Commentary for the week ending 12-11-09

Volatility returned to the markets as lot of movement - both up and down - saw the week close mostly higher amongst the major averages. The Dow closed the week up 0.80%, the S&P 500 was up 0.04%, and the Nasdaq was lower by 0.18%. Solid economic releases helped the markets higher late in the week.

The interesting story of the week started on Tuesday as the dollar started gaining strength. Debt issues are beginning to weigh on European countries as the credit rating of Greece and Spain was downgraded, so naturally it pulled the Euro down. Hence, the dollar is looking stronger. The trend over the past couple months had been a weaker dollar equals a stronger market, so the stronger dollar spooked the markets and sent them sharply lower on Tuesday.

As the week progressed, solid economic releases helped push the markets higher. Inventories in the wholesale sector came in positive for the first time in 14 months. An increase in exports narrowed the trade deficit of the U.S. Retail sales were up 1.3 percent, which is twice the estimate. And finally, consumer sentiment came in higher than expected. No surprise that markets were up. What is surprising is that the dollar rose while the market rose, breaking that inverse relation that we mentioned above.

At this time of the year, many major investment firms are releasing their 2010 forecasts. We would like to highlight some topics from the Goldman Sachs report. Why did we choose to highlight Goldman's predictions? Because they only lost money trading on ONE day last quarter. And TWO days the previous quarter (Link to Story). They are market makers and we take heed to what they say. Here are some highlights:

· They predict the S&P will reach 1,300 (it's just over 1,100 now) around mid-year, yet close the year around 1,250.

· No hike in rates from the Fed until 2012.

· Cash coming off the sidelines and into equities.

· They like the BRIC countries (Brazil, Russia, India, China), high operating leverage stocks, cyclical stocks (Tech, Energy, Materials), and high Sharpe Ratio stocks.

All-in-all, these are reasonable predictions from Goldman. However, we find it interesting that they don't believe rates will be raised until 2012. If that does happen, we believe that will cause a huge bubble in equities (which may still be happening at the moment).

A lot of useful information will be released this week. Tuesday has the releases of the PPI (Producers Price Index), Empire State survey, industrial production, and home builder's survey. Wednesday we will get the CPI (Consumer Price Index) and housing starts, as well as the Fed announcement on interest rates. Thursday we get the leading economic indicators. Finally, Friday is quadruple witching Friday, so we should see a pick-up in volatility to close out the week. These economic reports are all predicted to come in higher, yet any surprise could rattle this already nervous market.

Where are we investing now?

Little change in our strategy here. Until the Fed raises rates, or hints that they will, we continue to buy equities on the market pullbacks, especially higher-quality stocks. We are still bullish (positive) on commodities and the dollar will continue lower, despite its surge this week. TIPs continue to be a favorite, as we expect inflation to increase in the future. Additionally, we are looking at putting more money internationally, as emerging markets (excluding China) are an area we favor.