The Performance Derby

Jeffrey Kleintop, CFA
Chief Market Strategist
LPL Financial

Highlights

• The crowd favorite at the Kentucky Derby this past weekend did not win, surprising many, much like last week’s performance Derby where the crowd favorite, commodities, suffered a stunning loss.

• While precious metals may have lost during Derby week, they are not ready to be retired from portfolios. It is likely that commodities asset classes — including precious metals — will come back to post gains again.

The Kentucky Derby, the first race of the Triple Crown of Thoroughbred Racing, took place this past weekend. The crowd favorite did not win, surprising many. That was much like last week’s performance Derby where the crowd favorite, commodities, suffered a stunning loss. It was a surprising show last week both on Wall Street and on the race track.

Big Brown

The record crowd at Churchill Downs, and many more on television, watched Animal Kingdom take the lead with 1/8 mile remaining and win by a sizeable 2 3/4 lengths. There was talk of Animal Kingdom being likely to run the next two races and try for the Triple Crown which has gone unclaimed for 33 years. The last horse that came close to taking the Triple Crown was Big Brown.

Big Brown was the winner of the 2008 Kentucky Derby. He was the favorite to win and lived up to those expectations with a stunning win by nearly five lengths. He was the first horse since 1929 to win the race from the worst starting position — the 20th gate on the far outside. Remaining undefeated, he became an overnight pop culture phenomenon with New York Times profiles and his trainer made talk show appearances.

Just 10 days after the Kentucky Derby, in his fifth race, the 2008 Preakness Stakes, Big Brown was again the favorite. Big Brown won the second leg of the Triple Crown by more than 5 lengths, becoming only the fourth horse in 133 years to win both the Kentucky Derby and the Preakness while still undefeated. Big Brown, who was from New York, was being hailed as the biggest New York sports star of 2008 by sports writers.

Three weeks later, it was no surprise that Big Brown was again the favorite in the Belmont Stakes, the third and last race of the Triple Crown. Big Brown had become such a fad the betting odds were 1/4 to win the Belmont Stakes — that means you would only win $1 when you bet $4! Most of the horses had odds of 38/1 to 50/1 — meaning you would make $38 to $50 for every $1 bet. Betting became so popular bookmakers saw record-breaking interest as people who did not usually pay any attention to horse racing were caught up in Big Brown fever. Total wagering at Belmont that year was up nearly 50% over the year before. Bettors saw an amazing record of performance and saw what they thought was easy money. After all, there was no doubt the undefeated Big Brown would be the winner of the Belmont Stakes, by a wide margin and sweep the Triple Crown for the first time in 40 years.

So what happened? Big Brown did not just lose the Belmont — he came in last by a wide margin. In the last turn Big Brown simply — and inexplicably — gave up. Big Brown became the first Triple Crown hopeful ever to finish last in the Belmont. A lot of people lost money that day and tore up their tickets in disgust.

Big Commodities

Many investors in commodities felt like they made a bad bet this past week. Commodity prices plunged nearly 10% — coming in a shocking last in the performance derby by a wide margin after a long series of wins. Many investors sold their stakes in disgust.

Investors had been big fans of commodities. Trading volumes were way up, especially for precious metals like gold. Commodities, measured by the Thomson Reuters Commodity Research Bureau Index, had put up an amazing record of performance leading into last week. Overall, commodities are up about 150% since the end of 2001, averaging about 10% a year, but precious metal commodity gains were far stronger with gold up about 500% over the same period. Prior to last week’s pullback, the past year saw the broad universe of commodities gain 33%, gold posted a similar gain, and silver was up 157%. This compares very favorably over the same period to stocks, measured by the S&P 500, which were up 17% and bonds, measured by the Barclays Capital Aggregate Bond Index, which were up 5%.

Why the sudden disappointment for commodities last week after so many wins? There are several factors that drove last week’s reaction:

• Commodities had run up sharply setting the stage for volatility to the downside.
• Margin requirements were hiked sparking a catalyst for the pullback. The minimum amount of cash that must be deposited when borrowing from brokers to trade silver futures was increased to $21,600 a contract up from $11,745 two weeks ago. The sharp increase required investors to deposit 84% more cash to support their positions or sharply reduce their holdings of contracts. The new margin rules take effect today, Monday, May 9.
• Weak economic data added fuel to the selling. Economic data disappointed until Friday’s job report which led to a halt in commodities declines. Notably, the non-manufacturing ISM Index, the ADP payroll report, and most importantly initial jobless claims were all worse than expected.

Chart 1 illustrates the very close relationship between the inverse of initial jobless claims and silver prices. As the economy, measured by weekly initial filings for unemployment benefits (one of the most timely barometers of economic activity), was strengthening, silver moved higher in lock step. When claims faltered, so did silver.

We expect initial jobless claims to rebound as recent exceptional factors abate. With the death toll up over 350, the Alabama tornados were the deadliest national disaster since Katrina. In the wake of Katrina, unemployment claims soared 75,000. So, some of the recent increase in unemployment claims may be due to the storms. Claims may move back to around 400,000 soon supporting silver prices.

There was no clear single reason why commodities fell so sharply. The leaders to the downside among commodities were precious metals as many investors simply gave up.

Is a Bubble Just Starting to Burst?

Gold has been in a bubble before — the bubble inflated through the 1970s, peaked in 1980, and fell by over 60% during the following two and a half years. Are commodities, perhaps best represented by gold, a bursting bubble now? If so, there are likely to be gains ahead than losses using history as a guide.

As you can see in Chart 2, gold prices have tracked the classic bubble pattern but have yet to enter the parabolic stage where the bursting of the bubble and the ensuing sharp losses begin to become a risk — which is after 10 years and a 1,000% gain. The investment bubbles of the past experienced far more inflating than what gold prices have experienced so far. The technology bubble of the 1990s (measured by the NASDAQ), the oil bubble of the late 1990s/early 2000s (measured by oil futures prices), and the housing bubble (measured by the S&P 500 Homebuilding Index) took 10 years and posted gains of about 1,000% before they burst and quickly surrendered most of those gains.

Gold’s rally is now just entering its tenth year, historically the best year for gains. If gold tracks the classic bubble pattern — and it has so far — instead of plunge, it would double in value this year. It is worth noting that gold’s March 1980 peak at $850 is about $2,400 in today’s dollars when adjusted for U.S. inflation — well above the current price and near where gold would be headed if it tracked this classic pattern, though past performance is no guarantee of future results.

However, we do not believe gold — or commodities in general — is in a bubble and most likely will not continue to track the classic pattern. But we do see potential for further modest gains for precious metals and other commodities in 2011, to be accompanied by volatility.

The qualitative factors that are combining to allow gold’s shine to endure include the following:

1. The declining dollar and outlook for rising U.S. inflation – The actions by the Fed to stimulate the economy have led to weakness in the dollar. As the dollar goes down, the price of gold in dollars goes up. While gold surged to an all-time high in dollar terms over the summer and fall of 2010, gold has been flat over the same period in euros and in yen. In Australian dollars, the peak in Gold was back in February of 2009 and is down about 10% since then. So part of our perception of the big surge in gold over the past year is in large part because we are measuring it in weakening US dollars.

2. Strong emerging market demand – In China and India gold is both a savings vehicle and a luxury for an emerging middle class. India and China lead the world in terms of gold demand growth.

3. Central banks from sellers to buyers – The world’s largest central banks have been selling their gold reserves for decades after moving away from linking their currencies to gold. Most recently, Mexico, Russia and Thailand added to their gold reserves in February and March 2011. Given the current economic environment, we believe central banks may continue to add to their gold reserve base as further currency debasement and long-term inflation concerns persist. As the reserve currency status of the dollar comes into question, emerging economies are increasing their exposure to gold. With China and India holding relatively low levels of gold, a modest increase in their holdings as a percent of foreign reserves — as they diversify away from holdings of U.S. Treasuries – could easily account for 100% of current annual production.

4. Not just a defensive asset – Normally a beneficiary of a pullback in riskier investments, investors have often embraced gold as a perceived insurance policy against a return to recession. However, rather than act purely as a defensive investment, gold rose last year along side stocks and bonds.

5. Supply has been constrained – The supply-demand equation continues to provide a favorable tailwind for gold prices. After averaging growth of 4% annually since 1980, world production growth of gold has slowed considerably since 2001, averaging -1% annually over the past 10 years. To meet the gradual rise in demand, a steady increase in scrap supply has been needed. But scrap is falling short. It is getting more expensive to mine gold as the most accessible areas have been mined out and new mines are in increasingly remote or hard-to-mine locations. To meet the demand the major producers are pursuing digs formerly thought to not be economically viable at costs over $1000 per ounce.

Finally, with gold supported by multiple fundamental forces, one of our pre-conditions for a bubble is the asset has to be “over-owned.” All the gold produced around the world over the past 110 years (which accounts for more than 80% of all gold ever mined) at today’s prices is equivalent to only about 3.9% of the combined total value of stocks, bonds and cash around the world. While up from the 1.3% in 2000 when gold prices were depressed, it is similar to the 3.5% in 1990 and well below the whopping 12.1% in 1980 when gold traded near its last peak. While gold’s popularity is returning, it does not seem “over-owned.”

Come Back

After the stunning rout at the Belmont, Big Brown returned to racing in August of 2008 with a win in the $1 million Haskell Invitational Handicap at Monmouth Park, New Jersey. Big Brown’s last race was a month later with another win at the Monmouth Stakes. Big Brown then retired after winning 7 of his 8 career races having earned $3.6 million.

While precious metals may have lost during Derby week, they are not ready to be retired from portfolios. Big Brown came back to win again, it is likely that commodities asset classes — including precious metals — will also come back to post gains again this year.

To download a complete copy of this commentary click below.

IMPORTANT DISCLOSURES

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

This Barclays Aggregate Bond Index represents securities that are SEC-registered, taxable, and dollar denominated. The index covers the U.S. investment-grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities.

The ISM index is based on surveys of more than 300 manufacturing firms by the Institute of Supply Management. The ISM Manufacturing Index monitors employment, production inventories, new orders, and supplier deliveries. A composite diffusion index is created that monitors conditions in national manufacturing based on the data from these surveys.

The Thomson Reuters/Jefferies CRB Index is an objective and impartial and transparent benchmarks for the performance of the global commodities industry. The indices embrace most of the industry’s global market capitalization and have been structured to facilitate transactional efficiency. The index is comprised of 19 commodities: Aluminum, Cocoa, Coffee, Copper, Corn, Cotton, Crude Oil, Gold, Heating Oil, Lean Hogs, Live Cattle, Natural Gas, Nickel, Orange Juice, Silver, Soybeans, Sugar, Unleaded Gas and Wheat.

The fast price swings in commodities and currencies will result in significant volatility in an investor’s holdings.

Precious metal investing is subject to substantial fluctuation and potential for loss.

Stock investing may involve risk including loss of principal.

This research material has been prepared by LPL Financial.
The LPL Financial family of affiliated companies includes LPL Financial and UVEST Financial Services Group, Inc., each of which is a member of FINRA/SIPC.
To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity.

Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

Cinderella: The Last Chapter

Jeffrey Kleintop, CFA
Chief Market Strategist
LPL Financial

Highlights

• It is appropriate that this past Friday, March 4, marked both the 61st anniversary of the release of Disney’s Cinderella and the release of the February employment report that helps to tell the final chapter of the Cinderella story of the economic and market turnaround of the past two years.

• While GDP, consumer spending, and the stock market are at or near all-time highs and the manufacturing sector is booming, job growth has lagged in this economic rags-to-riches story leaving it incomplete.

• Friday’s market action and soaring oil prices serve as a reminder that even as the last chapter of this Cinderella story unfolds, new stories are being written that may be less favorable for the markets.

It is appropriate that this past Friday, March 4, marked both the 61st anniversary of the release of Disney’s Cinderella and the release of the February employment report that helps to tell the final chapter of the Cinderella story of the economic and market turnaround of the past two years.

While gross domestic product (GDP), consumer spending, and the stock market are at or near all-time highs and the manufacturing sector is booming, job growth has lagged in this economic rags-to-riches story leaving it incomplete. The U.S. economy lost 8.75 million jobs during the downturn, but has only gained 1.25 million back since then. But, February’s rise in employment by about 200,000 workers was the biggest number yet for this recovery, when adjusted for the census hiring that bloated the numbers in the first half of 2010, suggesting job growth may finally be starting to turn the corner.

This episode is not unusual when it comes to employment. Historically, job growth tends to lag a recovery in the economy and markets by about six months, as you can see in [Chart 1]. Currently, the 20% year-over-year gain in the S&P 500 is pointing to a 2% year-over-year gain in jobs over the next six months, equivalent to the creation of an additional two million jobs.

This week marks the two-year anniversary of the S&P 500 closing low of 676 that took place on March 9, 2009. The past two years have marked a dramatic recovery in the economy and markets. The S&P 500 is up 97% since then, and is now only about 15% from the all-time high set in October 2007. When including dividends, the S&P 500 has recovered all but about 9% of the losses since the peak.

What helps to make the good news in the February employment report from the Bureau of Labor Statistics more believable is the corroborating evidence, including:

• The decline in unemployment claims back to their 10-year average
• Strong employment readings in the Institute for Supply Management (ISM) indexes
• The positive University of Michigan jobs survey
• Rising number of temporary workers
• An increasing number of overtime hours

The stock market has been anticipating the return of job growth with a 12% gain over the past three months despite monthly reports of lackluster, weaker-than-expected job creation. Friday’s solid employment report was welcome news, justifying much of the 12% gain seen in the stock market. Yet stocks slid on Friday, giving back some of the powerful gains achieved the day before. Rather than being tied to the report on the job market, fear of escalating unrest in the Middle East over the weekend pushed the price of oil up sharply and this pulled the stock market lower in lock step.

Friday’s market action and soaring oil prices serve as a reminder that even as the last chapter of this Cinderella story unfolds, new stories are being written that may be less favorable for the markets. We continue to expect high single-digit gains for stocks and low single-digit gains for bonds this year accompanied by higher-than-average market volatility.

Click below to download a complete copy of the article

IMPORTANT DISCLOSURES

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

Stock investing may involve risk including loss of principal.

The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The ISM index is based on surveys of more than 300 manufacturing firms by the Institute of Supply Management. The ISM Manufacturing Index monitors employment, production inventories, new orders, and supplier deliveries. A composite diffusion index is created that monitors conditions in national manufacturing based on the data from these surveys.

This research material has been prepared by LPL Financial.
The LPL Financial family of affiliated companies includes LPL Financial and UVEST Financial Services Group, Inc., each of which is a member of FINRA/SIPC.
To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity.

Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

Santa Monica, CA — February 1, 2011– Rose Greene, an independent financial advisor at Rose Greene Financial in Santa Monica, CA  today announced that she was recognized as a top financial advisor and named to the LPL Financial Chairman’s Club. This distinction is based on a ranking of all registered advisors supported by LPL Financial LLC, the nation’s largest independent broker-dealer*, and is awarded to less than six percent of the firm’s more than 12,000 advisors nationwide.

“We congratulate Rose Greene for achieving this prestigious recognition, which is based on how successful advisors are in growing their businesses by delivering services and solutions to their clients,” said Bill Dwyer, President of National Sales and Marketing for LPL Financial. “We believe members of the Chairman’s Club are among the premier financial advisors in our industry. They serve as trusted resources and counselors for their clients and their communities.”

Rose Greene is affiliated with LPL Financial and provides access to independent financial planning services, investment advice and asset management services to over 400 clients in the West Side of Los Angeles.

About  Rose Greene Financial 

Rose Greene®, entered the financial services industry in the early 1980s. Fiercely independent, she founded her own firm, Rose Greene Financial Services focusing on independent, objective, financial advice.

Rose Greene, CFP® has spent more than two decades providing comprehensive wealth management services across a spectrum of clients helping them to improve their lives and follow their dreams. Her message is a simple, but valuable one: with time and disciplined investment, people can work toward financial security.

Rose Greene® is a Certified Financial Planner Practitioner and holds securities registrations 7, 63, 65 and 24 through LPL Financial, as well as a California Life and Health Insurance License (CA Insurance Lic. #0690429). She is a Registered Principal with LPL Financial. Rose has also served as the Vice-President of the International Association of Financial Planning (IAFP). In 2006, she was named one of the “Top Women Advisors” by Barron’s Magazine.*   www.rosegreene.com www.moneymattersblog.com

About LPL Financial
LPL Financial is one of the nation’s leading financial services companies and largest independent broker-dealer (based on total revenues as reported in Financial Planning magazine, June 1996-2010). Headquartered in Boston, Charlotte, and San Diego, LPL Financial and its affiliates offer industry-leading support to more than 12,000 financial advisors and over 750 financial institutions who, in turn, provide independent financial advice to millions of Americans.

* Based on total revenues, Financial Planning magazine, June 1996-2010

Member FINRA/SIPC

The sun is shining on investors as 2010 draws to a close. The economy has shown signs of reaccelerating from the summer soft spot, the stock market has made new two-year highs, as measured by the S&P 500 (returning to the level that preceded the September 2008 failure of Lehman Brothers), and the President signed into law a bill that extends all of the Bush tax cuts for two years, cuts payroll taxes, and expands jobless benefits.

The end of 2010 also seems to be setting the stage for the return of diversification. In 2008 and 2009, most markets moved together as the outlook for all financial assets was tightly linked to the global financial crisis and then to the recovery. During 2010, glimmers of the impending return of diversification became evident as markets began to behave more independently of each other. In May and June, as stocks and commodities asset classes fell, bonds steadily rose in value. And, inversely, in November and December, as stocks and commodities asset classes surged, bonds fell. A key potential benefit of having the investments in your portfolio behave differently is that it should serve to mute volatility, which is especially valuable when taking distributions from a portfolio. The return of the effectiveness of this important investment risk management tool is a welcome gift as investors look toward 2011.

However, the horizon for investors is not brightening everywhere. One area with a cloudy outlook is municipal bonds. The fiscal challenges facing U.S. states are serious and need to continue to be addressed in the coming years. However, we do not expect a stormy environment akin to the solvency troubles that plagued Europe in 2010. The state debt issues are different than those troubles in Europe in two main regards:
First, the magnitude of the problem facing some European nations is much greater. For example, the budget deficit-to-GDP ratio for some of the most troubled states, such as California, New York, and Florida, average about 1%, while European nations like Greece, Portugal, Ireland, and Spain average about 10%. Additionally, the total debt-to-GDP ratio for these same states average about 20% when including the states’ unfunded pension liabilities while those of the European nations are much higher at around 100%.
Second, the ownership of the respective bond markets is very different. Banks in the U.S. do not own much domestic municipal government debt while European banks own a lot of European government debt, which has magnified the problems overseas relative to those of the states.

No stormy skies or bright sunshine for 2011, we see a more middle of the road forecast, composed of a mix of clouds and sun. Recent years have seen extremes one way or the other and we see a 2011 that offers investors modest single-digit gains for stocks, low-to-mid single-digit gains for bonds, and an economy in the United States that muddles along at a 2.5 to 3% pace. As always, I encourage you to contact me if you have any questions.

Best regards,

Rose Greene

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not ensure against market risk.
The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
Municipal bonds are subject to availability, price, and to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rate rise. Interest income may be subject to the alternative minimum tax. Federally tax-free but other state and local taxes may apply.
This research material has been prepared by LPL Financial.
The LPL Financial family of affiliated companies includes LPL Financial and UVEST Financial Services Group, Inc., each of which is a member of FINRA/SIPC.
To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and make no representation with respect to such entity.
Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit Member FINRA/SIPC
Tracking #692722 | (Exp. 12/11)

From Data to Debates

December 6, 2010

Jeffrey Kleintop, CFA
Chief Market Strategist
LPL Financial

Highlights

• Last week, the markets were driven primarily by economic data as stocks and bond yields rose and the dollar fell.

• This week, in the absence of any high-profile economic data, markets are likely to be driven by policy headlines, which are not likely to be as favorable for investors.

• The policy headlines that markets are likely to be driven by include: the debate over extending the Bush tax cuts, the ongoing troubles in the eurozone (including Ireland voting on its 2011 budget), the effectiveness of QE2 before the Fed’s next meeting on December 14, and China may implement another rate hike ahead of the release of the inflation data.

Last week, the markets were driven primarily by economic data as stocks and bond yields rose and the dollar fell. This week, in the absence of any high-profile economic data, markets are likely to be driven by news headlines on policy debates, which are not likely to be as favorable for investors.

The economic data from last week that was especially good for the markets included the Federal Reserve’s (Fed) Beige Book, and China’s PMI — both released on Wednesday, December 1 — and the U.S. retail sales reports on Thursday, December 2.

• China PMI – The Purchasing Managers Index (PMI), released by the Beijing-based China Federation of Logistics and Purchasing and the National Bureau of Statistics, kicked off the better part of the week’s market rally on Wednesday morning. China’s manufacturing grew at a faster pace for a fourth straight month in November, exceeding economists’ estimates and indicating the economy can withstand higher interest rates.
• Beige Book – Released Wednesday afternoon, the Fed’s Beige Book, a qualitative assessment of economic, financial and business conditions across the United States, suggested the economy was rebounding from the summer soft spot. Ten of the twelve regions reported improving economic conditions. The Fed’s overall assessment that the U.S. economy “continued to improve” was strikingly different than it was back in September when they noted “widespread signs of deceleration”.
• Retail Sales – November same-store sales from retailers surprised to the upside when reported Thursday morning. Over 80% of retailers beat estimates by an average of more than 2 percentage points, for an average year-over-year increase of nearly 6% among the 25 national retailing chains that reported November sales results. This marked a strong improvement from October’s tepid growth of less than 2% with nearly 50% of retailers missing targets.

While these economic data points were the highlights of the week, the data has been so much better-than-expected, on balance, in recent weeks that investors dismissed the disappointing November employment reportreleased on Friday, December 3, as an outlier.

With a lack of any meaningful economic data this week here or abroad, market participants’ attention will turn to the policy headlines that are likely to be driven by:

• The debate over extending the Bush tax cuts due to expire at year-end.
• The ongoing fiscal and financing troubles in the eurozone, including Ireland’s vote on its 2011 budget (setting the stage for Greece’s vote on its 2011 budget the following week).
• The effectiveness of the Fed’s second round of quantitative easing (QE2) before the next Fed meeting on December 14.
• China may implement another rate hike ahead of its release of inflation data the following week.

None of this week’s headlines will likely result in as favorable an outcome for the markets (unless a quick deal is cut on taxes) as the data delivered last week. It is worth exploring each of these potential drivers.

Tax Cut Extensions

The debate over the tax cut extensions is likely to be contentious this week, following very partisan votes in the House this past week and the lack of public progress that has been made in the negotiation among Geithner, Lew, and the Republican and Democratic members of Congress. We look to the middle of the month as a more likely time for compromise and a vote in the Senate. On Saturday, Congress passed a continuing resolution that funds the federal government through Saturday, December 18. The end of that week leading up to the December 18 deadline is the most likely for a breakthrough agreement, with votes in both the House and Senate to immediately follow.

Fiscal and Financial Problems in the Eurozone

In the European Union (EU), the risk of a near-term liquidity crisis is being managed effectively, but the longer-term solvency problems remain almost untouched. News reports in recent days have focused on potential additional actions the EU may take to provide more demand for member nation debt (Spain and Portugal as the need for liquidity spreads from Greece and Ireland). The Greek government has so far received 29 billion euros as part of a rescue package intended to give them funding until 2013, enough time for the Greeks to fix their budget. The EU and The International Monetary Fund (IMF) approved the rescue package back in May in exchange for the Greek government agreeing to cut spending and raise taxes.

With the liquidity for their debt assured by the EU, how have the Greeks done over the past seven months addressing the solvency of their finances? Poorly. Higher taxes were introduced to boost tax receipts by 13.7% this year. That goal was trimmed to 8.7% in October and to 6% in November. So far, income has risen just 3.7% in 2010. The yield difference, or spread, between 10-year Greek bonds and German bunds was 8.86 percentage points yesterday, compared with a record 9.73 in May, reflecting the lack of material improvement in the solvency of Greece.

The fiscal crash diet in Greece, Ireland and other troubled EU nations is highly unpopular. Local protests are taking place daily. On December 15, there is an EU-wide labor strike planned. Efforts at fiscal austerity are fading. It is likely to be longer and more expensive to get the EU over-spenders back in line with EU mandates. In addition, it may require a tougher stance from senior EU members Germany and France to ensure adequate action is taken. This raises the risk that these headlines surface this week and weigh on the markets.

Fed’s Quantitative Easing 2

The Fed implemented QE2 to keep borrowing rates low to encourage economic growth, in part, through low mortgage and other consumer borrowing rates. Since implementing the first round of QE2, rates have moved steadily higher. The national average 30-year mortgage fixed rate (tracked by Bankrate.com) rose from 4.24%, when QE2 was announced on November 3, to 4.71% this past Friday, reaching the highest level of the second half of 2010. In addition, the dollar, widely expected to decline and act as a boost to U.S. export growth, has instead moved higher.

The Fed has faced political pressure on all sides since the last meeting on November 3 to do more, to do less, and to do nothing at all. Legislation was even introduced to change the Fed’s mandate. Debate surrounding the effectiveness of the Fed’s actions and how limited future actions to aid economic growth may be could dominate the headlines this week ahead of its next meeting on December 14.

China Rate Hikes

Last week’s China PMI report showed surging input prices, reinforcing the case for the central bank to raise borrowing costs again. In October, the Chinese central bank pushed the one-year lending rate to 5.56%, its first increase since 2007. The Chinese government’s efforts to rein in the money supply also included two reserve-ratio increases for banks last month. At the same time, officials allowed the yuan to appreciate about 1.8% against the dollar in September, and since then gains have totaled another 0.3%.

These efforts are intended to contain inflation which has been rising nearly 5% year-over-year. Concern that monetary tightening in response to higher inflation will act as a drag on growth spurred a 10% sell-off in China’s Shanghai Stock Exchange Composite Index since the last inflation report that was released on November 11. As we approach the release of the next inflation data point, China may announce another rate hike, possibly sending markets lower.

Beyond This Week

Neither bulls nor bears in 2011, we expect the economy and the markets will be range-bound in 2011. Bound by economic and fiscal forces that will restrain growth, but not reverse it, we expect single-digit gains for stocks as earnings growth slows and valuations remain under pressure, and singledigit gains for bonds as yields remain range-bound.

We anticipate that:

• The job market will stage a comeback with nearly twice the pace of job creation experienced in 2010;
• GDP will be near the long-term average at 2.5 – 3%;
• Policymakers will deliver economic stimulus that turns to a drag on growth later in the year;
• Investors will play it safe as inflows to riskier markets will be anemic;
• The currency impact on investing will be pronounced in 2011.

Overall, 2011 will continue the economic and market volatility of 2010. The global economy remains out of balance, teetering back and forth between the soft spots that invoke a need for increasingly extended policy support and the growth spurts that provoke a desire to begin to pull back some of the record-breaking stimulus. The last time government spending comprised as much of GDP as it does today (1945 – 1960), the economy went through a period of heightened volatility driven by the swings in policy action.

The policy-driven themes of reflation, which is the intentional pursuit of modestly higher prices, and a broader U.S. foreign policy provide investment ideas that can thrive in a year where the performance of the major indexes is likely to be lackluster. Investors with a more opportunistic profile may benefit from a tactical approach to investing in order to find attractive opportunities and successfully take profits in volatile markets. Longer-term strategic investors should consider remaining broadly diversified.

For more insight on our outlook for next year, please see our 2011 Outlook publication.

IMPORTANT DISCLOSURES

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

International and emerging market investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.

Stock investing may involve risk including loss of principal.

Purchasing Managers Index (PMI) is an indicator of the economic health of the manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries, and the employment environment.

The Shanghai Stock Exchange Composite Index is a capitalization-weighted index. The index tracks the daily price performance of all A-shares and B-shares listed on the Shanghai Stock Exchange. The index was developed on December 19, 1990 with a base value of 100. Index trade volume on Q is scaled down by a factor of 1000.

The International Monetary Fund (IMF) is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.

Quantitative Easing is a government monetary policy occasionally used to increase the money supply by buying government securities or other securities from the market. Quantitative easing increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

This research material has been prepared by LPL Financial.
The LPL Financial family of affiliated companies includes LPL Financial and UVEST Financial Services Group, Inc., each of which is a member of FINRA/SIPC.
To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity.
Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

Black Friday Has Investors Seeing Green

November 29, 2010

Jeffrey Kleintop, CFA
Chief Market Strategist
LPL Financial

Highlights

• Asking what Black Friday means for the stock market has the relationship backwards; it is the gain in the stock market this quarter that bodes modestly well for retail sales this holiday season.

• While Black Friday tells us little about how stocks might behave, there is a very consistent relationship between stock market performance in the months leading up to the holiday season and the gain in retail sales in the fourth quarter. This year, the performance of stocks in October and November points to a low-single-digit gain for holiday retail sales.

• Stocks, particularly those of the retailers, have reflected the improving consumer incomes and balance sheets and now sales may begin to reflect the release of pent-up demand. This may create a positive feedback loop, supporting job and economic growth in 2011.

Last week’s shortened holiday trading was a rough ride as Ireland and North Korea reminded investors that aftershocks of the global financial crisis continue and geopolitical risks are ever present. Later in the week, investors turned their attention to slightly better-than-expected retail sales over the Thanksgiving weekend—the traditional start of the holiday shopping season.

Does Black Friday for retailers mean a green holiday season for investors? Not necessarily; there have been years where positive fourth quarter retail sales did not bring positive results for the stock market. In fact, there is not even much of a relationship between how well holiday sales results fare against forecasts and stock market performance. To illustrate this point, over the past 18 years, the performance of the S&P 500 during the period from Thanksgiving through year-end was actually worse when retailers exceeded the widely followed forecast from The National Retail Federation than when they missed or were in line.

So, clearly, the question of what Black Friday means for investors has the relationship backwards; it is instead the gain in the stock market over the prior two months that bodes modestly well for retail sales this holiday season.

There is a very consistent relationship between stock market performance in the months of October and November leading into the holiday season and the gain in retail sales in the fourth quarter. This makes sense since the stock market is one of the best barometers of consumer confidence and, if it is rising, it stands to reason that consumers are feeling a bit more confident and willing to spend. In fact, measured statistically, the performance of the S&P 500 in the months going into the holiday season and holiday spending (retail sales excluding food and autos) have a high 0.8 correlation (a perfect correlation is 1.0). If you are going to try to forecast holiday spending, it would be easy to make the case that there is only one thing you need to watch—stocks. This year the performance of stocks in October and November point to a low-single-digit gain for holiday retail sales over 2009.

Early reports of sales this holiday season have been solid:

• The National Retail Federation reported Thanksgiving weekend sales up 6.4% over last year. Shoppers spent $45 billion over the weekend with the average shopper spending $365.34.
• Online sales trends have been very strong with sales estimated up 9% from last year on Black Friday. Tight inventories may have forced many to go online in search of favored styles and colors. Strong online sales have prompted shipping companies to issue upbeat outlooks with UPS predicting a 7.5% increase over last year and Federal Express forecasting a gain of 11% between Thanksgiving and Christmas.

Surveys show that more shoppers indicated they were also shopping for themselves. What is driving this pent up demand?

• More jobs and bigger paychecks may have given consumers the confidence to boost purchases during the holiday season.
• U.S. consumer debt has fallen by about $1 trillion over the past two years, according to the Federal Reserve. Credit card debt is one of the most sharply contracting categories.
• As reported in last week’s Weekly Economic Commentary, the percentage of disposable income consumed by financial obligations, such as a mortgage, rent, auto and student loans has fallen to a level not seen since well before the financial crisis and is now below the longterm, 30-year average.
• Consumers have been saving more with the savings rate at 5.7%, up from the 1-2% averaged during the boom years of 2005-2007.
• Stocks, particularly those of the retailers, have reflected the improving consumer incomes and balance sheets and now sales may begin to reflect the release of pent-up demand. While stocks are already signaling gains in sales this holiday shopping season, the performance of retailer stocks and the overall Consumer Discretionary sector has been pointing to solid gains with those groups of stocks doubling the gain of 4.2% for the S&P 500 so far during the fourth quarter.

Retail sales have yet to break out. The widely watched weekly measure of retail sales from the International Council of Shopping Centers has averaged a relatively consistent year-over-year gain of 2-3% during the second half of 2010. If sales do begin to accelerate it may be good news for the economy. A more confident consumer leads to more confidence in corporate America which may lead to brighter prospects for job and economic growth in 2011.

IMPORTANT DISCLOSURES

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

International and emerging market investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.

Stock investing may involve risk including loss of principal.

Because of their narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.

Specific securities listed herein are not an endorsement of their product or service or a recommendation of any kind.

The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

Consumer Discretionary Sector: Companies that tend to be the most sensitive to economic cycles. Its manufacturing segment includes automotive, household durable goods, textiles and apparel, and leisure equipment. The service segment includes hotels, restaurants and other leisure facilities, media production and services, consumer retailing and services and education services.

This research material has been prepared by LPL Financial.
The LPL Financial family of affiliated companies includes LPL Financial and UVEST Financial Services Group, Inc., each of which is a member of FINRA/SIPC.
To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity.
Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

Rose Greene, CFP® and experienced retirement planner, stresses the importance of investing for those with volatile income sources

09.15.2010– SANTA MONICA, CA Through over 26 years of advising clients in the entertainment industry, Rose Greene, Certified Financial Planner™, has identified a growing niche for whom she provides tailored financial advice: those with fluctuating income streams. With today’s volatile job market, Greene sees this scenario as increasingly reflective of the general population, particularly for those currently out of work or starting small businesses.

“Portfolio management for this emerging group needs to be handled differently,” says Greene, of Rose Greene Financial Services in California an independent representative of LPL Financial.

To read the rest of the release CLICK HERE

October 11, 2010

Still Waiting For a Spark

John Canally, CFA
Economist
LPL Financial

Highlights

• What can the FOMC minutes tell us about quantitative easing?

• The September employment report suggested that the labor market remains sluggish, and needs a spark.

• Contrasts between developed and developing market economies have implications for the US dollar, commodities asset classes and inflation.

This week, as the focus turns to the start of the corporate earnings-reporting season for the recently completed third quarter of 2010, investors will also have plenty of economic news to mull over, including key reports on:

• The 2010 Federal Budget deficit
• Manufacturing activity (in the New York region) for October
• Consumer sentiment for the first half of October
• Retail sales for September
• Consumer and producer prices for September
• Imports and Exports for August

In addition to these notable reports, one of the most closely watched reports is likely to be the minutes of the Federal Open Market Committee’s (FOMC) September 21 policy meeting to be released Tuesday, October 12 at 2pm. The FOMC is charged by Congress with the dual mandate of maintaining price stability and maximizing employment, is currently debating whether to begin another round of quantitative easing (QE) in order to stimulate the economy. We expect the Fed will start another round of QE as soon as the November 3 FOMC meeting.

What Can the FOMC Minutes Tell Us About Quantitative Easing?

While there is still some debate in the marketplace as to whether or not the Fed should do more QE, the real debate between now and then will center on how the Fed will implement QE, and whether or not it will provide the spark that the economy sorely needs to reignite economic growth. That’s where the dual mandate — full employment and stable prices — comes in.

The current 2.0 to 2.5% run rate for real gross domestic product (GDP) growth in the United States is probably too slow to push the unemployment rate — which stood at 9.6% in September — down, and too slow to push inflation (which is running at around 1.0%) much higher. The Fed is concerned that if it doesn’t act, that growth will slow even further, pushing the unemployment rate higher, which in turn will lower consumer demand for goods and services and put downward pressure on prices, and eventually lead to deflation — falling prices.

The minutes of the September 21 FOMC meeting may provide some insight as to how the Fed might approach the next round of QE. One approach is being called the “shock and awe” approach, in which the Fed would announce that it is purchasing a large amount (perhaps $1 trillion) of securities in the open market. They took this approach in March 2009 in its first foray into QE. At that time, the economy and financial markets were in free-fall, and the shock and awe approach was probably warranted.

Another approach could be the “bits and pieces” approach, whereby the Fed announces that it intends to make a smaller purchase of securities in the open market, and then reevaluate the purchases (and the economy) at the next FOMC meeting. This approach might appease those on the FOMC who are concerned that more QE might trigger inflation down the road, but also might disappoint markets looking for a bigger Fed statement in support of the economy.

More recently according to press reports the Fed has been considering targeting interest rates as a way to keep rates lower for longer. In this approach, the Fed would buy the targeted securities (i.e. the 2-year Treasury note or a certain mortgage backed or agency security) in the open market whenever the yield on the selected securities got above a certain level. This would also cater to those on the FOMC who think the Fed should take a goslow approach, and may find favor in the market as well.

The Fed could also decide to lower the rate it pays on commercial banks’ funds held by the Fed. The rate is currently 0.125%, but if it’s cut to zero, the banks would have more incentive to put the cash to work by lending to businesses, or simply buying Treasury notes.

The Fed could also do a combination of the items above, and it certainly has other options as well, as it attempts to provide the “spark” the economy needs to move to the next level in late 2010 and into 2011.

The September Employment Report Suggested that the Labor Market Remains Sluggish, and Needs a Spark

The September employment report (released on Friday, October 8th) reminded the market why the Federal Reserve is likely to embark on another round of QE. Essentially, the September jobs report was more of the same. The gain in private sector (excluding government) employment of 64,000 was:

• A bit below what the market expected (a gain of 75,000)
• Represented a deceleration from the prior month — 93,000 private sector jobs were added in August, revised from 67,000)
• Within the range of economists’ estimates (0 to +110,000)

The unemployment rate stayed at 9.6% in September. The market was expecting an increase to 9.7%. The unemployment rate, while down from its peak of 10.1% hit in the fall of 2009, remains uncomfortably high for the Fed as well as politicians facing reelection in the upcoming midterm Congressional elections on November 2. The September employment report is the last employment report to be released prior to the election.

The underlying data in the jobs report tells the same story as the tepid headline gain in jobs. The first bright spot was the gain in household employment, the monthly jobs report consists of two surveys, the establishment survey, which asks businesses about their payrolls, and the household survey, which asks members of a household about their employment status. The second bright spot was the second consecutive monthly gain in temporary help employment, which is a good leading indicator of future employment trends. The weak spots were the readings on hours worked and overtime hours worked in September versus August. Another glaring weak spot continues to be the state and local sector, where another 83,000 jobs were shed in September. Over the past year, state and local governments have pared nearly 275,000 jobs from their payrolls amid budget cuts at all levels of government.

As we noted in last week’s Weekly Economic Commentary, The United States economy shed 8.5 million private sector jobs during the recent Great Recession, and has added back only 855,000 of those jobs since the economy began creating jobs again in the fall of 2009. Thus, over the past 11 months, the economy has added an average of around 77,000 private sector jobs per month. That gain of 855,000 jobs over the past 11 months is far better than the job creation seen at the same point, 14 months after the end of the recession, in the “jobless recoveries” following the mild recessions of 1990-91 and 2001. On the other hand, the 855,000 jobs created in the past 11 months are only a drop in the bucket compared to the millions of jobs created at this point in the recoveries from the severe recessions of 1973-75 and 1981-82.

Still, job creation of around 77,000 per month is not enough to push the unemployment rate significantly lower from 9.6% in September. The Fed is hoping to keep borrowing conditions favorable for businesses likely via another round of QE. As we discussed last week, low borrowing costs cannot be the only spark to reignite the economy, although low rates are certainly a big part of the story.

In addition to low rates, businesses need to have a favorable legislative and regulatory backdrop, and with markets now pricing in a high probability that the Republican Party wins control of the House of Representatives in the upcoming midterm elections, the sweeping legislative changes at the Federal level over the past two years will likely slow to a crawl. In addition to having low rates, and a favorable regulatory backdrop, businesses need to have good visibility about future prospects in order to feel confident enough to add to payrolls in a meaningful way. On this front, the tone of the third quarter earnings-reporting season, which begins in earnest this week, should provide more insight into how corporations view their prospects for the fourth quarter of 2010 and 2011.

Contrasts Between Developed and Developing Market Economies Have Implications for the Dollar, Commodities and Inflation

Overseas this week, central banks in India, Chile, Mexico, and South Korea all meet to set interest rates. Underscoring the strength in many emerging market economies, and economies with plentiful natural resources, India, South Korea, and Chile have already been increasing interest rates to combat inflation. On the other hand, central banks in most of the developed world — The Fed, the Bank of Japan (BOJ), the Bank of England (BOE) and the European Central Bank (ECB) — have struggled to keep rates lower for longer in an effort to reignite growth in the aftermath of the Great Recession which ended more than a year ago in June 2009.

This dichotomy between strong growth and rising rates in the emerging world and slow growth and falling rates in the developed world has implications for:

• The US dollar (likely to head lower)
• Commodity prices (likely to head higher, in large part because they are denominated in dollars)
• Inflation in the United States (likely, and hopefully in the Fed’s view, headed higher)
• The eventual exit strategy from easing (likely later than sooner)

China is one of the big drivers of the growth in the emerging markets, and this week, Chinese authorities will release several of China’s monthly roster of economic reports money supply, loan growth, imports, and exports — for September. Chinese gross domestic product (GDP) for the third quarter is set to be released the week of October 18-22. The market is expecting Chinese GDP to decelerate further to around 9.5% year-over-year growth, down from more than 12% year-over-year growth reported in the first quarter of 2010. At 9.5%, growth in China is more than three times as strong as growth in the developed world, and consensus forecasts for growth in 2011 call for another year of 9.0%+ growth.

To download the full report click below

IMPORTANT DISCLOSURES

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

Investing in international and emerging markets may entail additional risks such as currency fluctuation and political instability. Investing in small-cap stocks includes specific risks such as greater volatility and potentially less liquidity.

Stock investing involves risk including loss of principal Past performance is not a guarantee of future results.

Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of a fund shares is not guaranteed and will fluctuate.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and are subject to availability and change in price.

The fast price swings in commodities and currencies will result in significant volatility in an investor’s holdings.

This research material has been prepared by LPL Financial.

The LPL Financial family of affiliated companies includes LPL Financial and UVEST Financial Services Group, Inc., each of which is a member of FINRA/SIPC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity.

Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

Quote of the week

It is wonderful what we can do if we are always doing – George Washington

New home sales up … 26.9%? Yes. The stampede was on in March as buyers raced to qualify for expiring tax credits, leading to the greatest month-over-month jump in new home purchases since 1963. According to the Census Bureau, new home prices averaged $258,600, almost unchanged from 12 months ago.₁

Existing home sales also jump. National Association of Realtors data had residential resales up 6.8% for March. In year-over-year terms, sales were 16.1% improved.₂

Notable gain in PPI. In March, wholesale inflation increased by 0.7%, above the 0.4% forecast by economists. Labor Department figures showed core PPI (minus energy and food costs) up by 0.1%.₃

Durable goods orders down. They slipped by 1.3% last month according to the Commerce Department. The silver lining? With transportation orders taken out, the category was +2.8% in March.₄

(Further) indications of improvement. The Conference Board’s index of leading indicators went up 1.4% in March, the twelfth straight monthly gain. February’s gain was revised upward to 0.4%.₅

8 straight for the Dow. Eight consecutive winning weeks, that is – on Friday, the Dow closed at 11,204.28 after rising 1.68% across five trading days. Even with fresh concerns over the debt of Greece, the NASDAQ gained 1.97% last week and the S&P 500 advanced 2.11%

Citations.

1 money.cnn.com/2010/04/23/news/economy/new_home_sales/index.htm [4/23/10] 2 npr.org/blogs/thetwo-way/2010/04/home_sales_rise_68.html [4/23/10]3 smartmoney.com/Investing/ETFs/Late-Rally-Boosts-ETFs-and-Stocks/ [4/22/10]4 online.wsj.com/article/SB10001424052748703709804575201793952864632.html [4/23/10]5 marketwatch.com/story/march-leading-indicators-rise-recovery-continuing-2010-04-19 [4/19/10]6 cnbc.com/id/36738472 [4/23/10]7 bigcharts.marketwatch.com/historical/default.asp?detect=1&symbol=DJIA&close_date=4%2F23%2F09&x=0&y=0 [4/23/10]7 bigcharts.marketwatch.com/historical/default.asp?detect=1&symbol=COMP&close_date=4%2F23%2F09&x=0&y=0 [4/23/10]7 bigcharts.marketwatch.com/historical/default.asp?detect=1&symbol=SPX&close_date=4%2F23%2F09&x=0&y=0 [4/23/10]7 bigcharts.marketwatch.com/historical/default.asp?detect=1&symbol=DJIA&close_date=4%2F22%2F05&x=0&y=0 [4/23/10]7 bigcharts.marketwatch.com/historical/default.asp?detect=1&symbol=COMP&close_date=4%2F22%2F05&x=0&y=0 [4/23/10]7 bigcharts.marketwatch.com/historical/default.asp?detect=1&symbol=SPX&close_date=4%2F22%2F05&x=0&y=0 [4/23/10]7 bigcharts.marketwatch.com/historical/default.asp?detect=1&symbol=DJIA&close_date=4%2F24%2F00&x=0&y=0 [4/23/10]7 bigcharts.marketwatch.com/historical/default.asp?detect=1&symbol=COMP&close_date=4%2F24%2F00&x=0&y=0 [4/23/10]7 bigcharts.marketwatch.com/historical/default.asp?detect=1&symbol=SPX&close_date=4%2F24%2F00&x=0&y=0 [4/23/10]8 ustreas.gov/offices/domestic-finance/debt-management/interest-rate/real_yield.shtml [4/23/10]8 ustreas.gov/offices/domestic-finance/debt-management/interest-rate/real_yield_historical.shtml [4/23/10]9 treasurydirect.gov/instit/annceresult/press/preanre/2000/ofm11200.pdf [1/12/00]

Events and data in recent weeks have prompted market participants to view the tailwinds that caused the markets to go sailing higher for much of 2009 as beginning to fade. They now view them as having become more balanced with the rising headwinds associated with increasing global frictions.

We continue to expect the powerful economic and profit growth to weaken in the second half of 2010. The weakening is likely to result from the fading of the extraordinary global policy efforts that created a tailwind for growth and the rise of new headwinds as some actions are reversed. The early stage of this transition is already underway leading to heightened market volatility. While there is still plenty of good news acting as tailwinds for the markets, there is increasingly more of a balance with the bad news, or headwinds. The winds of change blowing in the markets include the following:

Tailwinds

1. -The Federal Reserve (the Fed) is our friend (for now)
2. -U.S. Gross Domestic Product (GDP) growth is above average
3. -S&P 500 earnings growth is strong
4. -Credit and housing markets continue to heal
5. -China’s double-digit GDP growth (but slowing loan growth)
6. -Steep yield curve
7. -Massive global fiscal stimulus in the pipeline

Headwinds
-No job growth (yet)
-Federal, state and local budgets are awful
-Anti-business tone in Washington
-Commercial real estate woes remain
-China and India inflation risks
-European debt problems exacerbated by weak economies
-Bank lending is weak

These are not in any particular order since the importance placed on them by the market varies from day to day. Some of them will switch from being tailwinds to headwinds this year, like the actions of the Federal Reserve, while others may switch from being headwinds to tailwinds such as job

Want more details?  Click here to explore each of the winds that are currently driving the choppy market environment.

LPL Financial Research Weekly Market Commentary