool after giving up their search for a job. This marks the last payroll number before upcoming elections in November.

With such disappointing numbers, many were surprised that the market traded higher after such disappointing numbers. Some of the factors may have contributed:

  • While the overall employment number was down, the private sector did add 64,000 jobs which continues a modest up trend. The problem was on the government side with 159,000 jobs shed in temporary jobs for Census 2010 and other government jobs. Blacks (16.1%) and Hispanics (12.4%) continue to suffer higher unemployment rates.
  • With the continued weakness in job creation, the market looked ahead to the prospect that the Fed and other global central governments will resume the asset buying in government securities. This is causing buying ahead of the Fed driving down interest rates.
  • The market is also trading up on the prospects that the failure of the current administration could lead to changes in congressional power at the house and potentially at the senate level. A change similar to the political change that we got in 1994 would provide some gridlock.
  • There is also speculation on what the lame-duck congress will do after the election in terms of extending the Bush tax cuts.

With the prospect of more asset buying or quantitative easing (printing money), treasury rates are going to record lows with the following yields: 2-year treasury 0.35%, 5-year treasury yield 1.01%, 10-year treasury declining to 2.37%, and the 30-year treasury at 3.7%.

How low can they go? That is the big question for many who are already calling out a Bond Bubble. Time will tell but Pimco guru Bill Gross speculated that the Fed may take rates on the 10-year treasury down to 1.7% before it is all said and done.

This helps the consumer / businesses in two ways;

  • The low rates are driving down record low mortgage rates – setting off another refi-cycle
  • Businesses and individuals that have the credit to borrow, can borrow at very low rates.

The other impact of the potential quantitative easing (printing money) is the impact on gold and silver. Both of these metals continue to attract more buyers than sellers as both may be viewed as a fiat currency in the fact of global governments printing money. While this and treasuries may be a bubble, it seems investors are trying to find a refuge in the fact of the U.S. printing presses.

It also appears, that investors are running away from the U.S. Dollar again and moving assets to Asia, India, Latin America. For international investors, this will provide “wind at the back” when prices converted back to U.S. dollars at the end of the day.

Finally, seasonal patters seem to be taking hold with the move into October. September was not a disaster like some were predicting. It appears now that the lows of July 2nd will hold and the market will grind its way higher as we enter the fall months, election, and pre-election year of 2011. As expected, we continue to believe the corporate earnings will be better than expected.

Week Ahead:

  • Bond market closed Monday – Columbus day
  • Corporate earnings season – Intel (INTC)
  • Inflation readings on PPI (Thursday) and CPI (Friday)
  • Retail Sales (Friday)
  • International Trade (Thursday)

What is happening in the market – What do we like?

Investors continue to like precious metal and international allocations to hedge against the risks of quantitative easing here in the U.S. combined with yields that are getting squashed across the board. Investors have to walk the “yield plank” or into equities to get a better return.

Market Strength:

Market Weakness:

  • Bear Funds
  • Bonds – Short, Mid, Long
  • Zero Bonds
  • Finance
  • Emerging Market bonds

Invest wisely.

Disclosure: Long BRF, Long SLV, Long DBP, Long GLD, Long DBB, Long EEM, Long EPP, Long EFA, Long SCZ, Long RYAWX, Long IJH, Long IWO, Long IDX, Long THD, Long RWX, Long EPU, Long GXG, Long MSMLX

Source: Investment Landscape and Stocks We Like