Commentary for the week ending 3-5-10

A good employment report contributed to a solid week for the markets as they move into positive territory for the year. At the close on Friday, the Dow gained 2.33%, the S&P 500 rose 3.10%, and the Nasdaq topped them both with a 3.94% return for the week.

Source: MSN Moneycentral

The top story of the week came on Friday with the unemployment report. Early in the week, we had been prepped for a disappointing number by Larry Summers, citing the snowstorms would likely send unemployment higher. Job losses as high as 200,000 were being whispered on the trading floors. Friday we found out the unemployment fell by only 36,000, the unemployment rate remained steady at 9.7%, and January and December job losses were revised slightly downward. Obviously the figures were much less than anticipated and the markets welcomed the news.

While we welcome the better-than-expected news, we still remain worried. We won’t go into the metrics used to determine that 9.7% unemployment rate, nor its deficiencies, but the real unemployment number stands around 17%. Not to mention, we are still losing jobs. It has been a year this week since the market hit its bottom - we should be adding jobs at this point, not just losing them at a lower rate. This is one of the reasons we remain cautious.

A report that has not received much attention caught our eye late Friday. The CBO has found that the debt created by the Obama budget would be $1.2 trillion higher than forecasted. By 2020, the U.S. government debt would stand at $20.3 trillion - an astoundingly high number. The reason we bring this up is because there is no doubt government officials will call for higher taxes. The Bush tax cuts are expiring this year and the higher tax rates will certainly hurt the stock market - we would love to see these lower tax rates extended. We always love to bring up the fact the government officials have it backwards when it comes to taxes. A lower tax rate increases revenues to the government. That’s right - the lower the tax rate, the more money the government makes. More frequently now, we are hearing that the Bush tax cuts have caused an increase in the deficit, but this is absolutely not true. From 2004 to 2008, tax revenues increased by the largest margin in U.S. history, with the government collecting the most money ever in 2008. The “evil” rich paid an even bigger percentage of this revenue, as well. Along with these record revenues, though, we had a significant increase in spending - the culprit behind the deficits. We will get off our soapbox now, but this is important and it will affect the value of your investments.

It looks like a fairly quiet week ahead, as there are not many corporate or economic releases scheduled. Late in the week we will get the trade balance, retail sales, and the Michigan consumer sentiment numbers. The large snowstorms earlier this month may affect these numbers to a small degree, but little change is expected. Of course, we will keep our eyes open for any surprises here.

Where are we investing now?

We are encouraged by the improving economy, but remain cautious. In the short term, however, we remain optimistic. We believe the easy money and stimulative measures currently in place will help the markets higher. Higher interest rates, higher taxes, increasing government involvement in the private sector, and high unemployment have us a little worried for the longer term.

There is no change in our current investment strategy this week. In equities, we are focusing on higher-quality and multi-national stocks. We are still bullish (optimistic) on commodities and believe the dollar will head lower despite its recent gains. The situation in Greece could certainly happen here and we are already seeing signs of this in places like California and Pennsylvania. These issues will send the dollar lower. TIPs continue to be a favorite, as we expect inflation to increase in the future. Consequently, U.S. treasuries are sector we are very bearish (pessimistic) on. Finally, we are optimistic about international stocks, as emerging markets (excluding China) are areas we favor.