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Weekly Commentary - November 15, 2010

The Markets - Befitting the two steps forward, one step back nature of this recovery, the good news from two weeks ago was followed by four sobering pieces of news last week.

First, a prominent technology company which, according to CNET in March 2000, was the most valuable company in the world in terms of stock market capitalization, delivered an earnings outlook last week that was well below analysts' expectations, according to The Wall Street Journal. The dour news caused some investors to reassess the robustness of technology spending and that helped send stock prices lower for the week.

Second, the Federal Reserve began its bond buying program, dubbed QE2, but instead of interest rates falling, they actually rose for the week, according to The Wall Street Journal. Higher rates tend to make it harder for the economy to grow.

Third, sovereign debt woes hit Europe again as concerns rose that Ireland would be the next country to receive some type of bailout, according to The Wall Street Journal. Spain and Portugal 's financial situations appear weak, too, and the cost to insure all three countries' bonds against default rose to record levels last week.

Fourth, home prices fell in the third quarter of 2010 compared to the same quarter a year ago in nearly half of U.S. metropolitan areas, according to a report released by the National Association of Realtors last week. The housing market is still trying to regain its footing after the expiration of government tax credits earlier this year.

Now, here's a question. Are the above reasons the “real” reasons why the stock market dropped last week? Maybe. What we do know is financial journalists always try to ascribe a reason to every movement in the market. As humans it makes us feel good that we can come up with a “reason” as to why things happen because it gives us some sense of control or understanding of our environment. But, in reality, we don't always know why things happen. Last week's drop in the market may simply have been a natural pause from a strong upswing over the previous couple months.

Regardless of the reasons for the market's movements, it doesn't change our objective which is to help you meet your financial goals and objectives.

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.

Few Americans would argue that our annual federal budget deficits are unsustainable. What people do argue about is what to do about them. Last week, a bipartisan White House commission released its preliminary plan to cut the growth of the federal debt by $3.8 trillion by 2020, according to Bloomberg. And, of course, the sniping about the plan began as soon as it was released.

To be sure, the plan was bold. Sacred cows were skewered and, according to a co-chairman of the committee, “We have harpooned every whale in the ocean and some of the minnows.” Here are a few of the commission's suggestions:

• Raise the Social Security retirement age to 69 by about 2075
• Reduce or eliminate the deduction for home-mortgage interest
• Reduce farm subsidies
• Lower and simplify individual tax rates
• Lower the corporate tax rate to 26 percent
• Reform medical-malpractice law
• Slow the growth of the Medicare program
• Cut the federal workforce by 10 percent
• Permanently ban congressional earmarks
• Cut $100 billion from military spending

As financial professionals, one of the things that keeps us awake at night is the inability of our government -- both Democrats and Republicans -- to adequately address our budget deficits. Should they fail to eventually get the deficits under control, we may all pay a heavy price in the form of a lower standard of living. How the government progresses on reining in the deficits is something we'll be watching closely into 2011.

Weekly Focus -- Solve This: Mary needed 400ml of vegetable stock for a recipe she was following. However, the only measuring containers she had were 300ml and 500ml. How can she measure out exactly 400ml? See below for the answer.

Notes:

• 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 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.
• Past performance does not guarantee future results.
• You cannot invest directly in an index.

Answer to Weekly Focus Question: She should fill the 500 ml container first and use this to fill the 300ml container, thereby leaving 200 ml in the larger jug. Then she could empty the 300ml container back into the stock jar and pour the 200ml from the larger container into the 300ml container. If she once again fills the larger container from the jar and, again, fills the smaller container from this, the smaller container needs 100ml to fill it, which will leave 400ml in the larger container.

This summary was prepared with assistance from PEAK.

This material is for informational purposes only and is not intended to provide specific advice or recommendations to any individual or group. Before making any financial decisions or commitments, please consult with your financial professional.

Securities and financial planning offered through LPL Financial, Member FINRA/SIPC.

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