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Friday, October 14, 2011

Market, economic and financial commentary for the business week ending 10/14/2011

Stocks rallied for a second week erasing losses. The Dow Jones Industrial Average (^DJI) has almost risen 1000 points or approximately 9.4 percent from its 10/3/2011 low. The reason(s)? Some of the statistical economic data such as September retail sales has been positive and Euro-zone sovereign nations have collectively voted to increase their European Financial Stability Facility (EFSF) to  €440 billion or $610.89 billion to help keep banking solvency and national debt under control. 

There are also short-term trading aspects to the market that can either be ignored or not depending on if one is investing long-term or not. The short-term technical patterns i.e. the way the DJIA line moves up and down quite possibly indicated a slow down in the momentum of rate of change thereby signaling purchases. In other words, less and less people might have began selling when the DJIA approached 10,655 which served as reason to lock in profits from selling-short i.e. buying stocks at an out of the money price to sell at a later point when that out of money price is in the money. High frequency trading algorithms are also designed to look for patterns in market buying and selling which can also accelerate short-term market efficiency.

That said, not much seems to have changed. The trade deficit, deficit spending, unemployment, and lack of strong consumer sentiment remain high, and economic outlooks for Asia and Europe are low or have been lowered. The U.S. may avoid a recession based on recent data, but not by much and that could be all it takes for the global economic engine to also gear down which itself tends to have an accelerator affect i.e. reactionary economics causes spending to slow until a realistic spending opportunity occurs.  

If countries are buying less, why spend more? Europe is spending all its money throwing good money after bad at flailing banks and inefficient economies within an environment of credit downgrades, and the U.S. government has no money left. Corporations claim to be too afraid of regulations, taxes and future economic conditions to justify spending their $1.8 trillion  in capital per the Washington Post, an amount  about $500 billion higher than the Federal fiscal budget deficit of $1.3 trillion per the Congressional Budget Office. That deficit will be added on to last years deficit and the year before that, it's high. 

Corporations are left in the driver's seat because last year government spending was included in GDP data, unemployment will hold back consumer spending and according to the Bureau of Economic Analysis (BEA), the "increase in GDP during the 3rd quarter of 2011 was due to a "decline in imports, and an increase in government spending in addition to fixed residential spending." Interesting how net imports and exports are included in 'gross national product'. Next year the American Recovery and Reinvestment Act funding will wane even more, and what to do with Bush tax cuts in an election year?