Commentary for the week ending 12-18-09

High trading volume and several economic releases saw the markets close mixed for the week. The Dow hit a new high for the year on Monday, yet lost ground as the week progressed. For the week, the Dow closed down 1.33% and the S&P was down 0.35%, while the Nasdaq was up 0.98%.

There were several economic releases this week that signal the recovery is still in full effect. Industrial production, a coincident indicator, posted a solid gain. Housing starts continue to show improvement. The Leading Economic Indicators (Press Release) also showed a nice gain for the month. Both the Consumer and Producer Price Indexes showed an increase, with higher energy prices having a significant impact on these numbers. The price index numbers show that inflation is, in fact, occurring, albeit at a low rate.

Also this week, we heard from the Fed as they announced that the federal funds rate will remain unchanged at 0-0.25% for an "extended period". They acknowledge an improvement in economic conditions, yet the high unemployment rate justifies the historically low rates. We still worry that these easy monetary policies, if left in effect longer than necessary, will fuel another bubble and create an inflationary environment. Their argument is that the unemployment level and inflation are inversely related, so inflation is not a concern. This is typically true. One can look at the stagflation-plagued Carter era to realize that this isn't always the case.

Although the upcoming week is shortened by the Christmas holiday, we still have some important economic reports to consider. Tuesday we get the third quarter GDP estimate and existing home sales. On Wednesday, personal income and spending, consumer sentiment, and new home sales are released. Finally, on Thursday we will see November durable goods and weekly jobless claims. We don't see these having much impact on the markets and many traders will be on vacation due to the Christmas holiday, so it may be a quiet week on Wall Street.

Where are we investing now?

We are not doing much trading in any of our portfolios right now. If we were, though, we would continue to buy equities on the market pullbacks, especially higher-quality stocks. We are still bullish on commodities and believe the dollar will continue lower, despite its recent gains. 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.

Merry Christmas from Bluefin Investments