The markets, 2011, and Ghandi

Quote of the Week:
"First they ignore you. Then they laugh at you. Then they fight you. Then you win" - Mahatma Ghandi

Though spoken many years ago, Mr. Ghandi's words certainly seem to apply to the world in 2011. Let's take a look.

The "Arab Spring" which began last December has seen revolutions in Tunisia and Egypt; a civil war in Libya; uprisings in Bahrain, Syria and Yemen; major protests in Algeria, Iraq, Jordan, Morocco, and Yemen; so called "minor" uprisings in Kuwait, Lebanon, Mauritania, Saudi Arabia, Sudan and Western Sahara.

In Europe, the governments of Greece, Portugal, Ireland, Hungary, Italy, and Spain have changed rapidly in response to debt issues which have peaked in 2011. Germany, France and others are looking to get paid, so more changes are likely on the way.

Listing all of the changes occurring on the U.S. side of the pond this year would take the rest of this Update. Suffice it to say that the pace of change here is, in a word, rapid.

So, what does this have to do with the markets? Plenty; Markets seem to hate uncertainty. They generally respond to it by being exceptionally volatile. They tend to ignore positive data, if any, and focus negatively, resulting in stock prices moving downward. This is what we've seen recently. But good data can, and has, moved markets upward in spite of world events.

A few paragraphs below are a list of all of the economic data we will be seeing this week. It's an especially busy one. We'll see if the recent trend toward steadily improving economic and corporate profit data continues (for the record, we think it will, but marginally so). Most important, we'll see if markets begin to respond positively; whether the good U.S. economic data can finally overwhelm a tumultuous world situation in 2011, resulting in a year end rally. For us now, it's still caution. Stay tuned.**


Market Week: November 28, 2011

The Markets

Once again, European debt woes drove the headlines that drove the markets. The abbreviated trading week gobbled up last week's rally, leaving the Dow back in negative territory for the year, the S&P 500 with its seventh straight day of losses, and the Russell 2000 down almost 13% from its level just a month ago. Despite the euroangst, Treasury yields remained relatively stable, while gold ended the week below $1,700 an ounce. The euro sank to $1.32 and is now down almost 11% since its $1.48 year-to-date high last spring


Last Week's Headlines

• The congressional supercommittee charged with finding ways to cut the national deficit by $1.2 trillion admitted it had been unable to do so. As a result, $1.2 trillion in across-the-board budget cuts, split roughly evenly between defense and other programs, are slated to be implemented in 2013. The dissent among committee members also raised questions about the potential for resolution of other issues, such as payroll tax cuts and unemployment benefits that are scheduled to expire at year's end.
• Auction demand for German bonds fell short of what had been anticipated. As a result, the European Central Bank bought nearly 40% of the offer, raising questions about whether the debt crisis might be starting to affect even the eurozone's strongest nation. Meanwhile, the yield on the Italian 10-year bond rose once again, hitting roughly 7.3%, and yields on the country's short-term debt rose even higher.
• French President Nicolas Sarkozy and German Chancellor Angela Merkel said they will propose revising the European Union treaty to enhance fiscal coordination among countries, and Greece reportedly asked its bondholders to take a bigger reduction in the amount owed. Also, Fitch Ratings warned that France's credit rating could be in jeopardy, while Standard & Poor's cut Belgium's rating to AA.
• U.S. economic growth for the third quarter was a bit slower than earlier thought, but continued to improve from the previous quarter. The Bureau of Economic Analysis's second estimate for Q3 was 2% rather than the earlier estimate of 2.5%, but that was still higher than Q2's 1.3%.
• Lower demand for commercial aircraft helped cut durable goods orders by 0.7% in October, according to the Commerce Department. However, orders for nontransportation-related goods actually rose 0.7%.
• U.S. incomes were up in October, but the Commerce Department said savings rose more than spending. Incomes rose 0.4%, but consumer spending increased only 0.1%, while the savings rate rose to 3.5% of income during the month.


Eye on the Week Ahead

Major bond auctions throughout the week in several eurozone countries, including Italy, Spain, France, and Belgium, will be watched for signs of increasing pressure on yields. Also, eurozone finance ministers will meet Tuesday to discuss the debt situation. Friday's unemployment figure and Black Friday sales reports will highlight domestic economic data.
Key dates and data releases: new home sales (11/28); home prices, consumer confidence (11/29); business productivity/costs, pending home sales (11/30); U.S. manufacturing, construction spending (12/1); unemployment/payrolls (12/2).



Data source: Includes data provided by Brounes & Associates. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. 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. Equities data reflect price change, not total return.

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 2011