2009Oct18 Week In Review
2009Oct18 Week In Review
October 17, 2009
WEEK IN REVIEW:
This year’s rise in gold, silver and other commodities has been partly tied to concerns over the declining dollar. The Fed has been a passive observer. While financial media abounds with fears of rising inflation due to the Fed’s very accommodative easing, there is a positive side to this.
Inflation is continuing its decline. If you have been a frequent reader of our updates, you know we have been warning that deflation is a bigger long-term threat to the economy. The low dollar stimulates our economy which is not recovering very quickly from Obama’s Porkulus bill. With Core inflation at 1.3%, it is well below what the Fed needs as a cushion of safety to avoid future disinflationary shocks. If the Fed misses this, deflation is the outcome, and that is next to impossible for the government to reverse. The low dollar helps our exporters and earnings.
On the flip side, our imports are more expensive which has been reflected in the price of oil – an economic drag. As we enter winter and the demand for heating oil increases, households will be forced to redirect some discretionary spending to their heating oil supplier. However, imported consumer products have not, yet, been impacted by the lower dollar. Nevertheless, the need for warm homes will place more downward pressure on consumer spending in the months ahead.
Commodity indexes are useful tools in gauging inflation as they measure the prices of various raw materials - things that are made or grown so that other things can be made, purchased and consumed. Some commodity benchmarks are "production weighted," placing an emphasis upon those materials that are most consumed, others are equal-weighted to reflect more of an average change in the cost of "things". In either event, the value of these indexes has indeed risen in 2009. In our opinion, a depressed economy and depressed wageswill continue to mute overall consumer demand offsetting the normal inflationary expectation from commodity changes.
Our exports have been rising lately at strong annualized rates but still much below last year’s level. That is probably more a sign of global growth than of the dollar’s value. The impact of a weaker dollar is very slow. It does boost our exports and domestic production. Consistent with this, our imports have been slowing in tandem with the dollar.
With the Dow hitting 10,000 this week, questioning sustainability is valid. With the average mutual fund investor moving from equities to bonds, we have become concerned about the premium in fixed income assets.
The long term bullish trend for all equity funds is maintaining the upward momentum which began this April. The long-term indicator measures the entire equity fund universe comprised of both mutual funds and ETFs and reads their long-term charts to detect if the funds remain on a buy signal. Although 82% of funds are on a long-term buy signal, the levels have been higher in the past leaving headroom to move higher.
Market valuations are certainly not as attractive as in the past six months. However, carefully selected sectors are continuing to have positive earnings and remain attractively priced if acquired with a view of limiting downside risk using stop-loss orders or other defensive strategies.
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