Direction, the Volcker Rule, and Your Weekly Update

Brrr!

The chill in the air across most of the 28 states our clients inhabit was only eclipsed by the chill in the U.S Stock market last week… until Friday. You’ll read all about that in the attached, just like every week.

But in our thoughts this week, we’ll focus on something you haven’t heard about much recently. The “Volcker Rule” is set for a vote very soon by the Feds. The result, depending on one’s viewpoint, could be a safer road for American investors. We are all for that!

We’ll take a look at this important development.

Best always,
Lee and Jeremy

P.S. Thanks for your many responses to last week’s question about the market cycle, “Where do you think we are?” A majority of responders chose “Confidence” or “Enthusiasm”, both of which are general indicators of stock market highs. We shall see!

-L&J


This Week’s Quote:

“I wish someone would give me one shred of neutral evidence that financial innovation has led to economic growth…” ~ Paul Volcker, Former Federal Reserve Chairman


JL Davis Thoughts This Week:

In the late 1970’s when one of your authors sat for his first securities licensing exams, he did so with a fair understanding of the Glass-Steagall act, a relic of the depression that prevented banks and securities firms from entering one another’s businesses.
Adopted by Congress in 1933, the act drew a bright line between banking and securities. In the intervening years, Glass-Steagall was steadily eroded and finally repealed entirely in 1999. If you’re remembering the “tech bubble” of the early 2000’s or the events of 2008-9 and wondering if there is a coincidence, we believe there is indeed. Banks and securities firms blurred the lines, taking outsized risks, imperiling investors and the U.S. financial system in the process.

Fast forward to 2013 and we now find ourselves in the midst of a powerful stock market rally whose near 5 year upward timeline has been exceeded by only 20% of all previous bull markets. Since 2009, significant regulation has passed to help protect the public as well as the U.S. financial system. Within the Dodd-Frank legislation, one of the last elements for implementation is the “Volcker Rule,” which effectively bans trading by banks for their own gain. Named for the former Federal Reserve Chairman under President Reagan, the rule will be voted on this week. Though implementation may be delayed until early 2015, larger institutions will look to be in compliance much earlier. And that may be a good thing.

At JL Davis, we believe that investors deserve the protections this rule intends. A major financial institution shouldn’t be allowed to profit from trades which run counter to those they recommend to customers in our view.

One of the many benefits of being an independent firm is that we are free to make recommendations of our own choosing, not influenced by an overarching organization. We prefer our influence come directly from those who we are truly responsible to…our great clients.

So here’s hoping the Volcker Rule passes with flying colors and that the lessons of the recent passed stay at the forefront in the financial industry. All of us deserve it.**

http://money.cnn.com/2013/12/08/news/economy/volcker-rule/
http://www.usatoday.com/story/money/business/2013/12/08/volcker-rule-nears-vote/3890809/
http://www.reuters.com/article/2013/12/08/us-financial-regulation-volcker-idUSBRE9B705120131208
http://en.wikipedia.org/wiki/Glass%E2%80%93Steagall_Act
http://en.wikipedia.org/wiki/Paul_Volcker


Market Week: December 9, 2013

The Markets

Domestic equities managed to shake off five days of losses with a rousing bounce of nearly 200 points in the Dow after Friday's robust jobs report. For once, investors seemed to be more focused on the positive implications of generally encouraging economic data than on whether good news would accelerate Fed tapering. The S&P 500 and Nasdaq ended the week basically flat, while the small caps of the Russell 2000 had their worst week in a month

Last Week's Headlines

• The addition of 203,000 new jobs in November helped cut the unemployment rate to 7%, according to the Bureau of Labor Statistics. That's the biggest monthly decline in more than a year, and leaves unemployment at its lowest level since November 2008. The return of furloughed federal government workers was a factor in the improved employment picture, but the labor force also grew, and the number of involuntary part-time workers and those who had given up looking for a job declined. November's job growth also was higher than the 195,000 new jobs averaged monthly over the last year.

• There were more people than last year in stores over the Thanksgiving weekend, but heavy discounting meant that they spent less. According to the National Retail Federation, the average amount spent by each of the 141 million shoppers--$407--was down from almost $424 last year, though the NRF said it still forecasts a 3.9% increase in total holiday spending.

• The U.S. economy grew faster during the third quarter than previously thought. The Bureau of Economic Analysis said the annualized increase was 3.6%, substantially above the 2.8% initially estimated or the 2.5% growth in Q2. However, much of that growth was the result of businesses increasing inventories by 1.6%. Meanwhile, corporate after-tax profits were up 2.6% for the quarter; that's reduced from Q2's 3.5% increase, but 8.8% higher than in Q3 2012.

• The Institute for Supply Management's U.S. manufacturing index showed a 0.9% acceleration in growth with a reading of 57.3% in November (anything above 50 indicates expansion). Meanwhile, the ISM's gauge of the services sector showed growth slowing from 55.4% to 53.9% during the month.

• Sales of new single-family homes jumped more than 25% in October, which put them 21.6% ahead of last year, according to the Commerce Department.

• The Federal Reserve's "beige book" report continued to see "modest to moderate" expansion of the U.S. economy, and some Federal Reserve governors suggested publicly that it is time to let tapering begin.

• Increased U.S. exports of oil, soybean, and collectibles such as art, gold, and diamonds more than offset a slight increase in imports and cut the U.S. trade deficit by 5.4% in October. The $40.6 billion deficit is down almost 5% from a year ago.

• Americans earned less and spent more in October. According to the Bureau of Economic Analysis, personal income fell 0.1% in October; adjusted for inflation, the decline was twice that. Meanwhile, personal consumption rose 0.3%.

Eye on the Week Ahead

Time is running out for a congressional budget conference committee, established as part of the deal to end the federal government shutdown, to come up with a way to avert more budget battles. A report is due Friday. Key dates and data releases: retail sales (12/12); wholesale inflation, due date for congressional budget committee report (12/13).

Data sources: All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. News items are based on reports from multiple commonly available international news sources (i.e., wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. Market data: U.S. Treasury (Treasury yields); WSJ Market Data Center (equities); Federal Reserve Board (Fed Funds target rate); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold, NY close); Oanda/FX Street (currency exchange rates). Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indexes listed are unmanaged and are not available for direct investment.

Prepared by Lee Davis** and Broadridge Investor Communication Solutions, Inc. Copyright 2013