THE MONTH IN BRIEF

DOMESTIC ECONOMIC HEALTH
The big news to come our way in January was the big leap in consumer spending for December. We had the sense late in 2010 that consumers were readily opening their wallets and billfolds; the Commerce Department’s report of the 0.7% monthly gain in the category confirmed it. The Commerce Department also announced that consumer spending rose a very healthy 4.4% in the fourth quarter of 2010.²

January also brought a 0.4% drop in the jobless rate, but the news wasn’t as good as it seemed. Unemployment did fall to 9.4% for December as 453,000 people stopped receiving federal benefits, but only 103,000 people found new non-farm jobs. So the drop in the unemployment rate largely reflected job seekers giving up the hunt. Perhaps this was one of the reasons that the two major consumer confidence polls came to a split decision last month: the University of Michigan’s poll declined by 0.3 points in January, while the Conference Board’s poll reached an 8-month peak of 60.6.^3,4,5

The Institute for Supply Management’s closely watched purchasing managers indexes showed further growth. The December service sector index rose 2.1% to 57.1; the January manufacturing index, which came out at the start of February, rose 2.3% to a mark of 60.8. A 0.6% December gain in retail sales corresponded with the jump in personal spending.^6,7,8

Inflation picked up in December. The Consumer Price Index rose 0.5%, the biggest advance in 18 months – but core CPI advanced only 0.1%. The federal government’s Producer Price Index rose 1.1% for December with a 0.2% core PPI gain. Energy prices spurred much of the advances in both indexes. While overall durable goods orders fell 2.5% for December, they were actually up 0.5% with aircraft orders factored out.^9,10,11

GLOBAL ECONOMIC HEALTH
At January’s end, the European Financial Stability Facility (the rescue fund set up by the European Union last year) appeared to be shifting focus. The EU was said to be near an agreement by which the EFSF would buy bonds directly from fiscally troubled nations rather than offer bailout loans. At the end of January, the European Central Bank actually took a break from buying bonds from Greece, Ireland and Portugal. The ECB had already bought €76.5 billion of those bonds from May 2010 through January, and the EFSF is scheduled to be dismantled in 2013. EU Economic and Monetary Commissioner Olli Rehn commented that when it came to the sovereign debt crisis, “the worst could be over.” In other positive news, Germany’s jobless rate diminished to an 18-year low last month and the Markit Economics PMI hit a 9-month peak.^12,13

Many Asian economies were celebrating rapid growth, while also contending with the rising prices that came with it. In January, South Korea noted a 46% year-over-year increase in exports, but its consumer price index posted a year-over-year gain of 4.1% (the year-over-year gain had been 3.5% in December). Indonesia was facing 7% inflation. A hint of cooling came from China, where the China Federation of Logistics and Purchasing index fell to 52.9 from 53.9 a month earlier. Japan actually had its credit rating downgraded by Standard & Poor’s.¹⁴

WORLD MARKETS
Call it a relief rally, call it renewed optimism: many European indices did well last month, even those in fiscally troubled countries. The German DAX rose 2.2% and the French CAC 40 advanced 5.4%. The Dow Jones Stoxx 600 was up 1.5% last month, putting it up 7.0% across December and January. Spain’s Ibex rebounded 10.0% in January while the benchmark indices of Greece and Italy respectively rose 12.7% and 9.4% for the month. Notable January losers included the FTSE 100 in Great Britain (-0.6%) and the Sensex in India, which suffered a correction (-10.6%) thanks to pessimism over renewed inflation and rising interest rates. At the end of the month, it had fallen 12.4% from November highs. The MSCI World Index rose 2.19% last month while the MSCI Emerging Markets index fell 2.81% (measuring performance in U.S. dollar terms).^15,16,17,18

COMMODITIES MARKETS
Gold did poorly, oil did decently, and tin and cotton did amazingly well. Gold futures fell 6.1% last month, the first monthly loss for the precious metal since July 2010. In fact, it was gold’s poorest month since December 2009 and its poorest January since 1997. Silver also took a hit as investors turned back toward stocks and funds – it fell 8.9% last month. However, palladium was up 2.1% in January (for a 7-month winning streak) and platinum prices rose 1.3%. Tin prices rose 10.2% on the month, and copper pushed toward an all-time.^19,20,21

Elsewhere, crude oil pulled off a 0.9% gain to get to $92.19 per barrel at the close on January 31. Cotton soared 16.0% and wheat prices gained 5.9% in January. The U.S. Dollar Index lost 1.5% for the month.^19,22,23

REAL ESTATE
New and existing home sales continued rebounding. Residential resales were up 12.3% for December, according to the National Association of Realtors. While the median sale price fell 1.0%, the excess inventory was also reduced to 8.1 months of supply compared to 9.5 months in December. The NAR also said pending home sales were up 2.0% in December – not quite the 4.5% gain analysts had expected, but still nice. As for new home sales, the Census Bureau noted that they jumped 17.5% in December. (Sales of new and existing homes were still respectively down 7.6% and 4.2% from a year ago.)^24,25

Back on December 30, Freddie Mac found average interest rates on 30-year FRMs at 4.86%, 15-year FRMs at 4.20%, 5-year ARMs at 3.77%, and 1-year ARMs at 3.26%. By January 27, those rates had declined or held steady as follows: 30-year FRMs, 4.80%; 15-year FRMs, 4.09%; 5-year ARMs; 3.70%; 1-year ARMs, 3.26%.^26,27

LOOKING BACK…LOOKING FORWARD
The S&P 500 recorded its first positive January since 2007 and its best January percentage climb since 2006. The DJIA had its best January in 14 years. At the end of the month, this was how things looked.¹

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While Wall Street kept a close eye on the situation in Egypt at the end of January and the start of February, it wound up paying more attention to domestic economic indicators and earnings reports – the DJIA suffered only one triple-digit hit from the crisis. If stocks can suddenly navigate around a major geopolitical event with such ease, will that bode well for the rest of the year? While past performance is no barometer of future success, the historical data is encouraging: when the S&P 500 has posted a January gain, it has registered a yearly gain 81% of the time since 1928 (with an average yearly advance of 12.91%). The mood was more bullish than bearish at the beginning of February, with the Dow topping 12,000, the NASDAQ over 2,700 and the S&P 500 over 1,300.³¹

UPCOMING ECONOMIC RELEASES: Across the balance of February, we will get reports and releases concerning the January unemployment rate (2/4), December wholesale inventories (2/10), the first University of Michigan February assessment of consumer sentiment (2/11), January retail sales and December business inventories (2/15), January’s PPI, industrial output and housing starts (2/16), January’s CPI and Conference Board LEI (2/17), December’s Case-Shiller home price index plus the Conference Board’s look at consumer confidence in January (2/22), January existing home sales (2/23), January new home sales and durable goods orders (2/24), a final look at consumer sentiment in February from the University of Michigan (2/25), and January consumer spending and pending home sales (2/28).

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THE YEAR IN BRIEF

The economy grew, but instead of a V-shaped recovery we saw a shallow U-shaped one. The Fed didn’t touch the benchmark interest rate all year; it did embark on another round of monetary easing. The unemployment rate stayed consistently above 9%. On Capitol Hill, you had the passage of health care reforms and the Dodd-Frank Act, the surprisingly easy extension of the Bush-era tax cuts, and a resolution to the estate tax question. The real estate sector stumbled along; mortgage rates fell remarkably before rising a bit at the end of the year. Consumer spending increased, though not impressively; inflation was barely on the radar. The bull market in commodities continued. Foreign economies struggled with problems much greater than ours.

DOMESTIC ECONOMIC HEALTH
The American economy comes down to the consumer, and the good news is that consumer spending increased in nine out of the 11 months on record for 2010 (it was flat in April and June). As for inflation, it was almost nil: the Consumer Price Index gained just 1.1% from November 2009 to November 2010, and core CPI rose but 0.8% in that span.^2,3,4,5

The Conference Board’s consumer confidence survey moved from 50.6 (December 2009) to 54.1 (December 2010). The Reuters/University of Michigan survey moved from 72.5 to 74.5 across that span, with a 9.4% improvement in consumer expectations. America’s jobless rate did show some improvement: it was 10.0% in December 2009 and still at 9.8% in November, but down to 9.4% for December.^6,7,8

Let’s look at the growth in the service and manufacturing sectors through the lens of the Institute for Supply Management. Its November manufacturing report indicated the 16th straight month of growth in the sector, with employment trending positive for 12 months and production expanding for the past 18 months. The November service sector report indicated the 11th straight month of expansion and the 15th straight month of growth when it came to new orders. Census Bureau data showed durable goods orders up 14.3% from year-ago levels in October (and without seasonal adjustment, the year-over-year rise was 10.4% from November 2009 to November 2010.)^9,10,11

In the nation’s capital, the Republicans gained control of the House in the mid-term elections and President Obama seemed eminently agreeable to their demands by year’s end. In March, landmark health care reforms were passed to fulfill the President’s mandate of bringing health insurance coverage to (virtually) every American, though the public option that would have made the federal government a competitor in the health insurance industry was defeated. In July, the Dodd-Frank Act was passed bringing new regulations to the financial industry. Besides trying to prevent a repeat of TARP, it green-lighted the creation of a new watchdog agency to help protect and educate consumers, opened up derivatives trading to the public eye, and set the FDIC insurance limit permanently at $250,000.^12,13

The fall brought a new round of bond-buying from the Federal Reserve – QE2, as it came to be called in the media. The Fed committed to buying $600 billion worth of Treasuries through June 2011 and announced plans to buy up to $900 billion in debt by the end of next September. In December, the President struck an accord with Republicans resulting in swift passage of new tax laws: the EGTRRA and JGTRRA cuts were preserved for another two years, employee payroll taxes were cut by 2% for 2011, and the estate tax resumed for 2011 at 35% with a $5 million exemption.^14,15

GLOBAL ECONOMIC HEALTH
It was a harsh year for the euro and for the European Union. Central banks and governments faced payback for years of loose lending and nonchalant spending. Greece was the first EU member to crack, getting a €110 billion bailout from the EU and the International Monetary Fund in May. In November, Ireland got a ₤72 billion EU/IMF bailout, and Portugal and Spain remain on the EU watch list. (At one point last year, the bank bailout guarantees amounted to about 25% of the EU’s GDP.) In May, French prime minister Nicolas Sarkozy warned that his country would ditch the euro if Germany’s chancellor, Angela Merkel, didn’t agree to create an EU bailout fund. She did, and a €440 billion fund is now in place for any future rescues.¹⁶

In the third quarter of 2010, China became the #2 economy in the world, right behind the United States; Japan fell into third place. China’s manufacturers saw their collective profits rise 49.5% across the first 11 months of 2010. The nation’s central bank twice raised interest rates during the year. Japan couldn’t shake its deflation – in November, its core consumer price index went negative for an astonishing 21st consecutive month – but its industrial output rose in November for the first time in six months. India’s remarkable economic engine showed little if any sign of slowing down – the IMF projected India would end 2010 with a +9.7% GDP and forecast 8.4% growth in 2011.^17,18,19,20

WORLD MARKETS
Looking at the consequential stock markets around the world, we see some great 2010 performances. At the top we find Argentina’s MERVAL, +51.8% for the year. Finishing second, we have Indonesia’s Jakarta Composite, +46.2% for the year. Rounding out the top five, we have Thailand’s SET (+40.6%), the PSE Composite in the Philippines (+37.6%) and Chile’s IPSA (also +37.6%). Several other benchmarks outpaced the S&P 500 last year: Pakistan’s KSE 100 (+28.1%), South Korea’s KOSPI (+21.9%), Mexico’s IPC (+20.0%), India’s Sensex (+17.4%), Germany’s DAX (+16.1%) and Canada’s TSX Composite (+14.4%). Other gains: Singapore’s Straits Times Index, +10.1%; Taiwan’s TAIEX, +9.6%; Great Britain’s FTSE 100, +9.0%; Hong Kong’s Hang Seng, +5.3%; Brazil’s Bovespa, just 1.0%.²¹

Some benchmarks went negative: Australia’s All Ordinaries index (-2.6%), Japan’s Nikkei 225 (-3.0%), Ireland’s ISEQ (-3.0%), France’s CAC-40 (-3.3%), China’s Shanghai Composite (-14.4%), and finally two indices you would expect to finish at or near the bottom for 2010: Spain’s IBEX (-17.4%) and Greece’s ASE (-35.6%). How did the MSCI World Index and Emerging Markets Index fare in 2010? In U.S. dollar terms, the World Index gained 9.55% and the Emerging Markets Index posted a 16.36% return.^21,22

COMMODITIES MARKETS
The bull market continued. Palladium was the best-performing marquee commodity of 2010, gaining an astonishing 97.3%. Other metals also posted great yearly gains: gold rose 29.8% to close 2010 at $1421.10 per ounce, silver gained 83.8% to $30.91 a troy ounce, and copper prices rose 33.4% to $4.4395 a pound for December. Platinum futures advanced 21.5% last year.²³

How did energy and crop futures do? Well, oil climbed 15.2% for the year, with prices cresting at $91.51 on December 6 and finishing the year at $91.38. Natural gas was the “blown tire” of the commodities sector, with futures dropping 20.9% for 2010. Corn gained 51.8%, wheat 46.7% and soybeans gained 34.1%, spurred by a drought affecting Russia. Coffee futures were up 76.9% for the year, and sugar futures gained 19.2 across 2010. The Dow Jones-UBS Commodity Index followed its 19.0% 2009 gain with a 16.8% advance for 2010.²³

The U.S. Dollar Index gained 1.41% for 2010 and the real yield of the 10-year note went from 1.48% on December 31, 2009 to 1.00% a year later (a 32.4% decline).^24,25

REAL ESTATE
This is an annual review, so let’s talk about the numbers that really matter when it comes to the housing market: the year-over-year change in home sales and home sale prices. The latest available data we have, of course, comes from November 2010 – so let’s reference those figures. In November, existing home sales were down 27.9% from a year ago, though the median sale price improved by 0.4% in that time. New home sales were down 21.2% from 12 months ago, with a median sale price of $213,000 – a year-to-year retreat of 2.0% from $217,400 in November 2009.^26,27,28

Has the housing market hit bottom? Will we have to wait until sometime in 2011 … or 2012 … to see a bona fide recovery? As the biggest drag on the real estate market is actually unemployment, and as unemployment will continue at high levels for the foreseeable future, the near future of the sector does not look too bright.

Mortgage rates moved downward for most of 2010; new record lows seemed to be set every week during the summer and fall. Rates were on the upswing in December, at least in the short term. When Freddie Mac assessed matters on December 30, they noted the following year-to-year movement: average rates on conventional 30-year FRMs had moved down to 4.86% from 5.14%; rates on 15-year FRMs were averaging 4.20%, down from 4.54%; average rates on the 5-year ARM were at 3.77%, down from 4.44% a year prior; average rates on the 1-year ARM had descended to 3.26% from 4.33%.²⁹

LOOKING BACK … LOOKING FORWARD
It is hard to forecast the future; just ask the experts. At the start of 2010, some analysts were predicting growth of more than 3% for the U.S. economy (didn’t quite happen), an unnerving double dip in housing prices after the end of the homebuyer tax credit (this only happened to a minor degree), and a jobless rate well over 10% (it stayed below 10% from January-November). Some voices worried about deflation; that hasn’t happened either. And Harry Dent – the author of The Roaring 2000s who famously predicted the Dow would hit 40,000 during the last decade – forecast a severe bear market beginning in 2010 (as you can see below, that hasn’t happened at all).^8,30

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The fact is, we don’t know what 2011 will bring. There seems to be less talk of a double-dip recession in the air; the tax deal forged in Washington certainly eased the minds of the affluent (lenient estate tax, Bush-era cuts preserved) and the middle class (2% payroll tax reduction). Are we going to see a greatly improved real estate market in 2011? How about a big reduction in the jobless rate or a big jump in GDP? It doesn’t seem likely. The economy and the stock market have some momentum going; if the geopolitical climate remains relatively placid and indicators continue to pleasantly surprise, 2011 could be a better year for Wall Street and Main Street than 2010.

HOW DO WE INTERPRET THIS JOBS REPORT?
America’s unemployment rate fell four-tenths of a point in December to 9.4%. On the surface, that sounds great – after all, that is the biggest one-month drop in the jobless rate in 12 years. Beneath the surface, it wasn’t so great. Labor Department figures show that 453,000 people dropped off the unemployment rolls last month, yet only 103,000 people found new non-farm jobs. So perhaps the dip in the jobless rate mostly reflects job seekers giving up the hunt. In contrast to federal data, ADP’s new payrolls report indicates 297,000 new private sector jobs for December.^1,2

ISM FINDS CONTINUING EXPANSION
The Institute for Supply Management’s twin purchasing manager index surveys came out last week. Its manufacturing PMI came in at 57.0 for December, while its service sector PMI came in at 57.1. New orders were up 5.3% in the service sector survey with business activity/production increasing 6.5%.³

OIL & GOLD PULL BACK TO OPEN THE YEAR
Oil had its poorest week in two months last week, as prices fell $3.35 per barrel across five trading days to $88.03. Gold slipped $52.60 last week; futures settled at $1368.50 an ounce Friday. Was this because of a stronger dollar, investors locking in profits at the start of a new year, a shift in sentiment, or all of the above? Was it just a selloff or an omen of correction? Bulls are watching and waiting.⁴

BIG 7 AUTOMAKERS SEE NICE 2010 SALES GAINS
The world’s seven major automobile manufacturers enjoyed a collective 9.7% year-over-year increase in sales for 2010, according to figures compiled by MarketWatch. Toyota was the only one of the seven to see a 2010 sales drop, while Hyundai’s 2010 U.S. sales improved by more than 30%. Sales across the big seven (Ford, Nissan, Hyundai, Honda, GM, Toyota and Chrysler) were up 33.3% in December.⁵

STOCKS ADVANCE TO START 2011
The Dow rose 0.84% last week to close at 11,674.76 Friday. The S&P 500 (+1.10%) and NASDAQ (+1.90%) opened 2011 with even better weeks. The NASDAQ settled Friday at 2703.17 while the S&P settled at 1271.50.⁶

THIS WEEK: Earnings season starts after the closing bell Monday with Alcoa’s 4Q results. Tuesday, we get data on November wholesale inventories. Wednesday brings us a new Beige Book from the Fed. Thursday, the December PPI will be out plus the latest jobless claims data. Friday, we get December CPI, industrial output and retail sales data and the first University of Michigan consumer sentiment survey of 2011.

WEEKLY TIP

If your life or financial situation changed notably in 2010 (a new job, a marriage, an addition to the family), then 2011 should be a time to review the state of your personal insurance and your risk management approach. Call my office for more information: (800) 990-2734

WEEKLY RIDDLE – (Leave your answer in the comments section below)

Complete these words by putting the same 3 letters into each one: F—RISH, C—DY, S—GH.

Last week’s riddle:

By rearranging the letters in the phrase VIEWING A STIR, you can make the name of a U.S. state. What state is it? (This state has 12 letters in its name.)

Last week’s answer: West Virginia

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This information should not be construed as investment, tax or legal advice. The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. The NASDAQ Composite Index is an unmanaged, market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System. The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is not possible to invest directly in an index. NYSE Group, Inc. (NYSE:NYX) operates two securities exchanges: the New York Stock Exchange (the “NYSE”) and NYSE Arca (formerly known as the Archipelago Exchange, or ArcaEx®, and the Pacific Exchange). NYSE Group is a leading provider of securities listing, trading and market data products and services. The New York Mercantile Exchange, Inc. (NYMEX) is the world’s largest physical commodity futures exchange and the preeminent trading forum for energy and precious metals, with trading conducted through two divisions – the NYMEX Division, home to the energy, platinum, and palladium markets, and the COMEX Division, on which all other metals trade. Additional risks are associated with international investing, such as currency fluctuations, political and economic instability and differences in accounting standards. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. All economic and performance data is historical and not indicative of future results. Market indices discussed are unmanaged. Investors cannot invest in unmanaged indices. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional.

How effectively could it address America’s unemployment rate?

www.youtube.com/watch?v=9FYpmhC6iL8

How about a tax break for companies that hire? A new jobs bill introduced by Sen. Majority Leader Harry Reid (D-NV) proposes major tax incentives for hiring businesses. If the bill becomes law, will these incentives make a dent in the unemployment rate? Or will they matter little? Not everyone is optimistic.

On February 24, the $15 billion job creation measure passed 70-28 in the Senate and headed for the House of Representatives.¹ Just what is in this Senate bill?

The big perk: the “Hire Now” tax cut. If the bill becomes law, a business that hires someone who has worked less than 40 hours in the previous 60 days could skip paying its share of the new hire’s Social Security tax for the rest of 2010. That’s 6.25% of the employee’s salary. Companies could realize a payroll tax savings of up to $6,622 per new hire. (In case you are wondering, the federal government would reimburse the SSA for the lost taxes.) ^2,3,4

If the new employee lasted 52 weeks on the job, the business would get a $1,000 tax credit on its 2011 federal return.³

The other perks. The Section 179 deduction limit for small business capital purchases was raised to $250,000 for 2009, and this bill would keep the limit at $250,000 for the 2010 tax year. The “Build America” bond program would be extended and expanded – that’s the program created to help state and local governments raise funds for infrastructure projects. The current federal subsidy for state highway spending would also be extended.^1,2

The fine print. Any private-sector employer, any non-profit organization and any public-sector college or university would qualify for the “Hire Now” tax break. While a business that owes no tax could not get the $1,000 new-hire tax credit for 2011, it would be allowed to carry that credit forward to the future. There would be no limit on the amount of new employees a business could hire en route to claiming the credit.⁸

Is this really going to make a difference? Well, Sen. Reid believes that the bill could create and save as many as 1 million jobs. Analysts feel that may be stretching it. Economic Policy Institute economist Heidi Shierholz thinks the measure could result in “tens of thousands of jobs, but it is absolutely nowhere near big enough” to reduce the unemployment rate.³

Under the bill, a “new” hire does not have to be an additional employee. It can also be a worker replacing someone who quit or was fired.³ So service sector businesses with high turnover might get some major tax breaks. There might be a lot of hiring among such companies, but not a lot of net job creation.

Is another bill just ahead? According to The Atlantic, Sen. Reid plans to introduce a second jobs bill with much greater scope. This proposed (and almost certainly more expensive) legislation would extend jobless benefits and COBRA for millions, as well as numerous tax credits and programs scheduled to sunset. State Medicaid funding would be extended and Medicare physician payments would be updated through this bill as well. While The Atlantic says it has copies of the bill, Sen. Reid’s office has not yet confirmed its contents. The Senator has mentioned rolling out multiple bills in the next few weeks to address the country’s unemployment problem.⁵