At today’s close of 1,200.07, the S&P 500 has now slumped almost 12% from its April 29 closing high of 1,360.14, putting the market into what Wall Street considers a “correction” – generally defined as a pullback of 10% to 20% (declines greater than 20% are considered bear markets). For perspective, the market experienced a 16% correction in the summer of 2010 before rebounding after Fed Chairman Ben Bernanke announced the monetary stimulus policy widely referred to as QE2.

Although investors were cheered that the U.S. did not default, their focus quickly moved on to intensifying concerns that leaders both here and abroad have not done enough to address weakening economic growth both in the U.S. and globally. In the U.S., recent economic reports have raised fears that the U.S. economy might be in danger of tipping over into a recession. In Europe, a second major rescue package for Greece did not reassure investors, who have begun to focus on the debt problems confronting the much larger and more important economies of Italy and Spain. Investors there drove British stocks down 3.4%, while in Germany, the DAX index dropped 3.4% and in France, the CAC 40 closed down 3.9%.

Today’s action shows that investors are fleeing so-called “risk assets” such as stocks in favor of other asset classes they perceive as safer. Upcoming reports on U.S. employment and other economic trends will play a large role in determining whether investors can regain their confidence in the near-term.

For additional insights on the current economic situation, check out the most recent edition of Professionally Speaking featuring Raymond James Chief Economist Scott Browth, PH.D.  You can access this audio presentation by visiting http://marvinellis.com/event.php?id=24&e=captainslog.

We want to assure you that we are following the markets closely and will of course continue to do so. While declines of this nature are obviously a matter of concern, it’s also very important not to overreact. If you have any concerns about the current investment climate, please give us a call.

Compliance approval M11-1672

Specifically, the bi-partisan deal put into place provisions to raise the country’s $14.29 trillion cap on borrowing and cut the budget deficit by at least $2.1 trillion over the next decade.

The bill also:

• Establishes a procedure to increase the debt limit by $400 billion initially and procedures that would allow the limit to be raised further for a cumulative increase of between $2.1 trillion and $2.4 trillion.

• Requires that the House of Representatives and the Senate vote on a joint resolution proposing a balanced budget amendment to the Constitution.

• Creates a Congressional Joint Select Committee on Deficit Reduction to propose further deficit reduction, with a goal of saving at least $1.5 trillion over 10 years. If the committee cannot come up with a solution by the end of 2011, $1.2 trillion dollars will be cut – half from defense spending and half from non-defense spending (e.g., Medicare).

• Changes the Pell Grant and student loan programs. For example, the bill terminates the authority to make interest subsidized loans to graduate and professional students and will eliminate direct loan repayment incentives.

But, the work, it seems, is not quite done. As the measure finally passed, world markets were down and the U.S. Dow Jones Industrials were off for an eighth day in a row. Investors were unnerved by spreading debt troubles in Europe and a decline in U.S. consumer spending to the lowest level in two years. Having a deal in place is a major step in the right direction, though. Now, legislators can return their attention to fixing the economy and creating jobs.

Given its wide scope, the real-life implications remain to be seen. Economic indicators continue to show overall weakening and the U.S. government and affiliated securities’ credit ratings remain under scrutiny by the major credit rating agencies.

Of course, we will continue to monitor the situation in the days and weeks ahead to better gauge the potential impact on investors.

In the meantime, please give us a call if you have any concerns about the current investment climate.

Compliance approval M11-1655

Energy stocks have been particularly strong, with the traditional safe haven of gold also rising above $1,400 an ounce and the U.S. dollar touching its lowest point since last November. Volatility in equities was evident, with stocks posting their biggest weekly loss in three months during the week ended February 25. However, the overall trend remained resolutely upward, as shown in the chart below.

Investors had a variety of economic news to digest in February. Evidence that the recovery is still tentative came in the form of a downward revision of growth in gross domestic product, the nation’s total output of goods and services. The Commerce Department said GDP increased at an annualized rate of 2.8% in the fourth quarter of 2010, lower than its initial estimate of 3.2% but still an acceleration from previous quarters. Meanwhile, consumer spending rose less than expected in January, with Commerce reporting a 0.2% gain instead of the 0.4% that was widely forecast. Bad winter weather may have been a factor.

Consumers still appear upbeat, however. The Thomson Reuters/University of Michigan consumer-sentiment index rose to 77.5 in February, up from 74.2 in January and the highest level in three years. Separately, the Institute for Supply Management-Chicago Inc.’s business barometer – a measure of manufacturing strength – advanced to 71.2 in February, from 68.8 in January, its highest level since July 1988.

With interest rates remaining low, the economy continuing to expand and corporate profits staying strong, investors are demonstrating an appetite for equities that is thus far fuelling one of the strongest bull markets in recent memory.

We have seen a fair amount of volatility in the markets this year.  The S&P started the year at 1115.  It reached a peak of 1217 on April 19 and then hit its low for the year on July 2 when the S&P 500 reached 1022.  The market reached a new high for the year on November 1 at 1226 but then retreated to 1180 on November 30. 

For the quarter ending November 30, 2010 the S&P 500 was up 3.82% on a total return basis.  For the year the S&P 500 is up 7.86% also on a total return basis.  Although the market is up for the year it feels like we have been going sideways.  And depending on your definition a good case can be made that we are in a sideways market because we have not experienced the robust upward movement the market makes in a normal recovery after a recession.

On September 20, the National Bureau of Economic Research (NBER) declared that the Great Recession that began in December 2007 ended a year ago in June 2009.  We have been saying for over a year that the recession was over.  It was nice that the NBER could finally confirm this.  But for many, because of high unemployment, the sluggish economy, weakness in the housing markets, high levels of foreclosures, slower lending by the banking industry, and the high levels of state and US debt, the recession has not ended.   These negatives cause fear and paralyze many from spending.  Since we as consumers make up 70% of the economy when we don’t spend the economy suffers and the economy stays sluggish. 

There are, however, many good signs that the economy is recovering even though slowly.  1. Christmas spending this year is up compared to last year.  Consumers shopped in record numbers on Black Friday (the day after Thanksgiving) as well as on Cyber-Monday (the Monday following Thanksgiving).

2. In November GM had its Initial Public Offering (IPO) of its stock.  GM had gone bankrupt in June of 2009 when the US Government had to bail them out with 50 Billion dollars.  This IPO raised over 60 Billion which was 6 times what GM had expected.  The stock was expected to open at 26 to 29 dollars a share.  Instead it opened at $33.  The Government’s 50% ownership in GM has shrunk and the US has received a good return on its investment.  GM also report record sales in spite of decreasing the number of lines it has been building.

3. Bank lending standards have eased.  Many individuals and corporations are finding it much easier to get loans which helps to stimulate the economy.  Our Gross Domestic Product (GDP) is made up of how much we spend not how much we make.  If we earn $100 and spend $95, only $95 counts toward GDP.  If on the other hand we make $100 and borrow $10 and spend it all, $110 counts toward GDP.

4. Third quarter GDP numbers were revised up from 2% to 2 ½% which shows the economy is doing better than what was thought.  Equipment and software spending by businesses rose greater than had first been reported. 

5. Consumer spending rose 3% year over year.

6.  The trailing four-week average of unemployment claims has fallen to its lowest level since August 2008 but all of these positives aren’t enough to suggest that we will have a meaningful drop in the unemployment rate.

7.  Americans are paying down their debt.  Debt service ratios as a % of Disposable personal income has fallen from a high of 14% in the 3 Quarter of 2007 to 11.9% at the end of September.  Credit Card defaults continue to drop month after month.  And Americans saving rates are the highest at 5.7% that they have been in close to 15 years. 

8.  The November elections, as had been predicted, brought “change” across the country.  Republicans were elected in record numbers as Governors, the House saw the majority shift from Democrats to Republicans, and the Democrats lost their “filibuster proof” status in the Senate.  (See our 3^rd quarter newsletter for why this is a good omen for the markets and the economy.)

9.  And probably one of the biggest side effects that the tea party movement brought to Washington has been the pressure to extend the Bush Tax Cuts to everyone.  This gives those who take the risks in business the incentives to hire, try new things and in the end get the economy moving faster in a positive direction.  The owners of businesses all across the country have held off hiring because taking risks had become less desirable.

Fear is one of the great downward drivers in the markets.  We always seem to have plenty of things to worry about or be afraid of.  But lately it seems there are more than normal.  Some of these include: geopolitical risk in the form of heightened conflict between North and South Korea, the European debt crisis that doesn’t seem to go away, policy tightening in China, high unemployment, an FBI-led investigation of insider trading, confusion over the implementation of the Fed’s quantitative easing, high levels of state and federal debt, fear of inflation domestically and abroad, Obama’s health care plan implementation and the weak housing markets. 

But in spite of these negatives the markets have made nice gains this year.  Have you noticed that the markets this year seem to shrug off these negatives compared to how they acted while our economy was going through a much softer patch just a few years ago?

Because of the fear that continues to linger from the deep recession we have all experienced, stock prices remain relative low based on Price/Earnings ratios which are in the low to mid teens.  There is an excess of money in cash and extremely low paying bonds.   As fear subsides with an improving economy those holding these low paying investments will lose their appetite for reduced risk and will seek better returns.  As has happened in the past, when this shift takes place there will be a sudden rise in stock prices.  You want to be positioned to take advantage of this rise in prices while attempting to reduce risk until it is clear this shift is underway.  No one, including us, can tell when this shift will take place.  Please call our office so we can help you position your assets according to your risk tolerance and time horizon. 

We feel there is more risk to the upside movement in stock prices than there is to the down side.   We have seen this in just the first few weeks in December.

Written for 4th Quarter 2010 Newsletter. Ad #C10-26626.

This look at the year ahead features informed and timely commentary from the knowledgeable professionals at Raymond James. Some of the key factors discussed include:

• The overall outlook for the economy
• Strategies for investors in 2011
• The impact of the mid-term elections on taxes
• Lessons learned from the Gulf oil spill
• Challenges unique to small business recovery
• The continuing drag on the housing market

We hope you will find these carefully considered observations both insightful and useful.

Please feel free to call us with any questions regarding the Raymond James 2011 Economic Outlook, your portfolio or current market conditions. We always look forward to speaking with you.

On the plus side was a Commerce Department report that revised growth in the nation’s Gross Domestic Product for the third quarter to 2.5% (annualized), up from the original estimate of 2%. Commerce also said that corporate profits for the third quarter, in nominal or noninflation-adjusted terms, hit their highest levels since the government began keeping track more than 60 years ago. Since bottoming in the fourth quarter of 2008, corporate profits have grown for seven consecutive quarters, spurred by increasing productivity and, more recently, a pickup in consumer spending. Wages and salaries also rose in the third quarter, a positive omen for the important holiday shopping season.

The sideways movement of the market in November is reflected in the minor changes in the broad averages seen below.

Offsetting this welcomed domestic news were worries that Europe’s sovereign-debt crisis, which has already engulfed Greece and Ireland, could spread to include Portugal, Italy, and Spain. As Europe’s fourth-largest economy, the problems of Spain, which include a housing market collapse and unemployment of around 20%, are of particular concern to investors. With the United Kingdom and several other countries embarking on severe austerity measures, investors fear that economic growth in the 16-nation eurozone will be minimal at best. There is also apprehension that China’s economic growth may slow as authorities there begin to raise interest rates.

Markets seldom move in straight lines for long and stocks had risen sharply since late August when Federal Reserve Board Chairman Ben Bernanke promised that the Fed would take measures to boost the U.S. economy. Investors now appear to be waiting for more clarity on developments in Europe, holiday retail sales, and tax policy decisions in Washington before making significant moves in their portfolios.

With 2011 right around the corner and the global markets sending conflicting signals about what lies ahead, this is a good time to think about whether your portfolio is properly positioned for the future. If you’d like to discuss any year-end changes that might be indicated, just give us a call.

Compliance approval M11-0253

After a difficult August, stocks opened September on a strong note. We have been in a sideways market for most of the last year, which has been caused by fear and uncertainty. The S&P 500, which was down close to 5% for the month of August, advanced 3.8% in the first week of September to close at 1,105. The S&P 500 closed 12/31/09 at 1,115 and a year ago (9/3/09) at 1,003. This is what we call a sideways market.

We do not feel we will have a double dip recession. The economic numbers don’t support it. We feel the only thing that would cause a double dip is massive fear; creating a self-fulfilling prophecy. That being said, we are seeing fear leave and confidence return.

What has caused this sideways momentum is in large part due to our government. The largest expense a corporation deals with is employee benefits. You ask any corporation what Obama Care is going to cost them and their response is “We Don’t Know.” Between the various tax changes, Obama Care and overnight regulation changes, corporations and individuals are holding onto their cash and paying down debts. They are unsure how to safely proceed. There is more cash sitting in corporation’s coffers then we have seen in decades. Instead of hiring full time employees, corporations are pushing more overtime and temporary staffing.

We feel this sideways market will continue until the elections this November. After the elections investors and corporations will see the direction our government is headed. As referenced in the chart below, if you look at stock market returns by political party control, the healthiest situation would be to have a Republican Senate and House and a Democratic President. Why? Because the stalemate environment reduces Congressional spending giving corporations and investors more incentive to plan and spend.

Source:  U.S. House of Representatives, U.S. Senate, Gallup Inc., FactSet, J.P. Morgan Asset Management.  *In roll call votes where the majority in one party voted the opposite way to the majority in the other.  Data compiled by professor Keith T. Poole and Howard Rosenthal available at www.voteview.com.  Stock market returns are price only and calculated from election date to election date.  Data are as of 6/30/10.

We feel that if a shift to more Republican or balanced control in congress occurs, recovery back to the highs of 2007 could resume on schedule and occur in 2 to 3 years. If little shift occurs and we continue with more dominant control by the Democrats, then the recovery could take 4 to 5 years.

To deal with these sideways markets we are making some changes to our portfolios which are designed to hedge your assets should the markets go down while also allowing your assets to gather as much of the up side as possible. This way no matter how many years the recovery takes, volatility can be better handled while government policies and corporate spending policies change. Please contact us if we have not contacted you for our recommendations.

Interest Rates – a Huge Issue
Another concern we see are rising interest rates. They have been declining for the last 30 years. They are about as low as they can go and have only one direction to move and that is up. As interest rates go up, bond prices go down. In 1999 & 2000 tons of money was flowing into tech companies which caused a huge bubble. We are seeing the same thing now, except fear is driving the money into bonds. When interest rates start rising, many bond holders are going to be drastically affected.

We have been doing a tremendous amount of research and looking at historical numbers on how to properly position bonds to handle rising rate changes. For now, you want to be evenly diversified in all the bond sectors so you can potentially take advantage of the best interest rates out there, but once rates start going up we will give you more direction. We will watch the yield curve closely and focus you on the sweat spots that could be less likely to be affected by interest rate increases.

Foreign GDP Helping Our Economy
AllianceBernstein has forecasted that Emerging Countries’ (China, India, Brazil, Argentina and etc.) Gross Domestic Product (GDP) is forecasted to be 7.6 in 2010 and 6.0 in 2011 which is almost twice what developed countries will produce. There have been huge increases in middle income earners in these foreign countries who are buying many American products for the first time. That flow of money is going to stimulate our economy and has been overlooked by many. It takes time for the flow of money to integrate into the system, but it is coming.

Year End Projections
We believe that if elections create a stalemate in Congress and that no major lame duck legislation is pushed through during the last two months of the year that we could see the markets end higher for the year. We are expecting more sideway movements until then with a slow steady rise in the markets afterwards. The profitability of most US publicly traded companies is growing steadily. This will insulate the markets from large downward corrections. Inflation is going to remain low for a few more years. Unemployment will continue to decline around 1% a year. But, as a nation we have to start facing some greater challenges: funding Obama Care, Social Security, Medicare and Medicaid. Our children’s future tax burdens do not look well, but we believe as a nation we will figure this out also.

Raymond James Investment Strategy Quarterly
Raymond James has a huge powerhouse of economic and market resources for us. They recently started to organize all the various departments, economists and research data into one quarterly newsletter. If you would like to dive deeper into some good research and economic data we recommend reading this newsletter. It is available to you online at http://www.marvinellis.com/deliver/markets.php. 

Approval #: C10-19734.  If you would like to stop receiving this newsletter please contact our office at 801-295-7373.  The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material.  The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.  Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.  Any options are those of Ellis Financial Group and not necessarily those of RJFS or Raymond James.  Expressions of opinion are as of this date and are subject to change without notice.  Investments mentioned may not be suitable for all investors.  Past performance may not be indicative of future results.  This information is not intended as a solicitation or an offer to buy or sell any security referred to herein.