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Weekly Commentary - November 29, 2010

The Markets - Interest rates are rising in the U.S. and that may actually portend good news for the economy.

Since a recent low of 2.38 percent on October 8, the yield on the 10-year Treasury note rose to a high of 2.91 percent last week, according to data from Yahoo! Finance. Similarly, yields on the 5-year Treasury rose from 1.04 percent on November 4 to a high of 1.56 percent last week.

Rising rates can be either good or bad -- the key is the reason behind the rise. For example, if rates are rising because of a lack of confidence in a country's ability to pay its debt obligations, such as is happening in Ireland and Portugal , then a rise in rates is a bad signal about the country's future. On the other hand, if rates are rising due to strong economic growth, then that could suggest happy days are on the way.

Now, nobody would argue that the U.S. is experiencing strong economic growth; however, there are some positive signs that are being picked up by bond investors and that's putting some upward pressure on bond yields, according to Bloomberg.

The recent good news includes weekly jobless claims, which fell last week to the lowest level since July 2008, according to MarketWatch; consumer spending, which rose for the fifth straight month in October, according to Bloomberg; and a better-than-forecast increase in consumer sentiment, which boosted the outlook for holiday-season spending at retailers, according to Bloomberg.

Rising rates also benefit savers because they receive a higher interest rate on their savings. But, just like eating too much pumpkin pie, a good thing can be taken to an extreme. If rates rise dramatically from here that would likely cause some economic indigestion. So far, we're not in any danger of that scenario.

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.

Gold prices rose 0.5 percent last week and also rose 3.8 percent last week, according to The Financial Times. Confused? Welcome to the world of currency translation.

When measured in terms of the dollar, gold prices rose 0.5 percent per ounce on the New York spot market last week (and rose 0.9 percent in dollar terms based on the afternoon fix from the London Bullion Market Association as shown in the chart above). However, when measured in terms of the euro, the New York spot price of the beautiful bullion rose 3.8% per ounce last week. The difference occurred because the value of the dollar rose about 3.0% last week relative to the euro, according to The Financial Times article.

While this currency translation stuff might seem a bit esoteric and only of interest to financial wonks, it actually has a real-world implication for your investments. When you own investments that are denominated in other currencies -- which can happen when you own multi-national companies or invest in funds that own foreign companies or foreign bonds -- you have an added “currency risk.” And, as the world becomes more globally intertwined, the chance of a positive or negative currency translation effect may become larger.

From a practical standpoint, as the dollar gets stronger, it makes the return from overseas investments fall. Conversely, as the dollar gets weaker, it makes overseas investments rise as the overseas prices get translated into more dollars (because with a weaker dollar, it takes more dollars to “buy” the foreign currency). In recent years, the value of the dollar relative to a basket of six other currencies (the US Dollar Index) has bounced all over the place, but in the three years ending last week, the value of the dollar is up close to 6 percent against this basket, according to data from StockCharts.com. Due to the currency risks, as well as other risks such as political instability, international investing may not be suitable for all investors.

As an advisor, trying to build a portfolio that goes up in value or provides steady income is only part of the equation. We also have to keep in mind how a stronger or weaker dollar affects you.

Weekly Focus:

"All the gold which is under or upon the earth is not enough to give in exchange for virtue."

--Plato

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.

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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