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Weekly Commentary July 6, 2010 - The Markets

The Second Quarter in Review

Data as of 6/30/10	2nd Quarter	YTD	1-Year	3-Year	5-Year	10-Year
Standard & Poor’s 500 (Domestic Stocks)	-11.9%	-7.6%	12.1%	-11.8%	-2.9%	-3.4%
DJ Global ex US (Foreign Stocks)	-12.6	-11.2	9.2	-12.7	1.3	0.0
10-year Treasury Note (Yield Only)	3.8	N/A	3.5	5.0	3.9	6.0
Gold (per ounce)	11.5	12.7	33.1	24.1	23.3	15.8
DJ-UBS Commodity Index	-4.8	-9.7	2.6	-9.5	-3.8	1.8
DJ Equity All REIT TR Index	-4.1	5.4	53.6	-8.8	0.4	10.2

Notes: S&P 500, DJ Global ex US, Gold, DJ/AIG 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 available.

STOCK MARKET RALLY FALTERS ON “MACRO” ISSUES

The stock market rally that began in March 2009 came to an abrupt halt in the second quarter. Despite excellent first quarter corporate earnings in the U.S., investors fretted about larger issues that could overwhelm the economy in the months ahead. These “macro” issues include unsustainable government debt levels in numerous countries, the unwinding of stimulus spending, possible deflation, persistently high unemployment, financial regulation, and a government-orchestrated economic slowdown in China, according to The Wall Street Journal, June 30. These concerns helped send the S&P 500 index to an 11.9% decline in the quarter.

Second Quarter Country Returns Based on the Dow Jones Global Indexes
Ranked by U.S. Dollar Performance

Winners

Sri Lanka	25.7%
Peru	5.9
Philippines	5.8
Iceland	4.6
Indonesia	3.4

Other Notables

Greece	-39.3
Spain	-22.3
France	-20.5
Brazil	-14.8
U.K.	-14.0

Source: Dow Jones Indexes

ECONOMY SLOWS DOWN

A variety of economic reports over the past few weeks suggest the economy is slowing down. For example, home sales dropped, consumer confidence slumped, manufacturing growth cooled off, and new claims for unemployment insurance remained high, according to Bloomberg, July 3. However, let’s not get too carried away. A slowdown does not necessarily mean we are headed for another recession.

Today’s weak economy puts policymakers in a tough spot. Normally, fiscal and monetary stimulus is enough to jumpstart growth. Unfortunately, we’ve shot those two rockets and we still haven’t reached escape velocity. If the economy rolls over from here, the question becomes, “Where do we find a third rocket?” According to Tony Crescenzi, strategist and portfolio manager at Pimco, CNBC.com, June 7, our third rocket might consist of time, devaluations, and debt restructurings. If fired, this third rocket could be painful for many Americans.

INTEREST RATES DIVERGE BASED ON RISK PERCEPTION

As the stock market declined, yields on U.S. government securities declined, too, as investors fled to the perceived safety of our government paper. During the quarter, the yield on the 10-year note declined from 3.8% to 3.0%, according to data from Yahoo! Finance. This decline in yield occurred even though the government issued more than $300 billion in new debt during the quarter, according to The Wall Street Journal, July 1. It was a different story in the corporate bond arena. Yields on investment-grade corporate bonds and high-yield corporate (junk) bonds rose as investors began pricing in added economic risk. In a sign of growing risk aversion, the spread between yields on corporate bonds and government bonds rose significantly, as investors required a higher yield to hold the potentially riskier corporate bonds.

THE DOLLAR REMAINS POPULAR

Some naysayers think the dollar’s days are numbered, but that countdown had yet to begin in the second quarter. The dollar index, a measure of the dollar’s strength compared to a trade-weighted basket of six other currencies, rose a solid 5.9% in the second quarter, according to MarketWatch, June 30. Two major trends are apparently tugging at the dollar and in any given week, one trend seems to outweigh the other. The euro zone debt crisis helped spark a flight to the U.S. dollar and was a major reason why the dollar jumped sharply in the second quarter. However, toward the end of the quarter, disappointing economic numbers out of the U.S. and new austerity measures in the euro zone led some investors to rethink their dollar-haven strategy.

SUMMARY

The recovery from the recession hit a rough patch in the second quarter as several economic indicators turned soft and the stock market turned south. It’s too soon to tell if this is the start of a new leg down or simply a pause that refreshes. Either way, we continue to do our best to help you reach your goals.

Weekly Focus – Think About It

“Psychology is probably the most important factor in the market—and one that is least understood.”
—David Dreman

Best regards,
The Advocate Group

Securities offered through LPL Financial, Member FINRA/SIPC.

The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.
The DJ Global ex US is an unmanaged group of non-U.S. securities designed to reflect the performance of the global equity securities that have readily available prices.
Gold represents the London afternoon gold price fix as reported by the London Bullion Market Association.
The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.
The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
Past performance does not guarantee future results.
You cannot invest directly in an index.
Consult your financial professional before making any investment decision.

— 06 July 2010 Commentary, Economic Updates

Weekly Commentary April 5, 2010 - The Markets

THE FIRST QUARTER IN REVIEW

Data as of 3/31/10	1st Qtr	1-Year	3-Year	5-Year	10-Year
Standard & Poor’s 500 (Domestic Stocks)	4.9%	46.6%	-6.3%	-0.2%	-2.5%
DJ Global ex US (Foreign Stocks)	1.6	59.2	-6.6	3.8	0.7
10-year Treasury Note (Yield Only)	3.8	2.7	4.7	4.5	6.0
Gold (per ounce)	1.0	21.7	19.0	21.1	15.0
DJ-UBS Commodity Index	-5.1	20.4	-8.4	-4.0	3.0
DJ Equity All REIT TR Index	9.9	106.5	-10.4	4.0	11.8

STOCK MARKET RALLY CONTINUED

The stock market followed 2009’s powerful rally with a strong performance in the first quarter. The S&P 500 rose 4.9%, excluding dividends, which was its best first-quarter percentage gain since the heady days of 1998, according to MarketWatch. Strong corporate earnings, solid corporate balance sheets, and upbeat manufacturing data helped support the stock market’s bullish results, according to The Wall Street Journal.

It wasn’t a straight line up, though. Between late January and early February, the Dow Jones Industrial Average dropped more than 7% as news of credit tightening in China, sovereign debt woes in Greece, and debates in Washington on healthcare and bank reform helped scare investors, according to The Wall Street Journal. The scare was brief as investors quickly “bought the dip” and sent the averages higher by the end of the quarter.

INTEREST RATES WERE STABLE

The yield on the 10-year Treasury was essentially unchanged during the quarter as investors continued to snap up all the debt the government offered, according to The Wall Street Journal. Demand for corporate and high-yield bonds was robust which helped keep those rates at relatively low levels.

Some investors are concerned that our large budget deficits may result in a glut of bonds, which could cause interest rates to rise substantially. That could put the brakes on an economic recovery, but this worry has not come to fruition—yet.

THE DOLLAR ROSE AGAINST THE EURO

The big story in foreign currencies during the first quarter was the strength of the dollar against the euro. According to The Wall Street Journal, the dollar rose 6% against the euro as debt concerns in Greece, Portugal, and Spain weighed on the common currency. Investors are also evaluating the relative strength of the U.S. economy versus the euro countries and it appears that a consensus is building that our country may grow faster. If that occurs, it may mean interest rates could rise sooner in the U.S., which would also help support a strengthening dollar.

DOUBLE DIP RECESSION LOOKING LESS LIKELY

Recent economic indicators suggest the economy is healing from the severe recession of 2008-2009. For example, the Commerce Department said consumer spending rose in February for the fifth consecutive month. Consumer spending makes up about 70% of gross domestic product, according to Morningstar, so a rise in this number bodes well for the economy. The manufacturing sector is looking robust, too, as the ISM manufacturing diffusion index rose to 59.6% in March, which was its highest level since July 2004, according to MarketWatch. Readings over 50% indicate that more firms said business was improving than said it was worsening. It was also the eighth straight monthly increase.

Just after the quarter ended, the Labor Department released the March payroll report and it showed a gain of 162,000 payroll jobs. It was the third gain in the past five months and the largest increase since March 2007. This report, coupled with other economic data, prompted Robert Hall, the head of the National Bureau of Economic Research’s Business Cycle Dating Committee, to say that it is “pretty clear” that the deepest recession since the 1930s is over, according to a Bloomberg report. Hall’s organization is the “official” source on declaring the beginning and ending of recessions. Jeffrey Frankel, another member of the business cycle dating committee, said, “The most likely date for the recession’s end would be midyear of 2009,” according to the same Bloomberg report.

This mid-2009 date would seem to confirm the validity of the stock market rally that we’ve experienced over the past year. The market started rising in March 2009—not too far ahead of the time that Frankel suggested the recession ended.

SUMMARY

The stock market performed well in the first quarter as earnings growth continued to shine and the economy continued to mend. Longer-term issues such as large government deficits, housing weakness, and the withdrawal of stimulus money hang over the markets like a black cloud, but so far, these concerns have not deterred investors.

Weekly Focus – Think About It

“Economic progress, in capitalist society, means turmoil.”
— Joseph A. Schumpeter

Best Regards,

The Advocate Group

Securities offered through LPL Financial, Member FINRA/SIPC.

The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.
The DJ Global ex US is an unmanaged group of non-U.S. securities designed to reflect the performance of the global equity securities that have readily available prices.
Gold represents the London afternoon gold price fix as reported by the London Bullion Market Association.
The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.
The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
Past performance does not guarantee future results.
You cannot invest directly in an index.
Consult your financial professional before making any investment decision.

— 05 April 2010 Commentary, Economic Updates

Weekly Commentary October 5, 2009 - The Markets

As we enter the home stretch for 2009, let’s review what transpired in the financial markets over the past three months.

Returns through 9/30/09	3rd Quarter	Y-T-D	1-Year	3-Year	5-Year	10-Year
Standard & Poor’s 500 (Domestic Stocks)	15.0%	17.0%	-9.4%	-7.5%	-1.1%	-1.9%
DJ Global ex US (Foreign Stocks)	19.2	35.3	4.3	-3.6	5.7	1.9
10-year Treasury Note (Yield Only)	3.3	N/A	3.8	4.6	4.1	5.9
Gold (per ounce)	6.6	14.5	12.6	18.4	19.1	12.8
DJ-UBS Commodity Index	4.2	8.9	-23.9	-7.2	-3.6	3.3
DJ Equity All REIT TR Index	33.2	17.4	-28.1	-12.2	1.6	9.8

STOCK MARKET RALLY CONTINUED

Rising a stunning 15.0%, the S&P 500 scored its largest quarterly gain since 1998, according to The Wall Street Journal. International markets did well, too, as the Dow Jones Global Index, excluding the U.S. Total Stock Market Index, rose 19.2% in the third quarter. The gains reflected continued improvement in some aspects of the worldwide economy, as well as anticipation that the improvements will continue.

Year-to-date, worldwide stock market returns have been remarkable. Since the March 9 low, global stock markets have added about $20 trillion in market value, according to an October 4 Bloomberg article. Now that’s what we call “stimulus!” Here are some of the winning markets over the past three months.

Country Returns Based on the Dow Jones Global Indexes
Ranked by U.S. Dollar Performance

Winners:

Country	Percentage
Lithuania	71.0
Estonia	50.3
Hungary	39.1
Peru	35.6
Cyprus	35.6

Source: Dow Jones Indexes

Other Notables:

Country	Percentage
Brazil	29.0
Russia	26.3
India	18.3
U.K.	17.7
China	10.0

Source: Dow Jones Indexes

Notice that many of the top performing stock markets in the third quarter were in emerging countries. In fact, Hungary and Cyprus are repeat winners from the second quarter.

INTEREST RATES DROPPED

Disappointed with low short-term rates and meager returns from perceived safe investments such as money market funds, many investors fled the short-end of the yield curve and moved out to the longer – and riskier – end. So far, that has paid off. The Treasury asset class gained 2.1% during the quarter, according to a Merrill Lynch index. Junk bonds rose a very healthy 15.0% for the quarter and a record 48.0% year-to-date, according to Merrill Lynch data. And, investment grade corporate bonds rose 8.3% for the quarter, rounding out a hat trick for these three bond asset classes.

If inflation becomes a problem or the dollar goes into a freefall, you could see interest rates reverse course and start to rise. Of course, that could lead to a potential setback for the economy so the government is trying to walk a fine line between flooding the economy with liquidity – to help it grow – but not flooding it too much that it would lead to rampant inflation.

With the significant decline in most interest rates over the past few months, investors appear comfortable with how the government has walked this fine line. However, there is a definite concern that down the road, perhaps one to three years from now, we could be in for inflation that rivals the worst of the late 1970s/early 1980s period.

COMMODITIES WERE MIXED

The DJ-UBS Commodity Index rose 4.2% for the quarter and nearly 9.0% year-to-date. This positive performance masked a wide divergence among its components.

Crude oil finished the quarter nearly flat after a 41.0% gain in the second quarter, according to The Wall Street Journal. Gold prices rose more than 6.0% for the quarter as investors continued to debate which is a bigger threat – inflation or deflation. Copper soared another 24.0% on top of its 23.0% gain in the second quarter. And, for those of you with a sweet tooth, you’ll have to shell out more to feed your craving. Sugar prices rose a startling 43.0% for the quarter after reaching a 28-year (sugar) high in August. Poor weather in sugar-growing regions contributed to the rise, as opposed to a newfound love for the sweetener.

Theresa Gusman, head of global commodities at DB Advisors, said commodity prices should rebound as companies start to build inventories in anticipation of a recovery in demand. Others, however, feel that commodity prices already reflect an economic recovery and that further increases will be dependent on supply and demand factors, according to the Journal.

THE VALUE OF THE DOLLAR DECLINED

Big budget deficits, concerns about inflation, and a desire for riskier assets helped push down the value of the dollar last quarter. According to The Wall Street Journal, the dollar dropped 4.1% against the euro, 6.8% against the Japanese yen, and 9.5% against Australia’s currency.

In an August 18 op-ed piece in the New York Times, Warren Buffett opined that a continued rise in the debt-to-G.D.P. ratio could cause the U.S. dollar to “melt.” When Buffett gets involved, you know it’s time to take notice

SUMMARY

To say it’s been a wild ride in the financial markets this year is an understatement. We started the year with a massive decline and then after March 9, the markets exploded to the upside on faint signs of economic stabilization. While parts of the economy are working better, unemployment is staying painfully high. Some economists expect unemployment to hit or exceed 10.0% before it starts falling and that presents some strong headwinds for the markets in coming months.

Weekly Focus – Think About It

“In times of change, learners inherit the Earth, while the learned find themselves beautifully equipped to deal with a world that no longer exists.”
— Eric Hoffer

Best regards,

The Advocate Group

Securities offered through LPL Financial, Member FINRA/SIPC.

The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.
The DJ Global ex US is an unmanaged group of non-U.S. securities designed to reflect the performance of the global equity securities that have readily available prices.
The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
Gold represents the London afternoon gold price fix as reported by the London Bullion Market Association.
The DJ/AIG Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.
The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
You cannot invest directly in an index.
Past performance does not guarantee future results. {Due to ongoing market volatility, current performance may be more or less than the results shown in this white paper.}
Consult your financial professional before making any investment decision

— 05 October 2009 Commentary, Economic Updates

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