Commentary for the week ending 11-27-09

A lot of movement in a typically quiet week saw the markets finish virtually unchanged. The market opened higher on Monday as encouraging economic news helped push the Dow near the 10,500 mark. The big news of the week came on Friday, however, as the market took a hit when Dubai asked creditors for a 6-month extension on their loan repayments. In the end, the Dow closed the week down 0.08%, the Nasdaq was off 0.35%, and the S&P 500 was up 0.01%.

Existing home sales came in stronger than expected on Monday, jumping over 10% for the month. That puts the 2-month number for home sales at a 19.8% increase. Of course this dramatic increase is due to the homebuyer tax credit. We should see a considerable drop in these figures when the government intervention is withdrawn. Nonetheless, the market jumped higher on the news Monday.

Consumer Confidence numbers were also released this week, coming in slightly higher than expected at a 0.8% gain. Even though the number was higher than expected, the underlying components are still very weak. Consumers are still worried about the economy and are particularly worried about the weak labor market. In fact, fewer consumers believe the economic and employment pictures will improve over the next six months.

With the market moving sharply lower on Friday, the news out of Dubai gave investors a chance to take some money off the table and lock in their gains for the year. The Dubai situation is troubling, but we do not see it having much impact on business outside of Dubai. European and U.S. banks don't have much exposure to this area. We will wait to see how the market responds this week, but for now we see this as only a blip on the radar.

The Dubai situation may have an interesting impact on U.S. and world central bankers. To prevent a credit problem like the one in Dubai, they may leave easy-money policies in place and even promote more easing policies. As we have seen so far, this would be bullish for the market and commodities. Unfortunately, this adds more fuel to the bubble that is currently being created and increases the likelihood of a major correction in the future.

Several economic and earnings releases are due in the upcoming week. The biggest news comes on Friday with the November jobs report. Fewer job losses are expected this month, yet the unemployment rate will continue to grow from the 10.2% rate at which we currently stand. Any negative surprises here will certainly move the markets lower.

Where are we investing now?

In light of the large pullback we experienced Friday, we are content to sit on the sidelines and see how this plays out. If we decide to put some money to work, we will continue to buy equities on the market pullbacks, especially higher-quality stocks. We believe the cash on the sidelines will continue to push the market higher, despite the profit-taking seen this week. We are still bullish (positive) on commodities as the dollar trends lower. We are also putting some money in TIPs, expecting inflation to increase in the future. We are looking at putting more money internationally, as emerging markets (excluding China) are an area we favor.